Budgeting

CFO Perspectives

By Reg Baker, CPA PFS

How does a CFO create and manage a budget? And how does this help an entity be successful?

At this time of the year these are the types of questions being asked at all levels of an entity. There are many individuals involved with the budgeting process that, from my experience, do not fully appreciate their role or the importance of the process.

First and foremost, a budget is the road map of where an entity wants to go (please do not confuse a budget, which is a stretch target, with a cash projection, which is actual forecast; these are two entirely different reports). Some might say that the Business Plan is the map and they won’t be wrong. But it the budget that is the working document or tool that an entity and its leadership will use on a daily, weekly and monthly basis to reach the desired destination. The budgeting process has two primary (big picture) components. There first component is the Creation of the budget and then there is the Monitoring component.

Creation: The creation of a budget requires great coordination and teamwork. The CFO begins the process by designing the format that will be used by the entity, communicating specific assumptions (like sales growth, payroll increases, inflation rate, etc.) to the managers and educating the entities managers and staff on how to complete the budgeting forms. The CFO’s staff may even complete a large portion of the budget forms to assistant the line managers and ask for them to review, tweak, correct and submit for approval. The CFO will then review the results, determine whether the individual (departmental) budgets are consistent with the recommended assumptions, consolidate the various departmental totals into a combined entity wide budget and discuss with the “C” Suite Team the results. If necessary, the “C” suite will either refine the budgets and communicate the final results (top down approach) or ask the line managers to rework the budgets and resubmit for approval (bottom up approach). Regardless of the process, the ultimate goal is to have a final budget that all managers and have participated in creating and they “buy in” to the result. Some entities are m ore successful with this final “buy in” than others.

Monitoring: Once the final budget is approved and communicated to all managers the real work begins. Every month, as soon as possible after the month-end close so the month’s results are still fresh on everyone’s minds, a comparison of the actual results for the month are compared to the budgeted amounts. Significant variances are reviewed, analyzed and explained. Corrective action is taken as necessary. Most important are the trends and what is being done to keep the entity on track to meet or beat the budget! This analysis includes both revenues and expenses. Although the primary objective is the success and profitability of the entity, the budget can also be used to monitor the effectiveness of the entities managers.

An effective budgeting process can be a very effective tool in managing the entity and keeping the managers focused on a common goal.

Please contact me with your feedback at reg@regbaker.com.

I am looking forward to hearing from you or your staff with suggestions for future columns.

Reg Baker, CPS PFS