Pilot is often engaged to review or advise on the preparation of budgets and forecasts. All too frequently we see common pitfalls that organisations should avoid. Here are some key areas to keep in mind.

The world of accounting isolation

Finance teams at their worst prepare budgets and forecasts in a vacuum. This is often based upon what they know and understand, and what they think. This can lead to the preparation of budgets and forecasts failing to consider a number of important, highly relevant inputs, including the following.

• Key strategic priorities of an organisation – we should consider what these are, whether strategic priorities are changing, and therefore how this could impact the budget/forecast being prepared.
• Plans and objectives of other departments in the organisation – if we do not talk to others in the organisation about what their plans are, we may miss key information that should feed into and build the numbers in the budget. A classic example is not speaking with sales / marketing personnel regarding revenue targets for the coming year, or what pricing adjustments may be required.

What level of profit /return do we want?

We often prepare budgets and forecasts from a top-down approach. That is, we start with revenue, and work our way down the Profit and Loss. Often the profit number that comes out at the bottom is just a mathematical calculation. A more strategically focused thought process would involve considering what level of profit we desire for the investment we have made, and for the risk we are taking. Understanding this then allows us to target certain areas, drive desired behaviours, and subsequently build the right budgets to achieve our objectives from a financial return perspective.

Capital and cash flow requirements

Budgets and forecasts often solely focus on profit. Managing and forecasting cash flows is also critically important from a financial health viewpoint. Good forecasts include cash flow requirements and in particular focus on the following items:

• What the capital expenditure requirements are for the business for the coming period.
• Working capital management to ensure sufficient cash will be available to meet cash requirements as and when they fall due.
• Ensure any financing requirements, i.e. debt and equity (including costs associated with obtaining financing) have been considered and factored in. Of particular importance is the timing of these requirements so that cash holes do not exist, or key business plans are unduly delayed because of not being able to secure financing.
• Seasonality of cash flows, and revenue and expenditure items that have long cash lead times.

Compliance budgeting

We use the term compliance budgeting to ensure that compliance requirements are met through the budget process. Examples of compliance requirements may include banking covenants, or regulatory compliance requirements. These often focus on measures that relate to balance sheet health. Therefore, good budgets and forecasts provide a forecast balance sheet position. This provides comfort to management and those charged with governance that key compliance requirements have been addressed in the budgeting process and can be monitored on an ongoing basis.

Contact Pilot

If you would like assistance with budgeting and forecasting, contact Chris King on cking@pilotpartners.com.au or your Pilot advisor on 07 3023 1300.

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This article originally appeared in the Nexia “Sleepless in the C-Suite” publication, which can be viewed in full here.