Flawless Financials the Financial Forecasting Online Newsletter from Minotaur Financial and David Brode August, 2004 Sent monthly to over 400 subscribers. Please pass on Flawless Financials to those in your network. To leave Flawless Financials, follow instructions at bottom. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * This month: Management Challenges In Budgeting * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Last month we discussed the structure of the budget. But all too often I’ve seen solid budget software come to bad results because of how the process is managed. In this newsletter I want to discusss principles for managing the budgeting process to quickly get workable results. I. Conduct reviews at a higher level. It is easy to get caught up in reviewing lots of details because it seems more accurate. This discourages actually thinking hard about how the business really works and how the business can be improved. The best forecasts (and analyses of business practices) are done at a level significantly higher than the greatest level of accounting detail. II. Review economics, not line items. In reviews, stick to the 80/20 analysis. If senior management has difficulty accepting that we have 10% of expenses in “Other,” you need to have the analysis show how that has been historically true and they cannot slice it out just because it says “Other.” The argument is that it is a waste of time to show 25 more accounts worth of detail when we know that all these piddly accounts inevitably add up to 10%. This will take management fortitude. In general, senior management needs to keep focus during the process and not ask for immaterial details. It really messes up the work of Finance and annoys department heads. III. The reverse is true when meeting with department heads. Focus on the big things and let the “Other” line go so long as the percentage of other expenses is reasonable. In fact, we should probably tell them what the percentage is and forbid them from changing it. IV. Use targets. In the end, the final numbers for the budget are often set from the top. So it makes sense to give managers that number up front and have them try to create a budget that fits into those parameters. Practically, this means creating expense targets for each department or group before they fill out their budget. As much as possible, get manager buyoff to the initial target. Then they just have to produce details which add up to the target. One typical problem is that senior management will review the results multiple times, so everyone does the same work again and again. Using targets properly to cut down these unproductive cycles. V. Get good analysis out of Finance. Typically, the process gets so rushed that Finance just delivers consolidated numbers. To get analysis of the budget, two related things must happen. First, give department heads firm deadlines for submitting quality results. These deadlines need teeth. Second, give Finance enough time to do the analysis. All too often, the departments get more time and it comes out of Finance’s analysis time. This can’t happen! VI. Enforce the integrity of the process. Track spending and enforce rules that managers can spend only in accordance with quarterly budgets. Closing this loop ensures that department managers will take the process seriously. Until next month, all the best, David Brode -- Minotaur Financial Removing Financial Issues as a Deal Roadblock * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * NEWSLETTER ARCHIVE AVAILABLE Make sure to visit the Minotaur Financial website for the Newsletter Archive at http://www.brode.net/resources/ * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * http://www.brode.net mailto:David@Brode.net 1919 14th Street, Suite 510 Boulder, CO 80302 (303) 444-3300 * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * ABOUT DAVID BRODE I’m a financial modeling specialist. Over the last fifteen years I’ve completed dozens of models and certainly thousands of versions to support corporate development, M&A, strategic planning, and debt and equity transactions. These models have raised over $1B in debt and $100M in venture capital and private equity. Over time I’ve consistently revised software tools and work processes to get the job done quickly and well. If you have a financial forecasting issue, I’d love to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * (c) 2004 Minotaur Financial, All rights reserved. You are free to use material from the Flawless Financials newsletter in whole or in part, as long as you include complete attribution, including a live web site link. Please also notify me where the material will appear. The attribution should read: "By David Brode of Minotaur Financial. More articles on financial forecasting can be found at http://www.brode.net " * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * Are you struggling to convince others to do a deal which you think is a no-brainer? To discuss how you can take numbers off the table as a deal roadblock, call (303) 444-3300. I'm very accessible and glad to help. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * DO YOU LIKE THIS NEWSLETTER? You are welcome to share this email with colleagues who would benefit from better numbers. Your feedback is always welcome and appreciated. Write in to mailto:feedback@brode.net. * * * * * * * * * * * * * * * * * * * * * * * * * * * * * * PRIVACY POLICY: I never rent, trade, or sell my email list to anyone for any reason whatsoever. You'll never get an unsolicited email from a stranger as a result of joining this list. To SUBSCRIBE FREE to this newsletter, send an email to mailto:subscribe@brode.net. And you'll get Minotaur's Financial Forecasting White Paper in the deal. To be REMOVED from this list, send an email to mailto:remove@brode.net. (Please note that this message needs to come from the email address that originally subscribed. If you need help determining this, please email mailto:David@Brode.net.)