What budgeting and forecasting is done in well-run small companies?

Budgeting and Planning for small companies is difficult but extremely important, as cash flow mishaps are not easily absorbed. Large companies do a top down approach to planning. The CEO says the goals are to increase revenue by x% or volume should increase by x%. Department heads subsequently distribute the responsibility to get to the number target.

Conversely, small companies work from bottom’s up. Each product-line should produce a plan, I.e. sales of software, services, logistics management, and equipment. Next the plans are rolled together to make the overall company plan. Excel will allow the most flexibility with this approach.

Monthly, variance reporting should be conducted. After the first full quarter, monthly reports should include forecasting.

Regis: Thank you for your input. Does each department normally provide their plan at the GL account level or is it more broad than that? Are the product-line reports done as general number or as % of Revenue or another way? Any tips on how to tie this budgeting into our accounting system? Also, would your answer change if we expected to make ~$10 Million next year? At what point does it make sense to switch away from Excel?

Everyone Else: Does the input from Regis match your experiences and understanding? Any other input, ideas, or tips?

What you are looking for from the departments is raw data, i.e. units produced, dollars generated and expected costs associated with their product/service. You will need to produce the Administration piece, i.e. Tech, HR, Rent and Insurance.

GL Account #'s and % are not worth their effort and will slow the process down. If they gave you GL accounts, you would validate the information any way.

I recommend you build a model within excel and send it to the departments and ask them to populate the data you need to create a plan. Once you finalize each plan, as well as the company plan, load the information into Quickbooks.

Please keep in mind that the approach we are discussing is based on shared responsibility. A word about excel – you will not find a more versatile system, with more general acceptance.

But, there are many system alternatives. The point to change is not related to your revenues, but more towards the number of transactions and the number of users that need access.

As you can see from the above commentary, the tool is only as good as the expertise of the people using it as well as the relevance of the information to decision-making.

It sounds like your people could use some training because Excel is really the go-to tool for the business that you describe.

Post if you're going to go that route and I'll tell you specific types of techniques that their training should include as well as arrangements to look for so they don't forget everything they've learned.

If you're finding that Excel is too tedious or error prone, then sounds like you're ready for a CPM (Corporate Performance Management) system. These days, there are many mid-market products which are easy to use and inexpensive (SAAS based). I recommend/implement Adaptive Planning , even for startup's, because it gives smaller companies an easier way to address their planning and reporting needs and can integrate disparate data sources (ERP, CRM, HRIS, etc) . It also promotes a greater understanding of the business because you can start to understand/manage the business drivers that affect sales, income and cash flow.

If your business is growing and it can afford FT financial staff, I would recommend a CPM.

I agree with Jaime that Excel is the "go-to tool for the business that you describe". While prone to errors (...the same can be said of budgeting solutions), it enables the flexibility that entrepreneurs often demand (...budgeting solutions come with requirements (limitations) that, while helpful to the process, can be found not acceptable to the what-ever-it-takes requests of start-ups/young companies).

For right now, I'd suggest using Excel. It will serve as an excellent platform to get you up and running, and this work product will serve as a launching point for when you do want to / need to go to some more 'mechanized' planning tool (ie, Adaptive Planning, NetSuite, Host Analytics, Essbase, Hyperion Planning, Cognos, etc.).

For your P&L, setup a single spreadsheet with your P&L account codes down the leftmost column, time-periods (months, quarters, years) across the top. Totals in the rightmost columns (ie, quarterly, annual, cumulative). Give this single spreadsheet to each of your department managers, with instructions to fill it out with their budget for the forthcoming future timeframe, using this template as well as any additional sheets 'behind' this summary to support their budget submission. Important to have them 'feed' their support sheets into the summary spreadsheet.

Important to plan at the accounting code level of detail so that you can facilitate comparison of budget to actuals.

Individual summary sheets from each department can be summarized into a company total. Oftentimes, revenue is NOT department specific and has to be added as an additional non-department sheet.

Your too small right now to consider going to a non-Excel approach, unless money is not a concern. And, unless you've already instituted a planning mentality, I would not want to try to do that at the same time you attempt to implement a non-Excel approach. Note a non-excel approach could take between $50K to $500K depending the program, your level of in-house expertise and your timeframe to implement. The point at which companies convert from Excel to ? seems to be around $50M+/- in annual revenue.

Reporting would be to anyone submitting a budget (their result only), and the CEO / COO / President and other executive team members (department and consolidated results). Reporting frequency, would be driven by your companies 'sensitivity' to results, ie, if your short on cash, weekly might be appropriate, if you have a longer ramp, monthly, or even quarterly could be appropriate. Track budget versus actual, by $, $ change and % change.

Doug Neeper

Excel will work well for any size company under $100 million in revenue if you simplify the budgeting process. Many people think the more detailed the budget, the more accurate. My anecdotal observations is just the opposite.

First determine the key driver in your company. In software companies, it is personnel. Personnel costs represents 60-70% of total expenses. In hardware or manufacturing companies it is product and within product it is materials. Generally product cost represents 60-70 of total expense and materials represent 70% of product costs. Focus on the key cost driver and then fill in the rest.

Look for short cuts. When forecasting T&E look at weekly costs then break down airfare/hotel/food/etc. Have your sales group forecast travel by salesperson by the number of weeks and then break into the details in the accounting department.

In personnel, budget the base costs and budget taxes and benefits as a percentage of base cost. In this way, you ask managers to budget what they control and you take care of the details they can't control.

When you look at what each manager really has to forecast, it is generally less than 20-25 line items. This format really is nothing more than the 80-20 rule. 80% of the costs represent only 20% of the line items. You'll find the non accounting managers will take budgeting more seriously because they only have to focus on items they understand and can control. Do you really think they care about healthcare costs or social security expense? And by limiting the line items, Excel spreadsheets will be easier to control. Also, the time it take to budget is drastically reduced.

Back when I was the CFO of small, cash-starved companies, I used spreadsheets to maintain three types of cash flow forecasts:

1. A rolling 12-month forecast, which used the classic approach of converting my business forecast into a cash flow forecast. The purpose of this forecast was to warn us of impending danger while we still had some ability to adjust our spending and selling patterns.

2. A rolling six-week cash flow forecast, which included schedules of known costs, like payroll, loan payments, rents, utilities, AP payments, etc., along with revenue estimates based on the beginning AR and near-term sales projections. The purpose of this forecast was to warn me whether I should switch to my emergency cash-conservation mode.

3. A five-day cash flow forecast, updated each weekend. The purpose was to make sure I (a) could make payroll, (b) didn't forget any periodic payments (like certain rents and loan payments) for which no invoices were sent, and, (c) could fulfill any promises I'd made to vendors, or, at the very least, tell me when I needed to call vendors in advance of a delayed payment.

Also, when I prepared monthly financials for internal use, I usually added Source and Use columns to my balance sheet. By doing so, I (a) helped to remind non-financial managers that there's a BIG difference between profits and cash flow, and, (b) gave non-financial managers a reason to pay attention to the balance sheet, which they'd otherwise ignore.

I hate to admit it but we are currently working with excel to forecast and budget a capital program of approximately $300 million per year. We do have a team with a couple of excel experts that ensure the massive files we host are working. What makes this program currently work so well is the focus. We completely understand (after a couple of years building and changing the process) what the true performance indicators are. Like a few others have mentioned, don't go too far into the weeds. Understanding the larger picture is a must and ensuring the program is built to report and analyze the larger goals. In my organization, the focus is completing 90% or more of the planned capital work and ensuring all work aligns with the direction and organizational policies. Therefore, our forecasting is built around this focus.

You do not need a fancy program but you will need an excel expert to build the sheets and keep them maintained.

Best of luck!

I have been successfully using Excel to budget in $10M-$20M private companies for over 15 years. My process has been:
1. Create reports on the accounting system side for departmental income statements showing expenses by month and totaling to the year. Export reports to excel.
2. Copy and project next year. I take the first pass at the projection to make a preliminary budget and make sure it passes executive management expectations.
3. Provide each departmental manager a spreadsheet with the operational section they have control over (expense only, no revenue). I include a tab showing the prior year and a tab providing the next year and ask them to fill in their expectations. Then I review the spreadsheet with them to make sure we both understand their needs and make sure it ties to executive management expectations.
4. I roll up the excel spreadsheets into a summarized income statement to share with executive management and the Board. I also use excel to project the balance sheet and statement of cash flows. As you can expect, this gets to be a very complex spreadsheet with many tabs. You really need to protect yourself by tying back columns and rows to make sure you don't make formula errors along the way.
5. Once the budget is approved, I move it back into the accounting system.
6. Every month I provide managers their monthly budget. It's great if the reports can come directly out of the accounting system reporting manager, but with some systems it requires a trip through excel for a little more formatting.

I have implemented company-wide, bottom up budgeting in my last three positions. It was a lot of work up front, but is seamless once the reports are set up. Managers appreciate being involved in the planning for the upcoming year and it always uncovers new ideas and areas for improvement. They are also responsible for tracking to budget and it becomes very clear when plans go off track.

In a small company, I never expect a projection to hold perfectly true. In my current company, we budget 1/2 yearly to adjust our expectations and keep the budget relevant.

After many years of working in the budget and forecast process I realized that there are two key elements in the budgeting & forecasting process, regardless of the size of the organization:

1) Budgeting and periodic re-forecasting of the entire chart of accounts and not just the income statement (P&L).
2) Periodically and timely analyzing actual financial performance against the budget and understanding the data so it can be effectively conveyed to management so that proper decision can be made.

These two key elements when properly implemented can make the difference between business success and business failure. This is especially critical in small business where cash flow is often the main challenge to maintain, so visibility into key balance sheet accounts is extremely important.

If you only forecast your income statement accounts (using the accrual method of accounting) you will not have visibility into these key accounts; you will not be able to forecast your key financial ratios and you will not have a complete understanding of the future financial health of the company, given your expected revenue and expense assumptions.

In order for you to be able to do all that, consistently and accurately, you need to have the right tools. From my experience, using a spreadsheet tool (e.g., MS-Excel) is not going to address these challenges, especially forecasting a reliable balance sheet. You will need a more dedicated software solution that is designed specifically to perform these tasks. One package that comes to mind, especially for small and medium size organizations, is Budget Maestro from Centage Corporation (www.centage.com).

Regardless of what tools you use, you must make an effort to implement the two key elements mentioned above and from my experience in many industries, there are no real shortcuts here.