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It’s the most wonderful time of the year to start year-end planning for your business. The question many may be asking is ‘where do I even start?’ We’re sharing our timeline and dos and don’ts because right now is the perfect time to start planning so your business is ready to start the new year off with a bang! You don’t want to be left behind come January 1st.
First, establish a leader in the organization to facilitate the planning process. Most likely this will be your CFO.
Next, establish a timeline and work backwards. Here is an example:
The budget is something that you set up once a year and report against during the following year. It’s important to set up the budget model so that it is easy to layer in actual numbers for next year’s analyses. The biggest thing to remember is that it’s unchanged once it’s set.
The forecast is dynamic and resets at the end of every quarter for the next four quarters. Your forecast will reflect changes in your business as well as the economic environment since you originally set your budget. The Controller prepares the re-forecast quarterly and the CFO presents to the leadership team.
DO: Budget Top Down. Start by understanding your sales funnel and determine your base marketing metric. How do you bring in leads? How many leads turn into proposals? What is your close ratio? When you understand these numbers, you can forecast revenue more accurately from the top down. In addition to new sources of revenue, be sure to account for existing customer revenue and use a historical retention ratio along with any planned pricing changes to predict next year’s revenue.
DON’T set an arbitrary sales goal that is unsupported
DON’T set an unrealistic budget – revenue or expenses
DO forecast a cash flow statement and balance sheet that includes
DON’T try to do this without an accounting team
DO plan for uncertainty with scenario-based forecasting. Model low, medium, and high revenue scenarios and identify what variable costs will decrease and what discretionary spending needs to be reduced. This type of preparation can help you feel safe that there is a plan in place for profitability regardless of revenue volatility.
DON’T use last year or last month’s run rate as the only basis of expense forecasting
DO plan for seasonality and irregular expenses
DO take into consideration the current marketplace and adapt for the current economic environment.
DON’T expect your budget to be perfect. Remember that every quarter is an opportunity to re-forecast.