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Budgeting 101: Creating Successful Budgets

We often discuss budgeting in our firm, and I often write about budgeting because it is such an important topic in any company. As a consulting firm, we deal with this issue at almost every client. Let’s rehash some basics… Why is budgeting important? As properly stated by Ron Real (the author of 13 ½ Strategies for Winning the Budget Wars), “To achieve success in anything, you need two ingredients: a target to aim for, and a way to measure your progress towards it” (more from Ron Real below). Before we go into creating successful budgets, let’s address the common problems with budgets.

Successful budgets, budgeting rules, common problems with budgetsCommon Problems with Budgets

We deal with clients all the time that either do not have a budgeting system in place, or they have the wrong budget system. The following are some of the most common problems we see with budgets at some companies:

  • Lack of accountability
  • Employees ignore the budget, don’t follow it, or find ways around it
  • Only applies to some groups/managers and not to others
  • Results in fights or power plays, or managers play games
  • Budget process takes too long and consumes too much of people’s time
  • Budget is wrong from the beginning
  • Established goals are either easy to reach or unachievable
  • Filed away when completed – lack of follow up
  • Built on faulty or unrealistic assumptions or not everyone agrees on the assumptions or principles
  • Budget performance and financial feedback is slow or nonexistent
Ready to start creating successful budgets? Become a SCFO Lab member and start the Budgeting 101 Execution Plan where we go in depth into common problems with budgeting, budgeting rules, and budgeting principles. Learn more about the SCFO Lab here.

Successful Budgets

Successful budgets are possible, but the TONE STARTS AT THE TOP. If the leadership or Board does not take the budget process seriously and does not hold others accountable, then you will have a problem with the budgeting process. You can build a budget and a budget process that is well conceived, creates a visionary plan, and shares resources. The budget process is very much a team effort, but it often needs to be taught to others in the organization.

The tone starts at the top, and your CEO needs an advisor they can trust. Click here to download our free How to be a Wingman Guide to start setting that tone.

4 Budgeting Rules

Successful budgets are created by following rules and principles developed over my 28-year career. You can find all these rules and principles in the Budgeting 101 Execution Plan inside the SCFO Lab. Let’s look at 4 budgeting rules that help create successful budgets.

Rule #1: Decision Making Tool

The budget is a tool for decision making. It is not a disconnected document that has little to do with the company’s actual business. Start by reframing your and your CEO’s perspective on the purpose of a budget in a business.

RULE #2: Management Tool

Budgeting is a very important management tool for achieving lasting success. Just like the CFO is the wingman to the CEO, the budget is the wingman to all management.

RULE #3: The Plan

A budget is establishing the discipline to set up a plan and then adhering to the plan. In fact, 94% of all ineffective budgets are the direct result of weaknesses in the organization’s corporate structure. Some of these weaknesses include the following:

  • Inadequate leadership
  • Poor communication
  • Conflicting goals
  • LACK OF ACCOUNTABILITY

Hint: Be disciplined and follow the plan!

RULE #4: Problems Exist

Issues that lead to a poor quality budget process mean that these problems already exist within the organization ALL THE TIME! If your company is experiencing budget problems, then it’s time to look at what the problem really is. Issues that are probably already part of the corporate culture, but many times ignored, include the lack of:

  • Vision
  • Accountability
  • Communication

“Without a yardstick, there is no measurement.  And, without measurement, there is no control”
– Pravin Shah

There are many other rules to budgeting and basic principles, but we can not cover all of these in this one blog; however, we do cover this topic at length in our Financial Leadership Workshop (Day 4) and our SCFO Lab’s Budgeting 101 Execution Plan.

Understanding how budgets really should work is critical. I recently had an executive tell me that he did NOT believe in budgeting because it just meant that people now had the authority to spend everything allocated to them at the end of the year. Unfortunately, this executive was thinking of budgeting like the government thinks about a budget. You have $1,000 for the year, so you must spend it by year end. That is NOT a corporate business budget or budget process. That is a very flawed interpretation of budgeting.

If I could use just one word that describes why it is important to have a good budget process, it would be “accountability”.  A budget will force your team to be held accountable. But, if that theme of accountability does not start with the Tone at the Top, then you are guaranteed to have a flawed budget process.

If you are ready to take your financial leadership development to the next level, then look no further than the Financial Leadership Workshop. Registration for the Gamma Series of the Financial Leadership Workshop is now open. Learn more about the program and how you can get started in October 2018.

Suggestions to Create a Successful Budget

Other quick suggestions to create a successful budget include the following:

  1. Set goals and objectives that push for growth and efficiency, but keep those goals and objectives realistic. There is nothing more demoralizing than to have a unachievable goal.
  2. Start your budget planning process early. For a calendar with year end at December, start no later than August of the current year.
  3. Measure your actual results every month versus budget, and hold people accountable.

Adhering the these budgeting rules and reframing budgeting to your CEO and leadership team is just one example of how you as the financial leader can act as a wingman. If you want to step up and be the trusted advisor your CEO needs, click here to download the How to be a Wingman Guide.

Successful budgets, budgeting rules, common problems with budgets

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Successful budgets, budgeting rules, common problems with budgets

 

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Good Budgeting Processes

Budgeting garners a variety of reactions. Some are annoyed that nobody ever wants to look at them or follow them. Others don’t know how to read them – so they just ignore them. Then there are some that just follow the mantra – everything is going to be alright. But we have seen some budgeting errors that resulted in over $1.5 Billion of deficit.

I recently had a conversation with a CEO that a budget was useless and he could manage his cash by using the bank. Needless to say, I was shocked. Over the course of my career, I’ve written hundreds – if not thousands of budgets, financial models, business plans. It’s been cumbersome, annoying, and I can’t tell you how many times someone has tried to ignore it. It’s a pain and I figured I could communicate it easier. Every company needs a budget, but it’s made to be so complicated AND no one follows it. So, I’ve created some good budgeting processes that you can apply immediately.


One of the budgets revolves around your cash flow. Remember, cash is king. If your cash is limited or you just want to improve it, then access our 25 Ways to Improve Cash Flow. 

Download The 25 Ways to Improve Cash Flow


What is a Budgeting Process?

A budgeting process is a plan for the greater plan that helps you make strategic decisions and steer your company is the right direction. A budgeting process (or plan) enables you to keep your company alive.

“During every minute of the flight, I was confident I can solve the next problem.  My first officer, Jeff Skiles, and I did what airline pilots do: we followed our training, and our philosophy of life.  We never gave up.  Having a plan enabled us to keep our hope alive. There’s always a way out of even the toughest spot. You can survive.” 

Capt. Chesley B. Sullenberger III

What A Good Budget Looks Like 

Often, I get asked what a good budget looks like. A good budget allows the manager or executive to have control over what is going on with the cash. It builds both accountability and ownership for the employee and the manager. A good budget also allows anyone to make quality decisions – rather than making decisions completely blind. In addition, a good budgeting process generates discipline – thus, creating empowerment and success.

“A well-constructed numerical estimate is worth a thousand words.”  

Charles Schultze, former Director of the US Bureau of Budget

What A Good Budget Does Not Look Like

Just as important, we also need to look at what a good budget does not look like. In my career, I’ve seen numerous budgeting problems or pitfalls when working in my own companies or with clients. There was a lack of accountability. Employees ignored the budget, didn’t follow it, and found ways around it. Additionally, the budget could only be applied to specific groups/managers as it was not a universal budget. Their budgets resulted in power plays and managers played games, instead of leading their company forward.

Budgets also take time. I’ve spent months, working everyday on just one budget. The current process for preparing a budget takes too long. I’ve also seen clients with budgets that were wrong from the beginning. They built their budget on faulty or unrealistic assumptions. Or they ignored their team members’ concerns. The team was fractured.

And they established goals that were too easy to reach or simply unachievable! Other clients spend all this time creating a budget only for it to be filed away when completed. The common budget process calls for a lack of follow up. Feedback on budget performance is either slow or nonexistent. CFOs, controllers, and budget directors can’t do their jobs effectively without that feedback.

Finally, executives and top management have hidden agendas or aren’t committed to having a budget. They’ve gotten this far without using a budget, so why need one?

Your budgeting process determines the success of your final budget. Simple mistakes on your process could result in a massive cash crunch. To improve your cash flow, click here to access our 25 Ways to Improve Cash Flow.

Good Budgeting Processes

There is also no right way to prepare a budget. Each organization must find its own process. But there is an easier way to prepare a budget with your own process. Everyone sees budgeting as the CFO’s or accounting department’s responsibility, but a good budgeting process involves the entire company. There are a couple key things that you need to look at as you evaluate good budgeting processes.

Have These Four Budgets

In fact, there are really four budgets you need to account for. These include the

You cannot get to the capital budget and balance sheet budget until the operating budget is complete. So that it your #1 priority! In addition, you cannot get to a balance sheet budget without a cash flow forecast, so add that to your to-do list.

Create a Micro-Budget

A great tool for measuring and controlling a specific or vulnerable area is the micro-budget. The micro-budget instills both focus and accountability into your company. Micro-budgets are single focus budgets that companies use to measure and control one specific area. Some examples include:

Simplify Your Focus

Additionally, many accountants make their firms budget more complex than it needs to be. In fact, measure the complexity of your budget by four factors:

  • Operational Complexity
  • Diversity of Products and Services
  • Size and Geography of the Organization
  • Accountability to Others
  • Hallmarks of a Good Budget

Have Clear AND Measurable Goals

Budgets require clear and measurable goals. Without budgets, it is very difficult to achieve the business goals because each budget defines targets and measures the progress towards them.

Connect Activities and Profits

What prevents people from controlling costs or conserving resources is that they cannot see the direct connection between their job activities and their company’s profits. Part of your job is to help your coworkers and peers see how the work they perform impacts the bottom line. You can accomplish this by involving every employee in the budget development process. Ask them what they need to better accomplish their goals, issues they are seeing, or ideas to pursue.

What Your Budget Needs To Be

You can build a prudent, predictable, and well-conceived budget that creates a visionary plan and shares resources equitably. The process has changed. It’s now a team effort! Your team needs to know the concepts and budget process because (rule #1) the budget is a tool for decision making. It should not be a disconnected document that has little to do with the company’s actual business.

A Fiscally Prudent Budget

When you produce a fiscally prudent budget, it is achievable and balanced. Also, measure it using multiple non-financial metrics. The budget should both stretch employees and the organization as a whole. While it may leave wiggle room for flexibility, the budget should establish proper reserves where needed.

Remember, a fiscally prudent budget makes an investment in the present, as well as the future. The budget does not borrow from the future to fund today! If any one of the strategic goals listed on the budget is not met, then it should not put the company in financial distress. Finally, all the decision makers, executives, owners, and employees need to believe the budget is realistic, or else it risks not being a fiscally prudent budget.

A Well-Conceived Budget

In comparison, one creates a well-conceived budget at a strategic level. It is developed in conjunction with the firm’s planning process. Furthermore, it utilizes the business acumen of an employee in the trenches. For example, an employee in the trenches is serving the customer or making the product. They are the first line of your company. They have continuous feedback built in that informs the leaders whether a strategy is realistic or not. The leadership has to be in tune with their front line. In addition, a well-conceived budget includes the interests of all the organization’s stakeholders. Then develop the budget by consensus.

Conclusion

In the end, a good budgeting process enables you to better manage your cash flow and adapt when needed. If you are seeking more ways to increase cash flow in your company, download the free 25 Ways To Improve Cash Flow whitepaper to find other ways to improve your cash flow within 24 hours.

Good Budgeting Processes

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Budgeting: It’s About Achieving Success

Budgeting is All About Achieving Success, common budgeting problems

Ron Rael, author of 13 ½ Strategic Ways of Winning the Budgeting Wars, once said that, “To achieve success in anything, you need two ingredients: a target to aim for and a way to measure your progress towards it.” Budgeting is all about achieving success in business. When you improve the budget process, you are able to foster both empowerment and accountability. Eventually, it will lead to a better company. Although initiating change in your budgeting process will be challenging, it will further demonstrate your financial leadership.

The Most Common Budgeting Problems

The reason why you may have not seen much success come from your budget is because of the following common budgeting problems. First, the goals that are established before the budget is created are either too easy to reach or are simply unachievable.

If you know your economics, then you can avoid potential unrealistic goals or assumptions. Click here to download the Know Your Economics Worksheet to shape your economics to result in profit.

Then the budget is built on faulty or unrealistic assumptions. If the assumptions are correct, then maybe not everyone agrees on the assumptions or principles. This disagreement of what to build the budget on results in a dysfunctional team.

After the budget is built, there is often little to no feedback from management about the budget. We have seen this time and time again in companies. Those not involved in the budgeting process simply don’t care about the budget. They think that because they are not the CFO or Controller, it’s not their job. But everyone in an organization should care about the budget.

Additionally, when the budget is completed (usually after weeks of non-stop focus), it is filed away. It is rarely taken out and use in the daily strategy of the company. There is a lack of follow up.

When leadership has to meet with shareholders, stakeholders, etc. regarding the budget, they realize that they haven’t used the budget at all. Then they go to any means to achieve their budget. This manipulation defeats the purpose of having a budget. We suggest to design a budget that cannot be manipulated.

If you are thinking that the most common budgeting problems are more like cultural issues, then you’re correct!

Top 2 Budgeting Problems

Everything we have already said concerns the entire company. But the majority of our audience consist of CFOs and Controllers. The two problems that impact CFOs, Controllers, and budget directors the most include hidden agendas executives may have, the lack of commitment from executives for having a budget, and executives seen budgets as the CFO’s job. The responsibility of the budget is not solely reliant on the accounting department or CFO.

Budgeting is All About Achieving Success, common budgeting problemsHow to Budget Successfully

Budgeting successfully requires you to transform how you think about budgeting overall.

Use It As Decision-Making Tool

If you want to budget successfully, then you need to use your budget as a tool for decision making. It is not some disconnected document that has little to do with the company’s actual business. Instead, it should be a living and breathing part of your decision making. Plus, it is more effective when you use it to make decisions. When people ignore it or play games with it, your budget becomes ineffective.

Additionally, understanding the need to improve the quality of decision making and making it happen are two different animals. What you get all depends on the leaders’ commitment and attitude.

Use It As Management Tool

Budgeting is a very important management tool for achieving lasting success. A budget should establish the discipline to set up a plan. But you must also adhere to the plan. Furthermore, this management tool always you to measure your progress, and ultimately, your success.

“Without a yardstick, there is no measurement.  And, without measurement, there is no control”
– Pravin Shah

Issues Are a Result of Culture

We said it earlier, and we’re saying it again because it’s that important. Most budgeting issues are a result of an organization’s culture. Issues that lead to a poor quality budget process mean that these problems already exist within the organization ALL THE TIME!

Cost Associated

Everything has its cost! The budget is no exception. Budgets take work! They are not easy to implement nor are they easy to manage. Some of these costs include the following:

In addition, there are other costs associated with budgeting that could impact the bottom line. If employees are not conserving costs and making the most of opportunities, the bottom line will suffer. If leaders are not investing in their tangible and intangible assets equally while employing them to their fullest potential, the future bottom line will suffer.

Require Specificity

The budget and the plan it drives from is only effective when it leads to specific actionable and measurable activities and generate stakeholder value. Therefore, a budget must require specificity.

Assumptions Drive Everything

Also, your assumptions drive everything. Therefore, it is crucial that everyone be on the same page regarding assumptions in relation to decisions on what is important in your budget.

Governance of Budgeting Process

When your leadership team establishes governance in your organization, they are deciding how to best use all their resources to accomplish the purpose or mission.

Governance Principles

Use the following governance principles in your budgeting process. A reality based budget and planning system that enhances accountability is necessary for the good governance because it increases transparency. Furthermore, the key factor in a realistic and honest budget is people and their accountability. A well conceived and thoughtful budget improves the governance demanded by all stakeholders. In addition, the budget is a reflection of the importance that your executives place on governance and ethical conduct. Every game played with the budget is actually a breach of the organizations Code of Ethics.

CFO’s Role in Making the Bottom Line Commitment

 The CFO is essentially the CEO’s cheerleader! The CFO inspires higher level of performance.  The greatest challenge is to ensure that the strategic objectives and operational plans are adequate and inspirational enough to achieve the leaders’ desired financial objectives. The leader’s three plans, when combined into a cohesive strategy, will generally lead to success; however you define it. Furthermore, the CFO and executive team are the guardians of all assets – physical, financial and human ones. Use these assets to implement the plan and achieve the goals!

 CFO’s Discipline

Having the discipline to build a healthy budget, and having the budget instill discipline across your firm has many benefits. Not only will your budget properly serve as a management tool, but the benefits of discipline will filter over to other areas of your operation which will lead to efficiency and profitability. The next step in achieving success through your budgeting is knowing your financials or economics. If you want to shape your economics to result in profit, then click here to download the Know Your Economics Worksheet.

Budgeting is All About Achieving Success, common budgeting problems

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Budgeting is All About Achieving Success, common budgeting problems

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Make Money Grow on Trees

Make money grow on trees

Let’s go back to when you were a child. You looked up at a tree and thought… If money is made from paper and paper comes from tress, surely, I can make money grow from trees! Or maybe, you asked your parents for something extraordinarily expensive and they responded with “money doesn’t grow on trees”. We have always been told that we cannot make money grow on trees… Until now. There are a couple steps we can take in our businesses to grow dollar bills as easily as trees grow leaves.

Money Does Grow on Trees

You might be wondering at this point if we are really talking about how to make money grow on trees. Unless your company has access and uses natural capital, you probably cannot physically make money grow from trees. But we are still going to show you how to grow using what every company has. First, let’s look at a company that makes money grow on trees.

Clean Water Services is a water utility company in Oregon that faced an opportunity to make real change. Their only water source, coined the “sluggish” river, became the first river in the state to fail to meet the Clean Water Act. This Act mandated that the Clean Water Services make a change or face severe consequences. Needing to dramatically cool the discharged water from their waste management facilities, Clean Water Services faced two options. These options included either investing $102-255 million to cool the water or using nature’s own capital to cool the water at a mere $12 million.

In this case, the choice was obvious. Over the next 5 years, they would invest in planting trees to cover the river and won various EPA awards because of their successful use of natural capital. Because of their decision to go with the latter option, Clean Water Services increased their bottom line by planting trees – essentially making money grow on trees. The great thing is that if you are creative enough, you have the ability to capitalize on what is already provided. If you want to read more about this case study, click here to access it on Harvard Business Review.

If you are looking to learn how to make money grow on trees, it’s important that you have to tools to accomplish that task. Click here to download our 3 Best Tools!

How to Make Money Grow on Trees

What are some necessities required to grow a healthy tree? You need a seed, healthy soil, water, and sunshine. It’s simple! So, if it’s so simple, why do we not see that the same methodology working in our own businesses? Whether it be a business model or a person, you need an idea. You need a team surrounding you to bring the idea to fruition. Money is required to make it happen. You must continually invest in knowledge and advancing your product or service or risk getting left behind by competition. Let’s start taking your business to the next level!

Plant a Seed

First, figure out what type of tree you want to plant. This can include an idea, a person, or a business model. Apple’s seed was Steve Jobs. He had the idea and passion to revolutionize technology. Amazon converted to a subscription model and partnered with UPS to do logistics. Google took their algorithm and provided a free product for consumers while providing an advertising platform for companies.

Once you have identified what you want to do and where you want to do it, it’s important to commit to it. Remember though, it is okay to adapt as you learn what works and does not work. But, be aware that many young companies decide to pivot too quickly to prevent making a mistake and lose out on a great reward. You are missing out on an opportunity to make money grow on trees if you continue to change the type of product or service and how to deliver it every six months. Commit to your seed.

Toil Your Soil

The next step is to plan it in fertile soil. A seed is useless if it isn’t planted in nutrient-rich soil. By setting yourself up with a great foundation, you will be more likely to reap great rewards. What does this mean for you as the financial leader of your company? Have the resources, the right team, and the place that this seed would thrive. You wouldn’t plant a palm tree in Siberia.

Then, have a hyper-focused goal to reach X customers, $Y million in revenue, or enter Z more states/countries. Whatever that goal is, paint it on the walls and breathe it every second of the work day. A great leader will continue to remind and encourage the team of those goals.

You will still run into a few roadblocks while you try to toil your soil. As a financial leader, it can sometimes be frustrating when your entrepreneur chases multiple “squirrels”, losing their focus repeatedly. But thankfully, you can help guide them back onto a focused path towards success. Instead of getting annoyed, encourage them that if they focus on this one product or model, they can chase after that squirrel later. Keep in mind, your attitude toward your entrepreneur and the company’s goals will determine the level of success they achieve.

If you want to learn more about how you can be more effective in your role (and get two extra tools), click here to download the 7 Habits of Highly Effective CFOs.

make money grow on trees

Water Your Plant

You have identified your seed, planted it, but to make it grow, you need something critical in business. Cash! Cash is the blood of your company, the water to grow your company, the life-giving resource. But it is important that you measure the amount of water you are pouring on your seed before it is too late. Whether it is a sprinkle, a consistent stream, or a flash flood of cash coming into the business, the risk of pouring too much or too little can result in disaster – the death of your company. If you have ever kept and grown a plant, you know how important this balance of water is. Thankfully, there are ways to improve cash flow to help buffer a potential mistake.

To improve your cash flow as you water your plant, learn how to squeeze extra cash out of every area in your business (and get two bonus tools) by downloading the 25 Ways to Improve Cash Flow whitepaper.

Let the Sun Shine

Lastly, you need to let the sun shine and watch it grow to know when to reap the fruit. As the financial leader of your company, guide your CEO and senior management team to know when and what move to make. A great place to start is to look at the pricing of your product or service. If you want to analyze your pricing, click here to download the Pricing for Profit Inspection Guide.

make money grow on treesOther Tidbits

We have put together some tips to help your better manage the growth of your company.

  1. Develop a budget that you can consistently adhere to.
  2. Have an emergency fund to bail you out if something goes south unexpectedly. One of the biggest mistakes is exhausting all cash and depleting the reserves.
  3. Pay down any debt in the company quickly and strategically. Too much debt will strangle your ability to grow.
  4. Get referrals to build your business. In our consulting practice, we give referrals to banks and other businesses who we were not able to help ourselves. In return, they refer us clients.

Now’s the time to really think like a CFO. Download our three best tools to start speaking the CFO language and start growing your company. Make some money grow on trees!

How to Make Money Grow on Trees

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Make Money Grow on Trees

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Why Prepare a Budget?

Do you need to take an umbrella to work today?

Without a trusty weather app or friendly meteorologist, it would be difficult to know the answer. Fortunately, you probably have one of these tools to help you make an informed decision.

The CFO/Controller is the meteorologist for the business.  It’s your job to help the company decide when, and if, you’ll need an umbrella.  How do you do this? Prepare a budget.

prepare a budgetWhat is a budget?

A budget is an estimate of income and expenses within a given amount of time. It contains economic goals, boundaries, and limits on expenditures of the organization.

Why Prepare a Budget?

So, why prepare a budget? By creating a budget, you’ll be able to hold the company accountable for its expenditures, reduce costs, and prepare for a worst case scenario. It serves as a measurement tool that can visually illustrate if you have enough cash to operate or to grow.

The steps in the budgeting process are:

  • Prepare the budget
  • Negotiate and agree on the budget
  • Monitor the budget

Prepare a Budget

First, you as the financial leader must choose what type of budgeting method you want to use. There are two main types of budgets: zero-based budgets and traditional budgets. While zero-based budgeting allows you to re-examine all of your costs, traditional budgeting is more user-friendly.

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Typically, prepare the annual budgets before the fiscal year begins. This window of preparation helps facilitate execution.  Early decision-making will provide boundaries within which the company must abide. Oftentimes, if you don’t prepare budget ahead of time and create it on the spot, then arguments and internal issues begin to arise. You can avoid disputes when executing a budget by preparing early.

During preparation, it’s important to focus on fiscal targets. Fiscal targets are are goals for specific financial categories. These could include profit, debt payback schedule, operating expenses, projected borrowing requirements, etc. By laying out these goals, you’ll be better equipped to prepare a budget that will allow negotiating and finalizing of the budget to go smoothly.

Optimistic Budgets

prepare a budget

As a reminder, an overoptimistic budget can result in late payments and disorderliness in regards to keeping in compliance with the bank. There are several ways you could be overoptimistic in your budget, the major one being you are not projecting your sales correctly. If you’re a couple cents off, it’s okay.  A budget should be seen as a “set of guidelines, not rules, based on the best forecasts at the time but always open to amendment as circumstances warrant” (Accounting at Your Fingertips, p. 332).

To reduce the chances of creating an overoptimistic budget, it’s important to go back to the basics. By focusing on the economics of your business, you’ll not only create a realistic budget, but you’ll be better able to project future growth.

(NOTE: Want an easy tool to analyze your company’s economics? Download the Know Your Economics Worksheet to make sure you’re pricing for profit!)

Negotiate and Agree on the Budget

As with most things in business, negotiation comes into play.  The purpose of negotiation is to allocate resources according to your targets and policies with everyone’s best interest in mind.  However, fiscal policies should provide the framework for budget formulation. Make sure that you consider your company’s economics when structuring the budget.

During this negotiation process, it is vital for you as the financial leader to maintain the meeting as a negotiation rather than let the meeting turn into a bargaining session. Bargaining results in a win-lose situation where the goal is to get as many of your points on paper over another person or department. It may drive the process, but it is not effective. Often, the outcome of bargaining is inefficient resource allocation.

By comparison, negotiation is all about a group of people working towards one goal. Part of this goal should be to comply with fiscal policies and targets.

Monitor the Budget

So much time and hard work goes into creating a budget, yet so many companies fail to utilize the budget. The purpose of a budget is to measure operational efficiency and performance issues.

The efforts of budgeting should be focused on improving revenue forecasting or projecting. A budget is useless unless utilized in a dynamic manner. While budgeting provides the short-term execution plan, forecasting allows you to take historical data to measure the reality of success in executing your budget. You’ll be better able to allocate resources to the right departments.

(Check out the 5 tools that you might not be using but should be implementing along side your budget.)

When you link the budget and the forecast, you’ll be more equipped to monitor the budget.  Contrast this with a static budget that is often useless after the first month. It all starts by knowing your unit economics and then assessing your economics to judge whether they are working for your company.

To ensure that your budget is built to achieve your business goals, make sure to start with the basics. Find out more about how you could utilize your unit economics to add more value to your organization by clicking the link below.

prepare a budget, Why Prepare a Budget

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prepare a budget, Why Prepare a Budget

There are many methods you can use to improve productivity in your company. Click here to download a PDF of 10 Ways a CFO Can Improve Productivity.

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7 Warning Signs of Fraud

warning signs of fraudUnfortunately, companies of all sizes can become victims of fraud. In fact, a study on fraud published by accounting firm KPMG International found “a very large increase in cases involving the exploitation of weak internal controls by fraudsters up from 49 percent in 2007 to 74 percent in 2011.” Thus, internal controls are a first line of defense and are important in any size organization. So, implement them to reduce the opportunity for fraud. Whatever the size company, there are some warning signs of fraud that are important to pay attention to.

7 Warning Signs of Fraud

1.  Is the person reconciling the bank statement also a check signer?

These are important duties to segregate. When combined, a person signing a fraudulent check can go on without being detected.

2.  Does your company have several bank accounts?

Multiple bank accounts make inappropriate movements of cash harder to detect. So, make sure you understand the business need for each bank account the company has and use as few accounts as possible.

3.  Do you have a budget to compare with your actual financial results on a monthly basis?

This is an important control in the detection of unauthorized transactions.

4.  Have you noticed a controlling personality or secretive behavior on the part of an employee?

This may be a sign that a person is being deceptive or needs to control people or the environment in order to conceal their activity.

(Have you ever heard of skimming fraud? It’s the most difficult fraud to detect.)

5.  Are there accounts on your financial statements that you do not understand?

Ask! If your question is not welcomed or answered to your satisfaction, then pay attention to this response.

6.  Financials that are not timely or closed on a monthly basis.

Lax or non-existent cut offs leave room for inappropriate entries in months long gone.

7.  Are employees related in your accounting department?

Part of a functioning internal controls system is the need for collusion in order to circumvent controls.

The Fraud Triangle

What is the motivation for an employee to steal?  The fraud triangle shows us 3 following conditions:

  • Pressure (motivation or intent to steal)
  • Rationalization (justification of dishonesty)
  • Opportunity (ability to carry out misappropriation of company assets.)

Well designed internal controls serve to mitigate the opportunity for fraud in your organization.

(Have you every wondered does fraud follow economic cycles?)

How to Reduce Fraud

What can you do to reduce the chance for fraud in your organization? First, remember that internal controls are necessary for all size organizations. Check out the following ideas that you will find helpful as you assess controls in your organization:

Live Ethics in Your Corporate Culture 

A culture of ethics starts at the top and you start by demonstrating it on a daily basis. We cannot emphasize this enough as it sets the bar for acceptable behavior in your organization.

Trust is Not a Control 

Trust is not a control, so design internal controls. Then put them in place for the position. Thus, they should not be for a particular employee, regardless of how trusted that employee is.

Pre-Employment Screening

Conduct pre-employment screening including background checks as appropriate.

Utilize Entire Team

If you do not have enough employees in accounting, then utilize others as part of your control system.

Have Different Signers

If your bank account reconciler is a signer, then find a different signer. Segregate the check cutting, signing and reconciling duties from each other.

Unbiased Reviewer

Have the company bank statements go unopened for review by someone in a management position who isn’t cutting or signing checks.

Choose Signers Carefully

Understand what authority signers have with company bank accounts and choose signers carefully. Add extra controls to your corporate bank accounts – an example is precluding any counter withdrawals so that all bank account withdrawals go through the check writing process.

Anonymous Alert System

Set up an anonymous way for your employees to alert you of any concerns/suspicions related to potential fraud within your company. Then take these alerts seriously.

Segregation of Duties & Controls

Segregation of duties and internal controls protect both your employees and the company.

If you want to reduce the fraud or detect fraud in your company, then check out our free Internal Analysis whitepaper. We have designed this whitepaper to assist your leadership decisions and create the roadmap for your company’s success!

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Fiscal vs Monetary Policy

Fiscal vs Monetary Policy

What is Fiscal Policy?

Fiscal policy is essentially how the government decides to collect and spend money to impact the economy. This is studied in Macroeconomics to better understand the relationship between the economy and governmental influence. The study of fiscal policy is useful in speculating the reaction to changes in the government’s budget. It is also a frequent topic during presidential elections, because fiscal policy affects numerous industries.

For businesses, fiscal policy can be very important. Some businesses are directly impacted by government interaction in the economy. For example, businesses that have government agencies as their clients depend upon a fiscal policy that includes their services. Furthermore, other businesses are impacted by fluctuating taxes. Some industries are more exposed than others to taxes. So it is very important that the leadership of businesses takes these macro-elements into consideration.

Expansionary Fiscal Policy

There are three phases of fiscal policy that the government switches between depending on the outlook of the economy. Use the term expansionary fiscal policy when the government is spending more than it is receiving. Generally, this stimulates the economy during a recession or downturn. At the onset of a recession, high government spending with no rise in taxes is common. Then increased taxes and decreased spending follows. If this phase of fiscal policy does not work, it can leave the government in a greater deficit without a recovered economy.

Contractionary Fiscal Policy

Contractionary fiscal policy is the opposite of expansionary. It involves spending less than the government collects in taxes. Rather than attempting to stimulate the economy, this phase restrains the economy. This includes controlling inflation and paying down debt. Another tool of contractionary fiscal policy is raising taxes. When the government raises taxes, households have less disposable income while the government has more to spend.

Neutral fiscal policy is the phase between expansionary and contractionary fiscal policies. This is a period of time when the government’s spending is approximately the same as its collections. This phase is often a transition period between expansionary and contractionary policies, so it is a time of speculation and uncertain governmental policies.

What is Monetary Policy?

Use monetary policy to describe the decisions over a nation’s money supply. In the United States, the Federal Reserve has this duty. The key decisions affecting monetary policy are setting interest rates, setting bank reserve requirements, and buying/selling government securities. Thus, the same agency as fiscal policy does not control the monetary policy.

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See Also:
Generally Accepted Accounting Principles (GAAP)
Economic Drivers to Watch

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