BUDGETS AND FORECAST MODELS

The best budgeting and forecasting tool is a complete and accurate economic model of the enterprise, a living, breathing set of interactive relationships designed to behave like the actual business. An accurate economic model has great utility for scenario generation, analysis and optimization. It provides the management team with a precision tool to analyze and discard alternative budget options for growing the business. It can be used to test different pricing schemes, distribution strategies, sales force models, support options, payment cycles, hiring plans and marketing budgets. Once optimized and finalized, it serves as an Operating Plan with all of the gritty details of who, what and when. 

I have developed a template for Budgeting and Forecasting Models embodying over twenty years of experience building such models for clients in manufacturing, retail, software and services.  This template provides a platform for the rapid development of a custom model which a client can then take over as its own.

To view the elements of an Operating Plan suitable for Budgeting and Forecasting, please select from the menu below:

Choose One: Revenue Model Department Budgets Expense Summary Fixed Assets Income Statement Balance Sheet Statement of Cash Flow Budget To Actual Report

The bedrock of strong financial controls is a realistic and flexible budget.  The bedrock of cash management is an accurate forecasting model.  Ideally, these should be the same model.  The approved budget is held in a static copy, actual results are then input to a "living" copy of the same model, allowing for efficient "Budget-to-Actual" reporting and a constantly adjusting flexible forecast. New or adjusted budgets can be developed quickly from the existing baseline. Properly done, the model also provides a long term cash forecasting tool capable of serving as "deep radar" for the CFO.

The output of such an Operating Plan is a set of P&L, Balance Sheet, and Cash Flow projections.  But standing behind these is a complete model of the business that provides the following benefits:

• The entire management team knows exactly what each individual needs to do in each month of the Plan in order to hit Budget.



• The management team has a tool to measure Actual Results against Budget.



• The management team knows exactly how much cash it expects to consume or generate during the Plan period.



• If actual results start to vary significantly from Budget, the CFO can quickly pinpoint where the problem lies, by department, by budget line and by key ratios and assumptions.  Prompt corrective action can then be taken, aimed at the right target.



• If revenues fail to live up to forecast, the model can instantly provide a revised budget for where expenses need to come in order to react to the reduced expectations.


• The Company has a cash forecasting tool that automatically adjusts for actual results to provide invaluable early warning of changes in expected cash positions, allowing the CFO sufficient time to attract new financing if necessary.

Armed with such a tool, a CFO is in an excellent position to lead Board discussions rather than follow them.