Budgeting should be more than just the P&L.
The budget process is an opportunity to support strategy with resources.
Talent and cash are the big two, but they aren’t the only discussions to be had during this process.
And that is why only creating a pro-forma income statement is not only just part of the conversation, but dangerous when viewed independently.
This all being said, an income statement based budget should be prepared.
I prefer zero-based budgeting. It seems obvious that the revenue projections should match the strategy.
Is it so out-of-the-box to consider expenses the same way?
Plus, there is the added benefit of being in a position to talk strategy – and implications – with your team. All the way up and down the stack.
Advocate. Foster buy-in. Gather ideas.
It is just good hygiene.
Some non-obvious considerations, that may or may not require board action, include:
- New customer, vendor, and/or consulting contracts
- Modifications to employee benefits, or planned equity grants
- Changes to senior management staffing
Assuming the income statement budget is acceptable, I suggest a few additional budgets that should be prepared:
- Working Capital Budget: What are the plans for receivables, inventory, and payables? And what will be the impact on cash?
- CapEx Budget: What capital expenditures will need to be made? Land? Buidings? Equipment? Technology refresh? Furniture? Vehicles? Intellectual Property? Will any of these expenditures require board votes? And what will be the impact on cash?
- Financing Budget: What budgets require cash? How much? From where (debt, equity)? Typically these almost always require board votes. And what will be the net impact on cash?
We’ll spend some time in future posts discussing cash specifically. For now, it is worth considering the full, 360-degree impact of strategy on all aspects of the business.
Now go spark that revolution.