December 2009 Contract CFO Articles
Budgeting in the "New Normal" Economy
Contributed by Carol Coughlin, CEO/Founder of BottomLine Growth Strategies, Inc.; http://www.bottomline-growth.com
Key Factors in Starting a New Business
Contributed by Ken Weil, MBA, President - Consult Your CFO; http://www.ConsultYourCFO.com
Budgeting in the "New Normal" Ecomony
Smart companies typically spend the end of each year planning for the next. But this year (thanks to our ever-changing economy), even the smartest business owners have questions that make even simple annual planning anything but typical.
This year, business owners are asking:
When will the economy return to its pre-2007 status?
How will its return affect my business?
How on earth can I predict what will happen next year when I could not have predicted this year?
Is planning for 2010 just an exercise in futility?
The truth is that end-of-the-year business planning is no picnic. It's difficult even under the best circumstances. That said, we always recommend having a plan - one that includes at least a budget and cash flow projections for the upcoming year. But in a time when unpredictable is the only thing that is predictable, the question is: Where to start?
One of, if not the most, challenging parts of planning (especially, in the "New Normal" economy) is predicting revenue. While we certainly don't have crystal ball to tell you how next year will play out, we can offer advice on how to approach revenue prediction. Be aware that this is more of an art than a science.
Let's get started by looking at your 2010 revenue:
Begin with your signed contracts and predict monthly revenue from those. We suggest starting here because we prefer to watch your big picture emerge from the details of individual accounts. Companies with long-term contracts and predictable business models may find this a relatively easy exercise. But most companies are not in a steady-state, predictable situation. For those companies, it can easier to make predictions after examining each contract alone.
We also suggest adding two additional components to your revenue forecast (particularly if you own a service company). These are:
1. Predicted revenue from current prospects, adjusted by the probability (your confidence) that the prospect will become a sale.
2. An estimate of accounts/contracts that need "to be found." These prospects are not on your prospect list - yet - but they represent what your sales department will need to land over and above the contracts you're currently working on. "To be found" contracts may also correspond to sales targets for the sales people in your company. Note of caution: Since revenue targets set the stage for the rest of your budgeting and needed cash flow, we caution you to be conservative in your estimates here.
Next, take a look at Cost of Goods/Services:
Predicting cost of goods/services is likely less difficult than predicting revenue. Typically, cost of goods is a percentage of revenue based on historical costs and adjusted for price changes, efficiencies and other current conditions. For some companies, cost of goods/services also includes salaries and benefits associated with certain positions.
Administrative expenses are next. Often, these are evaluated account by account and there is typically more predictability. If your company is established, historical trends can be relied upon. But if your company is younger, a bottom-up approach might make more sense.
At this point in the planning process, the components of your budget are complete and it's time to take a look at the big picture.
If your expenses are higher than your projected revenue, you need to ask: How can I generate more revenue and where can I cut or defer expenses?
We also suggest you include a cash flow projection in your year-end planning. It's important to predict if your company is going to experience any periods of negative cash flow. Factors that affect cash flow include the timing of customer payments, arrangements with your vendors, inventory expenses and expenditures for capital and software development.
The complexity of your budget process will depend on several macro and micro factors. Macro factors include overall economic conditions, the status of your industry and where you are in the life cycle of your business. Micro factors are those issues that currently exist in your company. It's generally prudent to base expenses on a conservative revenue model.
Ultimately, we advocate having two budgets: one that's conservative and one that's a bit more aggressive. That way, you'll be better prepared no matter which way the economy goes.
Of course, a budget is academic unless it is shared with the appropriate level of management and used to measure against actual results. Additionally, budgets need to be dynamic. Many of the assumptions you will use to create your budget (and next year's plan) will be stale the minute the new year starts. This is why having a solid process to re-evaluate and re-project is so critical.
And the absolute best time to begin that process is now.
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Need help navigating the end-of-year planning process for your company? BottomLine Growth Strategies, Inc., brings experienced CFO's offering strategic, progressive and practical financial thinking for smart, sustainable growth. Call 443-798-1357 and find out more about how our team can support yours. After all, no one summits solo.
Key Factors in Starting a New Business
With the increased unemployment, more people are deciding to venture out on their own or with partners to startup a new business. However, the success rate of new startups is not very good.
"The impact of the national recession is evident in the business survival rates for the years 2003 through 2006. The national recession impacted the business climate primarily during 2008. The percentage of businesses surviving was much lower when the survival period included 2008, which would be the five-year period for businesses born in 2003, four years for businesses born in 2004, and so on for those born in 2005 and 2006. For those born in 2006, the two-year survival rate was 58% compared to a rate of 59% to 61% in prior years. The four-year survival rate for businesses born in 2004 was only 35%, compared to a rate of about 45% in other birth years when 2008 was not included in the survival period." (Big Sky Business Journal: Success Rate OF BUSINESS - Wednesday, 17 June 2009)
These entrepreneurs have a vision for a new business, but usually lack one or all of 4 key factors to make it successful.
First, startups are usually undercapitalized from the beginning due to lack of research to determine the costs in creating and operating the new business. Costs for legal, accounting, marketing and supporting administrative functions need to be properly determined and budgeted beforehand. Also, a catchall expense account should be created for miscellaneous unbudgeted expenses. Many companies underestimate these costs and therefore overestimate their profits and compensation. In addition, with credit facilities being unavailable to most startups in this economic downturn, it is imperative to have a realistic budget and enough cash reserves to get the new venture through these difficult times until the company becomes cash positive.
Second, most of the entrepreneurs do not want to do the day-to-day operations. Having a strong team is critical to any successful organization. So how do you create a strong team without creating a lot of expense? Building a basic infrastructure to do the day-to-day work, while paying an outsourced firm to guide and develop the staff or to complete certain tasks above the competency level of the support staff will free up needed cash. The entrepreneurs or partners will have the flexibility of increasing or decreasing the outsourced firms workload based on how the new startup is achieving their financial targets. This results in reduced costs. As the company grows and a full-time resource can be supported, hiring a new CFO or Controller will be beneficial.
Third, designing a strategic plan that includes both overall corporate and department goals that are both reasonable and quantifiable need to be followed and measured. An upcoming blog on strategic planning and budgeting will be forthcoming.
Fourth, establishing policies and procedures early in the growth of the company is crucial. The establishment of processes and internal controls will improve operating efficiencies and reduce financial risks, while reducing the need for unneeded overhead.
Consult Your CFO offers Oursourced CFO and Part Time CFO services to young, growing businesses. Call them today at 410-371-0821 to discuss your financial management needs.