vcfo budgeting basics webinar
DESCRIPTION
Have you completed your 2015 budget yet? Does your budget include line items other than the income statement? Are you putting it off for another month to focus on 2014 close? If next year’s forecast hasn’t been completed, you shouldn’t be surprised to find that you are behind schedule. However, it’s not too late to get started – vcfo’s team of CFO experts will guide you through the process during the Budgeting Basics webinar. Join vcfo's Josh Tabin, Houston Managing Director, and Cristina Silingardi, Consulting CFO, share their expertise in developing and delivering an effective budget for your business. Both Josh and Cristina have worked with companies of all sizes and in various industries, providing financial consulting, delivering operational and strategic guidance, leading the funding and financing process, managing mergers and acquisitions, and beyond.TRANSCRIPT
Basics of Budgeting Josh Tabin & Cristina Silingardi
Today’s Panelists
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Josh Tabin
Managing Director and
Consulting CFO, Houston
Cristina Silingardi
Consulting CFO,
Austin
Today’s Moderator
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Amy Hardin
Founder and CEO,
SELLect Sales Development
vcfo: What We Do
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Finance
Fractional or Full-time Project Work
M&A
Cash Flow Management
Exit Strategy
Transaction Support
Human Resources
HR Audits
Employee Development and Training
Payroll
Strategic HR Plans
Policies and Procedures
Benefits
Recruiting
IT and Technology Professionals
Finance and Accounting Professionals
Operations and HR Professionals
Agenda
What is a Budget
Budget Methodologies
Best Practices
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Poll Question 1
Do you currently have a budget in place for 2015?
a. Yes
b. No
c. Working on it
d. Have no idea how to get started
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What is a Budget?
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A plan
A limit
A schedule
A reality check
An allocation
Why Use a Budget?
A few compelling reasons:
• Stay within a limit
• Control
• Forecasting
• Delegate
• Prioritize wants, organize needs,
• Within the realm of what we can
• Represents a view of the future
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A few compelling reasons:
• Financial translation
of company goals
• Alignment of management
and department to achieve
goals
• Prioritize allocation of
corporate resources
• Can measure performance
against
Poll Question 2
What type of budget do you utilize?
a. Budgets only
b. Budgets and forecasts
c. Multiple budgets, scenario planning
d. None
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A Budget is a Quantitative Expression of a Plan
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Planning
Control
• Forecasting • Planning
• Control • Evaluation
Budgets involve:
Poll Question 3
Who approves your budget?
a. Board of directors
b. Investors/owners
c. CEO or executive team
d. Approval? What’s that?
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Budgeting in Context
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Budget Methodologies A Comparison
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Budget Methodologies
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Top Down
Bottom Up
Iterative Process
Top Down
Bottom Up
Iterative Process
1 2 3
What it means:
• Top-down budgeting is the term given to a budgeting process based on
estimating the cost of higher level tasks first and using these estimates
to constrain the estimates for lower level tasks.
Budget Methodologies Top Down
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step 1 step 2 step 3
How it’s implemented:
• A crucial factor for successfully implementing this method for estimating
budgets is the experience and judgment of those involved in producing
the overall budget estimate.
Budget Methodologies Top Down
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Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Top Down
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Noteworthy details
• Takes less time
• Promotes upper-level commitment
• Involves no multilevel participation
• Lower management better understands what upper management expects
• Presented down the ladder
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Top Down
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Disadvantages
• Translating long-range budgets
into short-range budgets
• Result of top management's
limited knowledge of specifics
of project tasks and activities
• Competition for funds among
lower-level managers, try to
secure adequate funding for
their operations
Disadvantages
• May cause unhealthy competition
• This process is a zero sum game --
one person's or area's gain is
another's loss
• Subordinate managers often
feel that they have insufficient
budget allocations to achieve
the objectives
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Top Down
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Advantages
• Aggregate budget is quite accurate, even though some individual
activities are subject to large error
• Budgets are stable as a percent of total allocation and the statistical
distribution of the budget is also stable, leading to high predictability
• Small costly tasks don’t need to be identified early in this process;
they are factored into overall estimate
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Top Down
Bottom Up
Iterative Process
1 2 3
What it means
• Sometimes called zero-based budgeting
• Bottom-up budgeting begins with identifying all the constituent tasks that
are involved in implementing a project and working out the resources and
funding required by each
Budget Methodologies Bottom Up
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step 1 step 2 step 3
Budget Methodologies Bottom Up
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What it does
• Provides the opportunity to create organization level budgets
by rolling up project budgets
• Create centralized project level budgets from their sub-project budgets
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Bottom Up
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What it provides
• Project managers have the flexibility to define their project
budgets independently
• Financial managers have the ability to centrally review the total
project budget/s
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Bottom Up
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Noteworthy details
• Takes more time
• Involves cross-section of the organization
• Presented up the ladder
• Seeks participation at all levels
• Encourages commitment to the plan
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Bottom Up
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Disadvantages
• Top management has limited influence over the budgeting process
• Individuals tend to overstate their resource needs because they suspect that
higher management will probably cut all budgets by the same percentage
• More persuasive managers sometimes get a disproportionate share
of resources
• A significant portion of budget building is in the hands of the junior
personnel in the organization
• Sometimes critical activities are missed and left unbudgeted
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budget Methodologies Bottom Up
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Advantages
• Is in the accuracy of the budgets for individual tasks
• Clear flow of information
• Use of detailed data available at project management level as basic
source of cost, schedule, and resource requirement information
• Participation in the process leads to ownership and acceptance
Top Down
Bottom Up
Iterative Process
1 2 3
continued
Top Down
Bottom Up
Iterative Process
1 2 3
What it means
• Iterative means “to repeat or do again”
• It is a combination of top-down and bottom-up budget building
• Higher project level estimated (top down)
• Lower level costed (bottom up)
• The two costs negotiated and reconciled
Budget Methodologies Iterative Process
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Disadvantages
• Relative inefficiency and time consuming nature of the
negotiations over the budgets
• Process may not work well when communication channels
are either informal or blocked between lower-level managers
and senior management
Budget Methodologies Iterative Process
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Top Down
Bottom Up
Iterative Process
1 2 3
continued
Advantages
• Promotes employee involvement and stimulates a high
degree of information flow between those involved in
the project at different levels
• Both senior management and lower level managers closer
to the actual process participate in the budgeting process
Budget Methodologies Iterative Process
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Top Down
Bottom Up
Iterative Process
1 2 3
continued
Budgeting Best Practices Tips, Value Drivers, Planning, and Analysis
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Budgeting Best Practices
Reduce:
• Time allowed to develop budget
• Iterations during development
• Level of detail
Use budget productivity tools
Consider external, non-financial, long-term influencers
Effective planning happens year-round, interactive and dynamic
Planning and analysis should be equal
Performance improvement should be a result of effective
budgeting and analysis of under-performing business areas
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Value Drivers: Key Performance Indicators
Non-financial metrics specific to each business (representing your
business objectives as measurable targets):
• Customer Conversion Rate
• MRR – Monthly Recurring Revenue
• CRR – Customer Retention Rate (and cost)
• Churn Rate
• Employee Retention
• Carbon Footprint
• Product Recycling Rate
• Access to Capital
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Rule of 78
Forecasting methodologies:
• Annualized run rate of 12x the average monthly billing, plus new revenue
acquired over the period.
• ($10 average / month = $120 annualized). Because the new revenue
acquired is unknown, this tends to be conservative.
• Rule of 78 is a quick calculation to estimate the total value of recurring
revenue over the next 12 months, and is calculated as the value of the first
month’s service x 78 ($10 forecasted for first month = $780 Rule of 78).
• Assumes the same amount will be billed and added to the run rate
every month for a full year. Does not consider seasonality, market
fluctuations, customer loss, etc.
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continued
Rule of 78
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Target $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10
Jan $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $120
Feb $0 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $110
Mar $0 $0 $10 $10 $10 $10 $10 $10 $10 $10 $10 $10 $100
Apr $0 $0 $0 $10 $10 $10 $10 $10 $10 $10 $10 $10 $90
May $0 $0 $0 $0 $10 $10 $10 $10 $10 $10 $10 $10 $80
Jun $0 $0 $0 $0 $0 $10 $10 $10 $10 $10 $10 $10 $70
Jul $0 $0 $0 $0 $0 $0 $10 $10 $10 $10 $10 $10 $60
Aug $0 $0 $0 $0 $0 $0 $0 $10 $10 $10 $10 $10 $50
Sep $0 $0 $0 $0 $0 $0 $0 $0 $10 $10 $10 $10 $40
Oct $0 $0 $0 $0 $0 $0 $0 $0 $0 $10 $10 $10 $30
Nov $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $10 $10 $20
Dec $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $10 $10
Annual Forecast Total Billing $780
78 x monthly run rate of $10
continued
Rule of 78
Recurring revenue impacts
• Working capital
• Cash flow
• Remuneration structures for sales reps
• Financial reporting
• Business valuation
With all of those impacts, it is important to be able to forecast
recurring revenue appropriately.
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Cost of Revenue & Operating Cost Planning
Fixed costs
Variable costs
Economies of scale
Economies of scope
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Poll Question 4
What level of planning do you do?
a. Income statements only
b. Cash only
c. Income statements, cash and balance sheets
d. None
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Balance Sheet Planning
Working capital
• AR
• Inventory
• AP
Capital expenditures
Cash
• Debt and equity
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Scenario Modeling
Sensitivity analysis
Base case vs. Growth plan vs. Downside plan
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Problems With Budgeting
The process is too long
There is a lot of game playing
Business decisions change but the budget does not
People in charge of budget are held accountable in
areas where they have no responsibility
Unrealistic budget predictions
Applying an arbitrary percentage to prior period actual
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Q&A
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Thank you We will be following up with you by email shortly to provide
more details on receiving CPE credit, as well as two budgeting
templates. Happy budgeting!
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