Budgeting and Forecasting Part 2: The CEO’s role in the budgeting process
Building your Backwards Budget
Next, work that bottom line figure backwards. By factoring in capital expenditures or additional investments the CEO wants to make, we derive at net income for the upcoming year. We then factor in fixed costs/overhead costs to come up with the gross profit margin needed, to achieve this bottom line. Finally, we apply the gross profit margin % to determine the revenue needed for the next year to achieve states goals. Revenue numbers become a plug… what number is needed to achieve this bottom line. By focusing on the bottom line, CEO’s change their mindset about every decision they make in the company.
The budget should be modified into a format that is easily updated on a regular basis for the upcoming year, to flush out changes that will inevitably occur in the market. We all know that change is inevitable. You will lose clients you didn’t expect. Cost of raw materials may be dramatically different than what you had planned. While these are critically important changes that must be vetted through your forecasting model, it is equally as important gauge real time impacts on the bottom line. Having access to this information as an ongoing point of reference, will keep you on track to achieve that bottom line number.
CFO Strategic Partners has helped hundreds of companies with their budgeting and forecasting models. We offer strategic discovery sessions with the CEO and management team as well as individual sessions with the division heads. As the new year quickly approaches, now is an excellent time to consider the budgeting and forecasting process to help ensure that the best decisions are made in 2015, to protect the bottom line.