Things to watch for in your Budgets:

 

Over the past 25 years, I have not only reviewed by created numerous budgets for businesses.   Here are my observations of issues or concerns which I have seen over the years with assumptions and ways budgets get created.  Hopefully, all new budgets you create never have these symptoms:

 

  1. Mismanaging the advertising offset timeline. 

 

There is normally a lag between when an advertising campaign is initiated, and when it leads to sales.  Unfortunately, many budget models, assume advertising is a percentage of revenue and there is no lag.  When you fail to have advertising leading the projected sales growth, you are making a strategic error.  The result will most likely be an over estimate of the sales affect and the under estimating of  the cost or resources needed to generate increased sales.  Always plan your advertising program to start one or two periods ahead of its targeted leads affect.

 

  1. Assuming the existence of revenue is going to imply positive cash flow.

 

Many budgets do not model both the balance sheet and the profit and loss statement.  When you only budget the profit and loss statement, you can get into a trap that you assume cash is generated at first sign of projected profits.   Unfortunately, there is usually a lag between the invoice being created and the completed cash collection.    This working capital phenomena will often get a young company is a serious cash flow situation.  Failure to recognize the normal flow rate from invoicing to cash collection, can lead to assuming cash will be available to support purchases in a pre mature fashion.

 

  1. Overstating Sales Projections

 

This is really the big daddy of things to watch for in your budgets.   Building sales projections prematurely is the common pitfall.  The optimistic sales growth projection will enevitable lead of cash crushes, when revenue is slower to develop.  Be careful to not get too aggressive in your modeling of sales and the conversion of a sale to an actual shipment.

 

  1. Ignoring or understating your budgetary needs:

 

By being conservative in your budgeting your capital outlays and expenses, you can cripple your business model.   If the real cash outlay is say $90000 and your only budget $55000, you are destined to be back requested additional funds from your financing sources.   Nothing will create disillusionment in your financing sources than to be surprised about needs for more cash.   Be realistic and accurate in projecting cash needs in your budget

 

  1. Forgetting about Government Mandated Payments.

 

Many budgetary models fall into the trap of not accurately planning for the timing of things like:  payroll taxes, sales taxes, and income taxes.  Many of these taxes are like a ‘pass through’ expense, where the company has little discretion as to the timing of the payment ot the government authority.  Because these payments carry big penalties for late payment, don’t under estimate the accurate time of the cash outlay.

 

  1. Capital Budget Items

 

Major capital expenditures need to be carefully budgeted.   The best models, in my opinion, allow budgeting for both the income statement and the balance sheet simultaneously.   Capital items can be quite large, and demand careful attention so that the cash is available when payment is required… no exceptions.

 

  1. Keep your plan up to date and communications open

 

Budgets are dynamic plans which need to reflect changes, both good and bad, as time goes on.   Your budget model gives you a yard stick to monitor actual vs plan an to track how you are doing.  This planning tool makes the budget an indispensable portion of any company’s financial system.  

 

Since variances are most often going to occur, keep your channels of communications open with all key parties.  This is especially critical when you are dealing with external financial sources and external owners.   Provide accurate and timely feedback to all parties so that they can interpret the financial results with commentary provided by you.  Don’t assume it is best to be an ostrich, and keep your head buried.  It is just the opposite… keep information flowing.

 

Happy budgeting…. Take advantage of the budgeting options you have in Solomon to successfully manage your business.

 

 

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