Business planning and budgeting for 2011

Tulsa Business Journal Article: http://tulsabusiness.com/industry_article.asp?cID=3&aID=04128163.8472256.675350.3937901.3922191.920&aID2=51941

In the last issue of the Tulsa Business Journal, we talked about the cost of capital for your business. In this article, we follow up with a discussion on how to plan your budget and capital for 2011.

Before we get started, the extraordinary environment in which you are expected to make plans for 2011 needs to be considered. In terms of business confidence in the past two quarters, revenues have been up slightly at U.S. companies, according to Cash Flow Analytics, but inventories have remained low, and capital spending has been sluggish. This tells us that while business has been picking up, managers lack confidence in any short-term recovery, otherwise you likely would have seen inventories growing and capital spending increasing.

Median free cash margin (free cash flow divided by revenue) peaked at 6.7 percent in the first quarter of this year but decreased to around 6 percent in the second quarter, compared with a norm for this decade running around 5 percent. In effect, companies have been holding on to an internal rainy day fund that can either help them through tough times in the coming year or be available to fuel organic growth or acquisitions should their confidence levels increase.

As a result, just as you budgeted in 2010, it may be a good idea to have different scenarios laid out in your plans for 2011, considering growth, declines and flat performance. The growth plan should target new revenue-generating initiatives while also focusing on improving profitability and maintaining healthy cash flows. In reality, it may end up being another year of fluctuations and unpredictability.

In the meantime, management should continue to focus on shortening lead times, enhancing systems, refining processes and improving internal communications, all tactical moves to increase efficiencies and control costs while regularly watching the market for signs of demand changes.

In starting the budget planning process, your first step is to analyze 2010. Identify the significant drivers for your business’ performance. Consider industry trends: What drives your company’s product or service demand, competitors and suppliers’ business condition and ability to affect costs, costs of raw materials and inventory levels, and product innovation? What are the likely internal drivers: staffing and wages, occupancy costs, IT utilization, days in accounts receivable and accounts payable, customer mix and margins?

The next step is to develop a plan for the budget process — what needs to be done, by whom and at what time. Write down your plan. You also need to set rules for reporting, monitoring and reviewing the plan.

Determine how to monitor the budget and delegate among different functional departments within your company. Are you going to focus on high-level monitoring or having accountability with every employee? Determine the business rules and responsibilities for key individuals who should be monitoring and reporting progress.

Then it is time to draw on input. You should build a financial model to better understand the financial implications of every scenario in the plan to determine changes to your income statement, balance sheet and cash flow. You may also need to consider restructuring your capital for different scenarios.

Once your team has developed the final plan, it is time to share some or all of it with employees and train them on how their roles and responsibilities impact the business’ overall success. Set goals for the business. Create a system to review and adjust on a monthly basis as actual results come in.

From a capital perspective, if your budget plan requires sourcing or replacing capital in 2011, it’s better to source capital when you don’t have a critical need for it.

If this sounds too intense or time-consuming for your business, you may want to try just a few of the ideas or call on your financial adviser to help guide you through the process.

By Matthew Bristow - 11/8/2010