Budgeting & Planning or how to explain the world with financials (b)
Top-down: This approach is based more on market growth rates and assumptions that initially tend to be very broad. In this case do not provide cost data right from the beginning. Instead, obtain some general market information that will allow for a good ‘guestimate’ of market size and volume growth patterns. Then discuss a growth rate with your CEO/department heads and apply it to your last actual financials. Once you have determined the growth rate compare your resulting revenue to the absolute size of your market and the monthly/yearly growth forecasted for your business. If there is no obvious problem (your total revenue in Year 2 is larger than total market size etc.) you can now add the cost data to your revenue assumptions. As with the bottoms-up method, discuss the relation between revenue growth/decline and cost increase/decrease with management.
eCFO Tips: This is a good exercise for start-ups in very fast growing markets. It will help to illustrate that if your market is growing by 30% per year and your company has top-line growth of 25% you are underperforming. If your company is not even growing in line with your target market something is wrong. Often your CEO and employees will be surprised by this analysis. A relatively high absolute growth rate is often mistaken as exceptionally good but this is not always the case. This analysis will give you credible arguments for operational improvements and structural changes.
In conclusion, both methods will be valuable. As you can see from my description, the actual goal is not to have the most accurate numbers in the world. Instead, it is important to educate your team how operational decisions will influence your financials. Budgets/planning/ and other annoying torture methods that eCFOs will come up with, can actually help instead of distract from operational issues.
eCFO Tips: Liquidity, controlling, budgets & planning will keep you very busy as eCFO. Once these measures have been implemented and accepted by your team, you can move on to other subjects. In my experience, this will need
a) a great team that supports you
b) at least a year of very closely monitored controlling
c) constant checks if you are still in line with operational reality
Make sure that you never implement a task that will keep you permanently operationally involved. Your team, technology and tools should be doing this work and if you find yourself constantly involved with these tasks RESTRUCTURE and make these tasks completely independent of you.
Often this will create some problems within your department, since it looks like you are designing tasks that are distributing lots of work away from you. Therefore, ALWAYS explain why certain tasks are very important. Make sure to also explain that you will be focusing on other tasks that will help to push the business forward. It also means that if you find assignments (as explained above in point c) that are no longer relevant you should immediately terminate them! On the other hand, if certain measures lead to an operational improvement or cost savings, you should make sure that this is communicated to the employee who actually prepares the data.
This post also concludes what I would consider to be the key operational tools an eCFO needs to have. Having covered the basic checks, controls and planning measures, we can now move to much more interesting areas. Stay tuned for more info on this blog.