Planning & Forecasting

September 22, 2022by Ravix Group

Tips to Getting It Right (and Avoiding Common Mistakes)

Planning is imperative for any situation, but financial planning requires a certain fluidity and finesse. Without solid preparation, lack of direction will cause a manageable situation to devolve into loss and crisis. What good planning consists of:

  • Lucid communication
  • Peer engagement
  • Consistent methodology

Successful plans must communicate clearly and concisely to investors and management, while simultaneously acting as a check on instinct and guesswork. A good plan must earn the buy-in of management by engaging them in the initial planning process, spurring debate and questions about reasonable resources. In addition, a strong plan includes a clear system of accountability and an expenditure approval process that is supported by the CEO.

Ravix Group offers outsourced accounting in San Francisco. We provide access to experienced financial experts who can help you improve the accuracy and consistency of everything rolling up to your financial statements.

Process Overview: The Importance of Buy-in and Accountability

The finance and accounting teams typically provide leadership and oversight of this crucial process. So, if you have a leadership gap, Ravix Group can provide consultants with extensive FP&A and budgeting experience to lead the effort.

For the initial preparation, there are several critical steps to keep your planning on track:

  1. Create a reasonable timeline for the planning process, including revisions and approvals.
  2. Ask the CEO to hold people accountable to submit their budgets on time.
  3. Schedule time for a full review of all areas of the budget and financial forecast by senior management.
  4. Exclude individual salaries from early discussions and ask executives to make the case for their resource needs.

Consider an offsite meeting for the final steps.

Avoiding Common Mistakes and Setting Your Team Up for Success

Here of two of many common mistakes that can undermine the accuracy of the planning process:

  • Common Mistake 1: the CEO verbally approves expenditures that are outside the plan. Executives use such approval to make an end-run around the plan. Plans may change, but expenditures outside the plan have to be looked at in the context of the whole plan. Following the process is crucial.
  • Common Mistake 2: Budgeters accept seat-of-the-pants projections. If someone tells you they are “just ball parking” or submitting a “what-if” scenario, it never ends well. Six months from now, the powers that be will think your projections were actual promises and expect you to deliver those numbers. CEOs get bullied by the Board, and CFOs get bullied by the CEO. It is the job of the CFO to refuse to present unsubstantiated numbers.

If these scenarios sound familiar, you probably aren’t alone. It’s human nature for leaders to try to work the system to the advantage of their individual departments. Fractional CFOsand financial analysts can provide support throughout the budget process. A fractional CFO can look at the process objectively and hold individual budget contributors accountable for their projections.

Get the Big Picture: Don’t Get Lost in Details

To obtain a reasonable idea of the “big picture,” you must orient your team. You can bring the management team’s expertise to the forefront in considering industry outlook. Additionally, ask and answer the following questions:

  • What does your customer base or potential customer base look like?
  • What will they be buying and when?
  • What are the economic, technological, legal, and regulatory changes expected?
  • How can you forecast the benefits or risks of these changes more accurately?

Take a look at competition, current pricing, and expected forces for price degradation and/or price support. Gross margins are a strong indicator of where to invest in the business and should be analyzed. Understanding of how costs vary with revenues and which expenses will be cut if revenues do not materialize according to plan, is critical. One should benchmark the plan against public market companies with a similar business model. Additionally, constantly looking at ratios, margins, and financial statement presentation will aid in attaining the larger objective behind the plan.

Common Mistake in Operating Budgets

Both cash flows and operating budgets must be fully understood in an integrated model. Forecasting P&L line items without supporting balance sheet and cash flow statements is a blunder that can cause wild inaccuracies in your budget.

If you need consultants who understand the P&L, balance sheet, and cash flow indications of budget decisions, we can help. Ravix Group offers technical accounting services that provide 360-degree views of critical budget decisions, risks, and opportunities.

When the Big Picture Changes – Putting the Process to Work

Always leverage your work. This includes instituting a monthly process to update the forecast and review the prior month’s budget-to-actual with each executive. Incorporate key cost and revenue drivers into a management dashboard that is reviewed weekly.

Common Mistake: Don’t Wait to Deliver Bad News

Do not delay the delivery of bad news. Always think carefully about informing the Board early when unfavorable variances to the plan seem likely to emerge. This builds trust and credibility and allows the potential benefit of ideas or assistance from Board members. Do not pin your hopes on a breakout Q4, or one or two big deals.

Instead, gain as much lead time as possible with the following strategies:

  • Constantly plan for unknowns and contingencies. One should always have a Plan B and make sure that the backup plan is consistent with the chart of accounts to allow budget-to-actual comparisons. To ensure good housekeeping, always keep a file copy of each final presentation along with copies of all supporting detail for future reference. Knowing who said what to whom, when and why is key. Finally, consider outsourcing non-key revenue or cost driver positions. Ravix Group’s outsourced accounting and bookkeeping services can help you fill these roles with excellent, motivated talent.
  • Always consider the audience. Tailor your presentation accordingly: avoid acronyms and jargon, state key assumptions clearly and use charts and visuals whenever possible. When it comes to divulging pertinent information, share the relevant portion of the budget with all managers to the lowest accountability level. Make sure the sum of the sales force target exceeds the plan. Institute a monthly meeting with each executive to review the forecast and the prior month’s budget-to-actual results. Finally, obtain explanations you will need for your variance analysis for the CEO and Board when called on to summarize the findings.
  • Ensure that the accounting side of the house and the planning side work in concert. By seeing the forecast, accounting can accrue and plan cash better. Financial planning and analysis staff will need accounting’s help to do a proper variance analysis and to forecast accruals and cash balances. Together, they should produce the budget-to-actual reports that the executives review each month with the CFO or their lieutenant.
  • Keep control of the PO process. Also, understand where your forecasting was weak and why, and take the time to apply a little historical analysis to improve the next forecast. This can be as simple as looking at lead times, new customer set-up times, or volume estimates.

Common Mistake: Don’t Lowball Your Plan

Do not present an overly conservative plan to investors. Always recognize the 50% cuts they will make. Conversely, presenting explosive revenue growth at some unrealistically near-term point in the future is unprofessional and impractical.

If it is February and the sales force does not have a compensation plan, think on your feet. Do not roll forward unused funds without questioning. Take a step back and look at what would be the appropriate expenditure of the funds. Always be able to answer the question, “How much do I have left in x account?” Do not finance blindly and accept sales forecasts from the sales team without applying historical analysis to determine their likely accuracy. “It was the VP of Sales’ responsibility” is a good answer for the Board if you want to find yourself looking for a new job. Lastly, budget for promotions, merit increases, and bonuses.

Financial planning and forecasting is one of the most crucial tasks for a management team to ensure transparency and the long term viability of the company. Put good habits into place early and often and your company will run like a well-oiled machine.

Ravix Group offers the best outsourced accounting services to help you deliver accurate budgets and forecasts. We can help you avoid common mistakes that throw your budget off and subject you to the wrath of the CEO and the Board. Contact us online or call (408) 216-0656 today to set up an appointment for accounting, financial planning and analysis (FP&A),and technical accounting services in San Francisco.

 

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