CEOs Need to Look at Budgeting Differently: It is Your Job to Think Big Picture
Many CEOs detest the budget process, and some think it’s a complete waste of time. But with the fourth quarter underway in the 2018 budget process, it might be time for an attitude adjustment — or in business terms, a paradigm shift about how you think about budgeting.
Each year, the budget should serve as a reminder. It looks far into the future about goals, hopes and dreams of the business.
Go back to the beginning of your career. When you started out, it was very likely you set goals for how much you wanted to make in salary by the next year or two. If it was good for you then, don’t you think it would be good for the company now?
Don’t get lost in the details. You likely have a talented staff for that.
Instead focus on realistic forecasting; a budget is more than a wish list – it is based on rational data.
Let’s start with a few key questions that will crystallize why this is such an important process every year. We have some good news – these questions are all about you and your goals. These goals then naturally translate to the direction of the company.
- How much money do I (and the other owners) want to make next year?
- What do I intend to do with this company in 3-5 years?
a. If you plan to sell the company then the next question is: How much do I want my company to be worth in those 3-5 years?
- What capital expenditures or additional investments in my company do I want to make next year?
- Do I anticipate my overhead/fixed expenses to change dramatically next year? If so, why and by how much?
- What gross margin can I reasonably hope to achieve next year?
Most CEOs begin the budgeting process backwards. They start with the revenue and spend hours dissecting customers, trends and backlogs to try and determine next year’s projected revenue. This will not address those critical questions. In fact, it does just the opposite; this process sets up the owner to take the leftovers.
Start, instead, with the bottom line. By asking how much money the owners want to make, or how much they want their company to be worth in 3-5 years, allows the CEO to determine what their bottom line (or EBITDA, cash flow, net income) needs to be next year. Once this question has been answered, 90% of the most critical part of the budgeting process has been completed.
Need help focusing on the right questions for your company? Turn to the talented team at CFO Strategic Partners. We have helped more than 1,000 companies form their budget and align their vision.