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Budgeting Forecasting FORECASTING AND


Budgeting Forecasting document sample

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              Presented By:
        Darrell Spence, CPA/ABV
        Curtis Blakely & Co., P.C.
              P.O. Box 5486
          Longview, TX 75608
              (903) 758-0734
Forecasting and Budgeting

 Everybody knows what a budget is, of course:
 It’s a way of figuring out how much you are
 going to spend on essentials and incidentals.
 It’s a lot easier to put together a budget if you
 have some basic financial information to work
 For your company, this kind of basic financial
 information resides in its financial statements.

Forecasting and Budgeting

 These financial statements – income
 statements, balance sheets, statements
 of cash flows – are fairly
 straightforward, because they’re based
 on how your company performed last
 year or the year before. Unfortunately,
 historical information is not always
 adequate when preparing a budget.
Forecasting and Budgeting

 In order to effectively create a budget, a
 company must first create a financial forecast
 from which the budget can be prepared.

Financial Forecasts

 Profound words about the future and
 about whether we should try to predict it
 have often been spoken.
 Our expectations, no matter how far off
 the mark they are, encourage us to set
 objectives, to move forward, and to
 achieve our goals somewhere down the
Financial Forecasts

 You can think about the future of your
 company in much the same way.
 Assumptions about your own industry and
 marketplace – that you’ll have no new
 competitors, that a new technology will catch
 on, or that customers will remain loyal –
 provide a framework to plan around.
 Forecasts assist a company in capturing
 these assumptions.
Uses of Forecasts - Budgeting
 Forecasts provide a moving picture of your
 financial situation tomorrow, next month, next
 year, and even three to five years out.
 Your financial picture is likely to be much
 clearer in the near term, of course, and much
 cloudier the farther out you try to look.
 Fortunately, you can use the best of your
 forecasts to make near-term decisions about
 where, when, and how much money to spend
 on your company in the near future. This is
 the budgeting process.                        7
Uses of Forecasts –
Long Range Planning
 A forecast will assist in determining the long
 term viability of a company.
 A forecast assists in evaluating capital
 expenditures. Will they pay for themselves?
 Can the company service the new debt
 relative to capital expenditures? Should
 capital expenditures be financed with debt or
 internally generated funds?

Uses of Forecasts –
Long Range Planning
 A forecast assists in planning dividend/capital
 credit payments. Will the company have cash
 flow available to pay these?
 A forecast assists in monitoring earnings.
 Will the company meet the financial
 performance required by lenders? Will the
 company meet regulatory requirements?

Uses of Forecasts– New Business

 Forecasts are needed to prove the feasibility
 of potential new businesses.
 A forecast can be used to obtain financing for
 new businesses.
 Forecasts help to determine cash needs in
 the start-up phase of a new business.

Uses of Forecasts - Valuations

 Forecasts are used for valuations in potential
 sales of businesses.
 Forecasts are needed for valuation of
 potential acquisitions.
 Forecasts are used for valuations in estate

Constructing Financial Forecasts–
Identifying Key Assumptions
 You want to be clear about what your
 business assumptions are and where they
 come from, because your assumptions are as
 important the numbers themselves when it
 comes to making a financial prediction.
 Several key assumptions are revenue
 sources, inflation rate, capital borrowing and
 repayment, subscriber/customer growth, and
 capital expenditures.
Constructing Financial Forecasts–
Establishing a Base Year
 For existing businesses, the most common
 base year used in constructing a financial
 forecast is the last full fiscal year’s financial
 statements. However, some forecasts will
 use the current year annualized for a base
 Whichever is used, adjustments should be
 made for known and measurable changes
 such as revenue stream changes, pay raises,
 new employees hired, changes in benefits
 provided, additional debt borrowed or repaid.
Constructing Financial Forecasts–
Establishing a Base Year
 Although existing businesses can use their
 track records and financial histories as
 starting points for the base year in the
 forecast, care should be taken. It is all too
 easy to get a bad case of forecasting
 laziness where last year’s data is simply
 grown at an inflationary rate with no
 adjustments made for nonrecurring items,
Constructing Financial Forecasts–
Establishing a Base Year
 For start-up businesses, the base year is
 developed from scratch. Revenues are
 computed based on projected customers
 times the appropriate per customer revenue
 amounts and expenses are often driven by
 customer numbers also. However, general
 and administrative expenses are often driven
 by number of employees, and other factors
 which would apply to G & A costs.
Constructing Financial Forecasts –
Determine Factors Which Drive Revenue and
 For telephone companies, revenues are often
 based on the number of customers/access
 lines, unit sales and sales price, rate base
 and expenses, and minutes of use.

Constructing Financial Forecasts –
Determine Factors Which Drive Revenue and
 For telephone companies, inflation, a plant
 growth rate and subscriber growth are often
 used for the following: plant specific expense
 – inflation and plant growth, plant nonspecific
 expense – inflation, depreciation – plant
 balances, customer expense – inflation and
 subscriber growth, corporate expense –
 inflation and subscriber growth.

Constructing Financial Forecasts –
Determine Factors Which Drive Revenue and
 The above works well for ILEC’s still
 operating in a regulated atmosphere.
 However, CLEC’s and other nonregulated
 entities might consider using different
 methods for forecasting.

Constructing Financial Forecasts –
Determine Factors Which Drive Revenue and
 Examples of these includes calculating actual
 cost of services sold, forecasting known
 expenditures (consulting, legal, etc.),
 forecasting salary and benefit requirements
 as employee headcounts increase, and
 obtaining departmental forecasts such as
 sales, network, customer, and administrative.

Constructing Financial Forecasts –
Capturing Data in Financial Statement Form

 After identifying assumptions, establishing a
 base year, and determining factors which
 drive revenues and expenses, forecasted
 financial statements should be prepared.
 Most companies get a spreadsheet program
 involved in the analysis at this point.
 An example of a forecast prepared using
 Lotus 123 is attached.

Creating a Budget - Overview

 Making a budget for your company is one of
 the most important steps that you’ll take in
 fulfilling your business plan.
 Your budget spells out exactly where your
 company’s resources will come from and
 where they’re going to go, and helps ensure
 that you make the right financial decisions.

Creating a Budget –
Use as a Business Tool
 A budget is a business tool that helps you
 communicate , organize, monitor, and control
 what’s going on in your business.
 A budget requires managers to communicate
 with one another so that they can agree on
 specific financial objectives, including
 revenue levels and spending targets.
 A budget establishes roles and
 responsibilities for managers, based on how
 much money they’re in charge of bringing in
 and how much they’re allowed to spend.      22
Creating a Budget –
Use as a Business Tool
 A budget creates a standard way of
 measuring and monitoring management
 performance by keeping track of how well the
 revenue targets and spending limits are met.
 A budget promotes the efficient and effective
 use of your financial resources by making
 sure that all your resources point toward a
 common set of business goals.

Creating a Budget –
What’s Inside the Budget
 A rough outline of your company’s budget
 looks a lot like your forecasted financial
 Your budget turns your financial forecast into
 a specific plan. In fact, many companies
 simply take their forecasted first year
 numbers and divide by twelve for budgeted
 monthly numbers. These are then compared
 to actual numbers and variances are
Creating a Budget –
What’s Inside the Budget
 Other companies will use their forecast as a
 guide in calculating more detailed actual
 budgeted amounts. These are then
 compared to actual and variances are

Creating a Budget –
What’s Inside the Budget
 Small companies might have one master
 budget, while larger companies might have
 operating, administrative, financial, capital,
 and development budgets. For these
 companies, a master budget is prepared by
 combining all of the individual budgets

Types of Budgeting Approaches – Top-
down Budgeting
 Top-down budgeting is done by the top
 people – owners or senior managers – and
 works best in small companies.
 Whoever is preparing the forecast should
 meet with the company’s decision-makers to
 take time to discuss general expectations
 about the future. The business assumptions
 that go into the forecast and the key
 predictions and estimates are discussed
 The forecast should then be prepared.      27
Types of Budgeting Approaches – Top-
down Budgeting
 Meet again to explore the results of the
 forecast. Consider different sets of business
 assumptions and weigh their potential effects
 on the forecast. Continue to meet until the
 group can agree on a reasonable forecast.
 Establish revenue and expense targets for
 your company’s major functional areas based
 on the forecast.
 Meet one last time after the budget is in place
 to review the numbers and get it approved.
Types of Budgeting Approaches – Top-
down Budgeting
 Once approved, the budgeted numbers
 should be implemented either using your
 accounting software or a spreadsheet

Types of Budgeting Approaches –
Bottom-up Budgeting Approach
 Bottom-up budgeting involves all
 management levels, which can mean more
 realistic revenue targets and spending limits.
 Typically works best in larger companies.
 The bottom-up approach to creating your
 budget really is just an expanded version of
 the top-down process, taking into account the
 demands of a bigger company and of more
 people who have something to say.
Types of Budgeting Approaches –
Bottom-up Budgeting Approach
 You still want to begin putting together your
 budget by meeting with the company’s
 decision makers.
 That group should still spend time coming to
 a general understanding of, and agreement
 on, your company’s financial forecast, along
 with the business assumptions and
 expectations for the future that go with it. But
 rather than forcing a budget from the top, this
 approach allows you to build the budget from
 the bottom.
Types of Budgeting Approaches –
Bottom-up Budgeting Approach
 Managers and supervisors at all levels in the
 organization should meet and start with a
 recap of the budget guidelines, but
 discussions should focus on setting revenue
 and expense targets. After all, these
 managers are the ones who actually have to
 achieve the numbers and stay within the
 spending limits.

Types of Budgeting Approaches –
Bottom-up Budgeting Approach
 Summarize the results of the budget
 negotiations. If necessary, get the decision
 makers together again to discuss revision in
 the financial objectives, based on the
 insights, perceptions, and wisdom of the
 company’s entire management team.
 Go through the process again, if you have to,
 so that everyone at every level of the
 organization is on board (or at least
 understands the reasoning behind the budget
 and its numbers).
Types of Budgeting Approaches –
Bottom-up Budgeting Approach
 Approve the budget at the top. Make sure
 that everybody in the company understands
 what the budget means, applying the budget
 not only to financial objectives but also to
 larger business goals.
 Once approved, the budgeted numbers
 should be implemented either using your
 accounting software or a spreadsheet
Forecasting and Budgeting -
 Unfortunately, the uncertain future that makes
 your financial forecast and budget necessary
 in the first place is unpredictable enough to
 require constant attention.
 You should monitor your financial situation
 and revise the parts of your forecast and
 budget that change when circumstances –
 and your own financial objectives – shift.

Forecasting and Budgeting -
 The entire financial forecast should be
 updated regularly, keeping track of
 when past predictions were on target or
 off, and extending your projections
 another month, quarter, or year.

Sample Telephone
Cooperative, Inc.

4 Year Projection
Version 2000-2


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