By William A. Long, Jr. C.P.A. - Partner

With most companies on a calendar year, it is time to start thinking about developing your budget for next year. You should plan to have the budget finalized before the end of this calendar year. Your budget should be loaded to your general ledger system and your company should be managed to your budget, not just last year's activity.

If you're a business owner, you should be the person pushing this process. You know your business best, and should be actively involved in the budgeting process. Your budget is only as good as the information you provide to your team to create the budget. At a minimum, you must provide the following information to start the budgeting process:

• Operational revenue forecast:
• The revenue forecast should be developed based on how you report sales on a month-by-month basis.  Do not just give an overall percentage increase.  This is not budgeting.  Use this as a time to think about how best to grow revenue for next year, as well as how seasonality affects your business.  If your revenue budget is not realistic, your overall budget is worthless.

• Information on operational changes and planned capital expenditures:
• Include all planned capital expenditures in your budget as part of your cash requirements as well as its impact on depreciation expense.  You will also use this information in the cash forecast.  Include a contingency amount for unexpected capital expenditures, as they tend to always occur.  Be sure to disclose operational changes you are considering such as expansion into new markets or new locations.  

• Information on planned payroll changes:
• Cover specific hires and terminations as part of your payroll budget. Budget planned increases at the department and individual level not just an overall percentage increase.  Use this as a time to review each position relative to minimums, midpoints and maximums for the position.  Tying the payroll portion of the plan to specific positions and individuals helps ensure that the plan has a sound basis.

Relax - now it is up to your finance team. Armed with the above information, your finance team should draft a monthly budget for your review. Be sure to set a deadline to review the draft budget with your team and be sure to verify the following:

• Verify that your revenue projections and operational and payroll changes are correct.
• Verify items such as insurance, lease payments and debt payments have been budgeted correctly.
• Be sure that any assumptions used to develop the budget are documented.
• Finalize your budget.

Preparing your Cash Forecast

Most people first ask "Why do I need a cash forecast when I have a budget?" Most companies get into trouble because they run out of cash and did not see the problem in advance. A well-developed cash forecast should predict a cash problem months in advance. If you see the problem coming, time is on your side to resolve it. Banks can be helpful if you approach them early with a potential problem that is well documented along with your solution.

Your cash forecast involves both your profit and loss budget and changes in your balance sheet. The forecast must be balanced back to your profit and loss budget. Changes in items that impact cash such as capital expenditures, inventory turnover and increases in receivables and payables must be factored in. Be sure to look at line of credit availability and balances as part of the cash forecast. Your banker will appreciate your diligence and will likely be more amenable to accommodating your needs.

Once completed you should sit down with your team and review the cash forecast at least monthly, with a detailed review of the next three months. Be sure to note trends to your original forecast. If trends are negative, start taking action immediately to reverse. Remember, if you're the business owner, it is your net worth that is being spent!