At Thomas Huckabee, CPA our budgeting process has various different stages and components. Using capital expenditures and sales as examples, let’s take a look at the steps we take:
- For both sales and capital expenditures, we develop a budget of costs– including purchases, employee hiring and scheduling production. This is on top of our deep dive into other miscellaneous expenses such as overhead, IT or facilities/rent.
- All this is crucial for planning your company’s available cash. And, in finance, “cash is king.” It is a certainty that all organizations, no matter how large or small, must have a sufficient amount of cash available at the right time, which basically means immediately.
- Budgets are also used to predict the results of a certain course of action and then to compare the actual budget to what actually happens in your business. This is called variance analysis. Your company’s budget is compared to, on a monthly, quarterly or annual basis, to what your company actually achieved. For example, if you analyze your headcount on a monthly basis and realize that one cost center is, for unforeseen reasons, over budget in the compensation and benefits area, we will help you realize what is driving the variance to budget plan. In accounting and finance, this is a very useful tool which can allow a company to change a strategy before a catastrophic event occurs, rather than just reacting to its aftermath.
Forecasting & Projecting
Thomas Huckabee, CPA helps corporations prepare forecasts and projections with the purpose of adhering to a specific budget. Forecasts and projections are types of financial statements. A financial forecast is your company’s expected Financial position, including the results of its operations and any changes in your market financial position. Forecasts are often based on assumptions which reflect the conditions that your company expects in the future. They represent your company’s expected financial position based on the results of a “hypothetical” future scenario. Changes, particularly drastic changes, in financial position and operations can be derived based on those assumptions.
Ironically, the past is also a very important management tool. To use compensation and benefits as an example again, you may be able to realize that each employee is set to receive a 3% increase in salary for the next year, which would roughly translate into a 3% increase in budget for compensation and benefits. It’s a red flag if you see compensation and benefits raise by 10% in the respective department, so you will need to investigate.
At Thomas Huckabee, we can help your organization prepare these types of complex reports for your internal management team and advise them on a course of action. Examples of this could be a relocation to a new facility or the sell or purchase of another business. Your reports can also be prepared to support a lender financing application or simply to be compliant with the term of your current banking agreements.
The word “projection” is often used to present the hypothetical course of action for an entity- be it a public or private sector organization, an entrepreneurial startup enterprise or non-profit organization. It is what your company “thinks” will happen in the future with it’s financials. Projection is most often used to answer those “what if” types of questions. You may also be a witness to your company’s management test a hypothesis about possibly changing a particular product line or price level…by applying the basic principles of economics- supply versus demand, to determine if these changes will impact operations or your financial position. It cannot be emphasized enough how important the validity and trustworthiness value of projections are.
Budgets can be either a forecast or a projection because they are based on your company’s assumptions and/or actions are expected or are merely hypothetical. Contact Thomas Huckabee, CPA today to learn more about the critical aspects of budgeting, forecasting and projecting so you can be certain your business complies with all statutes and laws.