The end of 2018 is the perfect time to reflect on how your business has performed during the past year, and more importantly, to define the personal and professional goals/objectives that you and your business have for 2019.

Regardless of size, it is important for every company to budget and forecast their 2019 results, which will serve as a measuring stick for the year’s performance in comparison to (a) prior periods and/or (b) projected performance.

Tracking your operating results against the budget is critical for several reasons:

It serves as a guidepost as to how you are performing for the year.
It helps identify trends and/or operating expense increases that you would not be able to identify without comparing it to a benchmark.
It is an effective tool for internal controls to ensure that your finance team has properly recorded transactions, and there are no potential fraudulent acts by the employees that you would have missed otherwise.

The countdown to the new year has begun. If you have not yet done your budget, it is time to start—and to do so expediently.

Successful Budgeting

A key component of a successful budget is an appropriate amount of detail included in supporting schedules. For example, if you are a retail company, you might want to examine weekly sales goals instead of monthly or quarterly goals due to seasonality of your products.

Companies will also want to ensure that all assumptions are clearly documented and all potential outcomes are accounted for in potential results. At AcceleratingCFO, we have found that if there is variability to potential results then we will assign a probability factor to account for uncertainties in the industry. For example, if you are in the construction business, we would assign a probability factor to unit sales based upon different levels of the prime rate.

Another important factor we consider for our clients in preparing their budgets are tariffs and their potential impact both on purchasing goods overseas and selling them in the global markets.

Don’t Budget in a Vacuum

It is critically important that your finance function and/or CFO does not prepare the budget in a vacuum. The “lazy” way to perform any budget is to take the prior year’s results and say, “I want to grow by 10%” and then multiple everything by 10%. Doing so does not help track actual results.

The meaningful way to prepare your budget is to speak with staff members in all areas of your company, including marketing, sales, production, inventory management, and other teams that will directly impact your expenses and income. This process certainly takes longer to perform, but it is, unequivocally, a more thorough analysis of a company’s financial situation.

Once completed, it is then imperative to communicate the budget to team members so that they are aware of what their financial targets are for the year. If you prepare a budget, yet do not publish specific targets, your company is set up for failure. For example, if your sales team is not aware that the goal is to increase sales by 20%, then they will not be driven to that type of performance. Continuing in this example, return on investments from marketing could be significantly reduced if the sales team is unaware of targets, since marketing expenses are largely driven by sales, and a successful marketing campaign takes months to prepare. This highlights the importance of coordinated goal setting across the company.

As financial executives, it is our responsibility to help CEOs and business owners integrate their company vision into its financial performance.

Take-away: All companies need to perform a comprehensive budget for next year in order to make 2019 a successful year.

Brian Califano