Often, when people think of budgets, images of CPAs and CFOs come to mind. They’d assume leave the numbers to those with the titles and letters following their names. However, in reality, budgets are for many more than just those with accounting backgrounds. In fact, all
individuals with any spending authority in an organization should be comfortable bonding with the organization’s budget.
A budget is an invaluable tool to help individuals make well-informed decisions based on actual numbers, rather than hypotheticals. With those decisions, individuals can guide the organization strategically through each quarter and fiscal year, with a clear picture as to where the organization stands and in which direction it is heading. The budget creates a detailed road map to help navigate through expenditures and forecasts.
Ultimately, there are three primary budget considerations for any organization:
1) More People Involved from Inception. Each person who authorizes an expenditure in any way, whether it is signing checks, approving invoices, paying bills, or some other task affecting financials, should participate in the budget preparation process and the monthly budget review. It is critical that they are involved in the budget process from inception, or are brought up to speed as quickly as possible. Often, when I ask someone who is in charge of expenses why the budget to actual is off, they respond that they have no idea how the budget was put together in the first place. How can anyone expect these individuals to properly manage expenses when they are unaware of the principles behind them? This is easily solved when the individual is involved from the beginning.
2) Alignment of Budget and General Ledger. The budget line items and categories should be identical to those in the general ledger. Accounting and finance teams need to focus on analyzing differences at month-end, not inputting, exporting, and manipulating data merely to get it to the point where they can analyze it. It should all be organized in the same way from the start. For example, a property and casualty insurance company may have their general ledger categorized by type of customer, while their budget is categorized by their annual statement (the document each insurance company is required to file with the state of domicile). Varying methods of organization requires increased allocation comparing the actual results with the budget, resulting in misspent time and resources. To make matters worse, through this time-consuming process, an organization lacks the critical information needed to pivot at a time of crisis. For example, when a country’s entire economy shuts down due to a global pandemic.
3) Accounting Alignment. The accounting in the budget analysis and the general ledger should be the same by department. One common issue occurs with payroll. Oftentimes, payroll is run every two weeks and recorded on a cash basis in the general ledger, but on an accrual basis in the budget. For example, if an employee gets paid $120,000 per year, the budget would allocate $10,000 per month for payroll, while the general ledger would show $9,230 for two payroll months and $13,846 for three payroll months. It would never match. When budget to acutal analysis is presented to the management of the organization, there should not be time for an explanation of the accounting differences in the budget and actual. Rather, the conversation should be 100% focused on maintaining alignment with the strategic goals that were established when initially creating the budget.
Other benefits of proper budget management include, empowering more employees to make better decisions for the organization, saving money over time, curbing spending, and increasing preparedness. Additionally, when the budget process is carried out properly, it can reduce fraud. Once the person authorizing the expenditure understands that someone will be carefully analyzing the details for which they are responsible, they will be less likely to steal from the organization.
While many people would rather push off the numbers, columns, and formulas of the budget process to someone else, it’s really the last thing they should do. In fact, when they are involved in the process, they will understand all of the components and essential information on a more comprehensive level. In doing so, they not only create a stronger bond with the budget, but also create a stronger bond to the organization itself.
If you would like to discuss your budget and how to ensure it is working efficiently for you, or if you have other specific areas of concern, please click here to schedule a 30-minute free consultation.
Monthly Archives: November 2020
While this year has given us challenges beyond what any of us could have imagined, I choose to be thankful for all the experiences I have had and lessons I have learned in 2020. Thanksgiving is the perfect time to have gratitude above all else.
Early this year, if someone had told me I would be okay with certain things, I would have said, “No, not me. I just can’t live like that!” Admittedly, there were many ‘I can’ts.’
- Go months without hugging my Mom tightly
- Deal with my Dad’s inability to speak
- Work out consistently at home, rather than at a gym
- Use paper towels other than ‘Bounty’
- Use toilet paper other than ‘Charmin’
- Not going out to eat twice a week
- Work at home every single business day, without physically attending any networking events
- Clean my own house
- Have naked fingernails and toes
- Do a TV interview without the assistance of a makeup artist
Despite all of my resistance though, I did each of these things in 2020, and learned so much about myself and my ability to cope in the process. I met some amazing new people, had some wonderful new experiences, and learned that I can, in fact, do all of those things and so much more. I would never have known this about myself if 2020 had not forced me to adapt.
I learned to be a more well-rounded business professional. Pre-pandemic, I was a master at in-person networking. I gain a tremendous amount of energy from walking into a room of people, seeing old friends, and meeting new ones. I love shaking hands, hugs, and engaging in conversation. Like so many of us, I love the human connection.
As we all know, COVID-19 ended our ability to make that human connection. The isolation of working at home and not enjoying experiences with others was tough. I was also committed to going to the gym and to the group with whom I work out, all having been dear friends for over twenty years. Losing that treasured time was also extremely difficult.
Yet, I survived these losses and foreign experiences. I figured out how to network with Zoom calls, join virtual conferences, and then follow up with attendees. I made connections that not only filled my pipeline of work, but also broadened my perspective of events that were occurring all around the world. I was able to work more efficiently and in ways that would have been highly unlikely before the pandemic. For example, I was able to effectively service clients in London, New Orleans, Sarasota, and Jacksonville – all remotely. I was also offered the opportunity to be the opening speaker of the embarcLA Virtual Conference, organized by the Mayor of Los Angeles. This event was designed to help those with entrepreneurial aspirations who lost their jobs. It was so exciting to see inquisitive young minds asking the right questions and learning the intricate steps of turning big, bright ideas into productive, profitable businesses.
I work out at home consistently and love using the homemade barbells that my husband made for me. I am so grateful to be able to continue to take care of myself, and, of course, grateful to him.
I got back into my kitchen and spent some time reorganizing. Now, I love to cook, and although I still enjoy the ambiance of a restaurant, I do so with a more critical eye on the food prep.
When quarantine first started, my Mom had just experienced a stroke and was in Rehab, while my Dad was in Assisted Living. They were apart and kept in their rooms for weeks during the first part of the shutdown. Given that both have dementia, this was very difficult to explain to them. Finally, they were reunited in Assisted Living, but, of course, I was unable to visit. They were locked in their room, but at least they were back together. The isolation caused a significant decline in my Dad’s health, and there have now been times where he does not even recognize me. We all lost so much as a family. But now that the restrictions have been loosened, I am able to visit them. And I choose to be grateful for that.
I learned to be happy with the paper towels and toilet paper I had. It turns out, it is not that big of a deal to have the ‘right’ brand, after all.
I reconnected with a number of my college buddies, and I now treasure the Zoom cocktail hours we had during lockdown. Purposefully checking in with others was different, and in many ways, more genuine and engaging than a typical networking event.
This was also a time where the news was not always the easiest to understand or process. I have found a healthy way to get the news that I need to be informed. I am so glad that I am inclined to learn what all sides have to say on a specific subject, so that I can silence the noise and understand the true issues better. When I recently tried to explain to someone that I enjoy being friends with all, and hearing everyone’s perspective, the woman looked me straight in the face and said, “It must suck to be you.” I simply laughed and told her it did not. I have learned so much, treasure the diversity of thought I hear from all, and am grateful for that perspective.
As this year, with all its challenges, comes to a close, I will continue to choose to be grateful for each of these extraordinary experiences and for all that I have learned through them. I am exceptionally grateful to my clients, referral partners, friends, and family, all of whom helped contribute to my journey. I am grateful for each one of you.
My hope is that each person who reads this has a safe and Happy Thanksgiving, remembering that the exuberance of gratitude can far overshadow any fear and anxiety if we allow it to. Choose gratitude each and every day. Happy Thanksgiving!
I have noted that, even during these days of the COVID pandemic, there is still a lot of money in the PE and VC world that investors must spend for firms to survive.
PE and VC firms invest in companies with a plan to exit the investment in three to five years. The exit can take the form of another investment round at a higher valuation, an IPO, or the sale of the business altogether. Another dynamic is becoming increasingly apparent: PE-backed companies are having an increasingly difficult time implementing an exit and/or raising the next round of capital.
Why the difficulty, when there is an incredible amount of money for investors to invest?
The primary factor leading to next round challenges is the enhanced due diligence investors are performing now compared to pre-pandemic. The long run of economic gains nourished a confident exuberance in investors where the investor had to believe in a company’s financial projects similar to how Dorothy had to believe in Oz … without much evidence. The supply of capital outweighed the supply of companies to the point that investors were willing to lower the bar for the due diligence completed on sales and financial projections, data rooms, and balance sheet liabilities.
The current atmosphere based on a stricter due diligence process represents a correction that goes back to the core fundamentals of investing. When the pandemic dust settles a bit, the correction will result in a more sustainable environment for the PE and VC firms. In the meantime, portfolio companies must place more focus on the following areas to support due diligence efforts:
Data rooms. Companies that cannot produce supporting documentation for their financial and sales assertions are destined to fail due diligence. Deals fall apart when a company cannot produce contracts, proving professed commitments or demonstrating compliance with the contract terms. Be prepared for due diligence efforts by appointing a trusted, organized document manager to oversee your data room. Read more about data rooms here.
Projections. Think like the investor—play a great game of Sesame Street and make sure that one of these things (your financial projections) looks like the other (your historical trends). Practice the dialogue spoken regarding your company’s future to ensure it rings true to what you can support based on data and research.
Historical financials. Your financial data must be accurate and easy to follow by potential investors. When you produce complicated financials that require confusing explanations or take too long to organize, you put the deal at risk. Just like a burglar will move on from a house with a security system, investors are glad to move on to the next deal that requires less effort to close.
If you are a founder or a C-suite executive of a fast-paced, growing entrepreneurial company, are you prepared for the next round of funding or other exit strategy? Let’s talk about how to begin organizing your data room, simplify your financials, and produce realistic, evidence-based projections that investors will find credible. I would love to speak with you about the challenges you face in preparing your exit strategy. I invite you to set up a 30-minute free consultation with me by clicking on this link to my calendar – let’s talk!
Are you wrapped around your pet’s little paw? We are, despite the fact that we recently learned they will lie to us.
Last night, I fed our Maltese and Bichon Frise their dinners and went about my evening activities. Later, my husband, Glenn, came into the kitchen and the little guys acted as if they had missed their dinner. Given the circumstances, he, of course, fed them again.
While our dogs may lie about whether they’ve eaten yet, some things never lie, such as the real data you need to run your business each day. And whether or not you intend to, it’s the same data you need to pitch to investors when seeking funding.
With the right infrastructure in place, you have answers at your fingertips, such as:
What is the seasonal fluctuation of my business so that I can prepare for the ups and downs?
What is the demographic profile of my customers so that I know where, when, and how to reach them?
What is the average cost, price, and profit of a sale? Am I losing money on my best sellers?
These questions and many more can be answered by having the right infrastructure in place and capturing the data as you conduct daily business.
What does the “right infrastructure” look like? The answer is different for each organization based on its size and complexity. At a minimum, an organization should have a list of existing and potential customers and a system to maintain communications with them. The optimal tool is an integrated Customer Relationship Management (CRM) system. An organization also needs to manage money and financial information to project cash flow for the next 12 weeks, have the correct information for tax compliance, and make the appropriate strategic decisions. This may mean you need a separate billing system and/or General Ledger. You also need to properly set up your General Ledger with the right coding segments to be able to report on profit and loss by product, location, customer, and department, among others.
If you feel that you are blindly making decisions about hiring, marketing, warehouse space, or any other issue, remember the numbers don’t lie. Let’s talk one-on-one in a free consultation to get you in the right direction. Check out these times on my calendar and choose the one that is best for you.
When I have guests over for dinner, I empty trash cans, pull out the cloth napkins, and replace the everyday hand towel with a nice guest towel. The morning after the dinner party, I almost always say to myself that we should keep the house this tidy and organized all the time. A decluttered house feels really nice. Working at home during the pandemic has allowed me to have the time to keep the house up better and I have enjoyed it.
Think about getting your house in order and keeping it that way, similar to keeping your books and records audit ready. When business owners and their CFOs go through an audit that requires a lot of up-front preparation to get the information auditable, they generally discover facts about their business of which they were previously unaware. The ability to use financial data to think strategically and make sound decisions about the operations of the business is not a luxury to undervalue.
Auditors estimate their costs for performing your audit based on the books and records being clean and auditable. I have asked some auditors how much more first year audits cost than their original estimate due to the books and records being out of order. They report that the range is 20% to over 10 times the original estimate. This is not a pleasant outcome for anyone.
Here are seven tips on how to keep your books auditable and help reduce your audit costs.
Maintain a checking account balance in checkbook style that one person reconciles to the bank statement and then a second person reviews for accuracy.
Reconcile balance sheet account balances no less than once a quarter, if not every month. The two accounts that are generally audit gremlins are prepaid expense and accrued expenses. If you have not reconciled these accounts in the last year, I can almost guarantee you there will be unexplained numbers in them.
Keep a data room with all of your contracts and loans. With the digital age and the end of the metal filing cabinet, this seems to be something that is rarely maintained appropriately. Read more about the data room in my previous blog Who is Your Betty.
As soon as you decide to engage an auditor, your immediate next step should be to get the list of information they will want. Assign a person and a due date to each item on the list and distribute it to the responsible parties. Set deadlines for delivery of the documents and monitor progress until the tasks are completed (Excel schedule, Asana, or other project management software).
Complete the confirmation information and attorney letters immediately after you receive the list of the items the auditors want to confirm. Make sure the auditors give it to you as soon as you have a year-end trial balance for them to review.
Provide the auditors with a complete trial balance. Every adjustment to the trial balance you provide auditors increases the price of the audit.
Work on the format and disclosures of the audited financial statements for the current year as soon as the previous audit is complete. There is no excuse for digging through loan documents to prepare the financial statement footnotes after the year-end, or to read a new GAAP disclosure to figure out how to do it after year-end.
Barker Associates works with companies to access audit readiness, which is a far better investment than starting an audit with false confidence you are able to get through the audit. Let’s work together to make sure your audit fees are not multiples of the original quoted rate from the auditors. Click here to set up a free consultation.