Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode July, 2004 Sent monthly to over 400 subscribers. Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Budgeting Principles * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Summary As summer slips towards fall, many companies turn their attention to budgeting and planning. This newsletter discusses techniques to increase the accuracy and utility of the budget by implementing budgeting best practices that will minimize the effort required from all participants. Specific recommendations are to: - Plan and review at a higher level than is traditional. - Create a process efficient enough to be used quarterly, if not monthly. - Ensure spending can be tracked against the budget. After participating in the budgeting process with scores of clients, I’ve developed my own “tried and true” budgeting principles. I present them below for your use: I. The budget is primarily a measuring stick, not a forecast. The real forecast is set forth in the strategic plan. Thus the annual budget is only useful for filling in details that we can track against. Furthermore, only budget a line item if the accounting system can report against it. The budgeting exercise is useless if you cannot track progress against the budget numbers. II. Avoid excessive detail. Pareto was right: 80% of the issues are in 20% of the items. When budgeting, only identify and focus on the high- impact items. Have the discipline to let other items remain lower priority. There’s a limit to how detailed the budget should be. Getting down to each postage stamp is not useful, neither is going to full general ledger detail. The proper balance is somewhere above that, where you can see trends in major categories but not be forced to forecast dozens of line items. III. Headcount costs deserve a detailed look. Salary should be planned at the employee level. When listing employees, be sure to code them by department/group so the expenses can appear in the group’s final budget. Benefits and taxes should be calculated according to general rules and charged to the department/group. If the charges are part of G&A’s budget, then no manager has the ability to control this line item. Managers need to realize that adding $100K in salary adds another $12K (for example) automatically in taxes/benefits. IV. Other categories should follow the 80/20 rule. One recent client was budgeting over forty items for each department. Relatively simple analysis showed that 15 categories accounted for 90% of expenses. So these categories were budgeted directly and the remaining categories were budgeted using one “Other” line. Should corporate require displaying detail for the extra 25 accounts, create an allocation process to fill out detailed general ledger accounts from the Other line using historical ratios. Granted, it is an extra step, but the time savings up front from not focusing on minor items frees up the time to do this simple process at the end. V. Plan often. Annual plans are a relic of a bygone era. Conditions change rapidly and require us to respond rapidly. Fortunately, we have the technology to do so. Budgets should be re-set quarterly and the annual budget process should not be significantly different from the quarterly budget forecast. Of course this raises issues about whether managers will sandbag the last three quarters of the forecast since it will be redone in three months, but there are numerous ways to discourage this behavior. Until next month, all the best, David Brode -- Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NEWSLETTER ARCHIVE AVAILABLE Make sure to visit the Minotaur Financial website for the Newsletter Archive at http://www.brode.net/resources/ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ABOUT DAVID BRODE I’m a financial modeling specialist. Over the last fifteen years I’ve completed dozens of models and certainly thousands of versions to support corporate development, M&A, strategic planning, and debt and equity transactions. These models have raised over $1B in debt and $100M in venture capital and private equity. Over time I’ve consistently revised software tools and work processes to get the job done quickly and well. If you have a financial forecasting issue, I’d love to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2004 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net " * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Are you struggling to convince others to do a deal which you think is a no-brainer? To discuss how you can take numbers off the table as a deal roadblock, call (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)