CFO in focus part 3- Forecasting and budgeting – strategic thinking

For effective management reporting as a CFO, we believe in 3 main ingredients:

1. Setting up for success – attention to transactions
2. Refining performance – benchmarking and analytics
3. Strategic thinking – forecasting and budgeting

This is the 3rd and final part of our CFO in Focus series where we explore the 3rd key ingredient – Strategic thinking – forecasting and budgeting.

Strategic thinking = Forecasting and budgeting

“A budget doesn’t limit your freedom; it gives you freedom.” – Rachel Cruze

Budgets

We come across many enterprise leaders who are thinking about what they can achieve and plan how they’re going to execute their strategy. There is no more effective way to translate financial vision into reality than establishing a budget, particularly one that uses SMART goals which are; Specific, Measurable, Accurate, Realistic and Time oriented. Establishing a budget meets the definition of a SMART goal and it enables the realisation of mere thoughts. It’s something that, from a management reporting perspective, can be referred to with respect to what has been projected as financial vision, to what has occurred

Forecasting

This is a malleable/flexible way for an effective enterprise leader to update their budget. For example, if a material budgetary assumption changes within a respective period, for example costs blow out or revenue is unexpectedly volatile, a forecast enables the budget to not be made entirely redundant. After all, there is no point looking at a budget if it’s out of date. Forecasting is merely an updated budget, and it provides the ability to change and react effectively, when warranted.

Director Quote “You can’t be haphazard in forecasting and once you’ve set a budget just merely changing it quickly. Otherwise, you’ll never have anything of substance if you just keep changing the expectations. Forecasting is being realistic around what you’ve achieved, as you go. It’s like a rolling review of your budget to make sure that your forecast is dynamic. It’s dynamic in a sense that it can change where a budget can’t” Patrick McStay.

Cash and accruals 

The last point on budgeting & forecasting is it needs to be mindful of cash and accruals. They say “Cash is King”. Sometimes businesses look highly profitable, however they have no cash.  Cash is the oxygen to a business. So for most businesses, we highly recommend that a budget and forecast entail consideration of both cash and accrual.

The understanding of how to report on accruals and cash may be a little bit technical for enterprise leaders, hence they require some consultation with an advisor or tax agent, but ultimately, there’s no point being profitable if you’ve got no cash. On the flip side, there’s no point having a lot of cash if you’re not making money and it’s all going to catch up with you at some point in the future. They’re not mutually exclusive cash and accruals, they go hand in hand so keep them married.

Summary

Whether New Leaf Advisory clients engage us for CFO services or not, we are always considering the points raised above when reviewing their enterprise, incidental to our core service in handling the standard tax and accounting compliance services.

In terms of the value add, we’re not only considering tax strategy and advisory, which is a separate service, we’re thinking CFO. In other words, we are thinking, “If I was in your shoes as an enterprise leader, how would I be looking at things, and how can we do things better?”

This CFO in focus blog series sheds light on (only) one of the multitudes of perspectives we have at New Leaf Advisory in overseeing our clients’ affairs. This topic, in particular, we have flagged 3 key ingredients relating to management reporting which are extremely important and apply to every client that we have. From the smaller clients to the bigger clients, this is fundamental for success.