Last week, you completed a budget Balance Sheet for the next financial year.

This week, we will look at another key budget document: your budget Cashflow Statement. This is an important component of your budget because it will identify your budgeted cash movements and cash position. Knowing where you are going to be in terms of your money is critical so plans can be made to supplement cash if required, manage cash requirements and invest if surplus cash availability is your outcome.

The beauty of creating a budget Cashflow Statement in excel is that when it is properly connected to your budget Profit & Loss (P&L) and budget Balance Sheet, the numbers for the budget cashflow statement should just automatically flow through.

Refer Figure 1 below as an example of a simple fictitious budget Cashflow Statement which is linked to the budget templates presented in previous newsletters. Column A represents broad categories of your Cashflow Statement and Column B is your budget cash movements for each of those categories.

Working through each of the key cash flow items in turn as follows:-

• Profit and Loss After Tax – refer Row 1 below – this amount is directly transferred from your budget P&L. Note this figure includes non-cash items such as depreciation. Depreciation of Fixed Assets (refer Row 2 below) needs to be added back from your budget P&L depreciation expense so as to determine Cash Inflow(Outflow) from Operation (refer Row 3 below).
• Inventory Movements – refer Row 4 below – this is the difference between your actual closing inventory balance from prior year and the budget inventory closing balance in your balance sheet. A positive number means you are reducing inventories which effectively impacts cash favourably.
• Receivables/Prepayments Movements – refer Row 5 below – as with the inventory above, this figure represents the difference between prior year actual closing balance and budget current year budget closing balance in your balance sheet. A positive number means you are reducing Receivables which effectively impacts cash favourably.
• Accounts Payable Movements – refer Row 6 below – this figure represents the difference between prior year actual closing balance and budget current year budget closing balance in your balance sheet. A positive number means you are increasing Payables which effectively impacts cash favourably.
• Non-Current Movements – refer Rows 8 and 9 below – as above, the figures represent the difference between prior year actual closing balance and budget current year budget closing balance in those balance sheet categories. A positive number means you are impacting cash favourably.
• Fixed Assets movements – refer Rows 11 to 14 below – the figures in this section represent budgeted cash movements in your Fixed Assets such as Capital Expenditure and/or Proceeds from Sale of Assets. A check on this number is done by subtracting budget depreciation expense from closing actual Fixed Assets written-down-value and comparing it to budget closing fixed assets.
• Shareholders Equity movements – refer Rows 15 and 16 below – this is usually zero but if owners are contributing more capital to the business, it needs to be factored into this section.
• Manual Adjustments – refer Row 17 below – I don’t like using this section as it is a ‘plug’ to make the Cashflow Statement balance. Only use it if there are small roundings.
• Net Cash Generated – refer Row 18 below – summing all of the above you get to a figure showing your net movement in cash. Make sure it makes sense. If it is a negative figure, do you need to revisit either your Balance Sheet or Profit and Loss statements? Do we need to curtail Capital Spending or more aggressively target customer collections?
• Cash Funding – refer Rows 19 to 22 – picking up opening and closing budget Bank/loan balances from your Balance Sheet, you will identify how you are budgeting to fund cash shortfalls or allocate cash surpluses. The total in Row 22 should equal the value shown in Row 18.

Do you need to organise funding in advance for your business to remain solvent or have you got surplus funds that can be invested to generate a return above bank interest?

If there is a seasonality factor to your business, you should look at doing a monthly phased budget Cashflow Statement so you can identify the peaks and troughs of your cashflow needs and plan ahead for any such requirements.

SUMMARY

Use this week to develop your budget Cashflow Statement and hence identify budget cashflow movements in and out of your business, sources of cashflow in your business and identify future Bank/Funding requirements as part of your budget process.

As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Ross – Virtual CFO

Last week, you finalised phasing your Profit and Loss (P&L) budget for the next financial year.

This week, we will look at another key budget document: your budget balance sheet. This is an important component of your budget because it will drive one of your key strategic objectives as noted in Blog 7: Cash!

Refer Figure 1 below as an example of a simple fictitious Balance Sheet where Column A represents broad categories of your Balance Sheet, Column B is your current actual balance sheet values and Column C is your budget balance sheet for the forth coming financial year.

Working through each of the key balance sheet items in turn with your current actual balance sheet and ratios as a starting point:-

• Accounts Receivable/Debtors – refer Row 1 below – you should budget an improvement in your debtors days outstanding of at least 50% and hopefully it sits below 60days.
• Inventory – refer Row 2 below – as with the Accounts Receivable, you should budget an improvement in your inventory days held of at least 5% and hopefully it is below 90days.
• Accounts Payable/Creditors – refer Row 3 below – the goal is to increase the number of days; which is opposite pattern to Debtors/Inventory. It should mirror the Debtors days as a target but for budgeting purposes let’s assume you increase payable days by 5% for your budget.

As an illustration, if your Working Capital (Debtors plus Inventory less Creditors) is $100k and you improve each of Debtors, Inventory and Creditors by 5%, that equates to an extra $5k in cash to your business.

• Fixed Assets – refer Row 5 below starting with from your closing down written value of Fixed Assets, add your additions and subtract your disposals and subtract your depreciation expense to calculate a budget Fixed Assets values.
• Leave provisions (Annual Leave and Long Service Leave) – refer Row 6 below. Using your closing actual leave provision values and assuming that the budget is for all employees to take their 4 weeks Annual Leave, the Budget Annual Leave provision will only increase by pay rate increases. Long Service Leave is a little more difficult as the entitlement and taking of long service leave needs more detailed analysis, sometimes at an individual level.
• Company Tax Payable/GST – refer Row 7 below. These amounts payable to the government should be estimated for budget purposes.
• Miscellaneous Provisions/Prepayments – budgeting for these general accruals and prepayments should be fairly straight forward, use closing values as a guide to calculate these.

Summing up all of the above gives you your Funds Employed values for both actual and your budget. Refer Row 9 below. Funds employed gives you the value your net assets excluding bank/loans, of the business. The way these net assets have been funded through shareholders equity, loans and bank balances is totalled up at Row 14 below. Note that as a Balance Sheet principle, it needs to balance whereby row 9 is to equal row 14.

The Shareholders Equity section of your Balance Sheet is where your accumulated profits and capital amounts reside. Your P&L Budget Profit After Tax will transfer into this section Refer Row 10.

The ‘magic’ number/s that drops out to balance your budget balance sheet are your loan/bank balance (Rows 12 and 13 below). This will give you the picture of where the financing of your business is projected to be based on your P&L Budget and the components of your budgeted Balance Sheet.

The question/s might be, do you need to organise additional funding? Will you have excess funds available for investment? Do you need to review your capital expenditure?

SUMMARY

Use this week to develop your budget Balance Sheet and hence identify Bank/Funding requirements as part of your budget process.

As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Ross – Virtual CFO

Last week, you finalised your Profit and Loss (P&L) forecast for the current year and budget for the next financial year.

This week, we will look at the phasing of the budget P&L by month so you can use your phased budget to compare actuals results each month.

Using your excel spreadsheet model from last week (Figure 1 below), add in another 13 columns representing each month of the new financial year and a total, refer Column G below.

There are a variety of ways of phasing your budgets. Obviously you want to select the method that best allocates budget revenue and costs in the most realistic expected pattern for each category of items in your P&L by month. Some entities plot historical values and mirror the percentage proportion across months in their new budget phasings. Some entities simply divide the full year budget by 12 and use those figures for each month. Some entities allocate across months based on working days by month. Others use seasonal adjustment factors to phase across months. Others use a hybrid version of all of the above.

I recommend that you keep it simple. You want your  budget phasing to be reasonably accurate, but it doesn’t have to be precise. Even if you over simplify the phasing, any monthly variations will just be timing variances as every month adds up to the full year totals no matter what method you adopt.

WORKING DAYS PHASING

I recommend using the working days allocation method. This method provides not only the simplicity you seek, but a level of accuracy that is reasonable if your average daily sales values are consistent across the year (and hence are not seasonal) and you incur costs in such a pattern too. Naturally if you are aware that you will generate revenue is a seasonal manner or you will incur certain costs in a differing pattern across the year, make the relevant adjustments to your phasings. An example of costs for which a working day allocation is not reasonable is if you are a manufacturer and you shut down annually to do annual preventative and planned maintenance generally over the Christmas and January period. In this instance, your Repairs and Maintenance (R&M) budget phasing will need to be adapted to reflect the fact that major R&M costs will be incurred when the business is actually closed.

I have simulated the phasing using the working day method as illustrated in the following model (Figure 1, Column G and Row 1). Note that I have assumed that the business is closed 4 weeks per year (spread across December/January and April Easter) for annual leave/shutdown and for 2 weeks of Public Holidays. This leaves the business open 46weeks of the year which equates to 230 working days.

SUMMARY

Use this week to phase your final Profit and Loss Budget by month ready for the new financial year so you can start comparing and measuring actual results each month against your budget each month.

As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Are there any topics you would like me to cover in upcoming blogs? Are there any issues or ‘pain-points’ you would like to see covered?

Ross – Virtual CFO

Firstly, congratulations for coming on this journey with me so far! This week, we pull everything we have done for your forecast and budget together to come up with a Profit and Loss (P&L) Forecast for the current financial year and P&L Budget for next financial year. Very exciting!

Using the information developed so far, and your excel spreadsheets, following is a schedule (Figure 1) that pulls it all together to give us a first look at your first cut P&L Forecast and Budget. Note, I have used most of the numbers used so far as illustrations, they are fictitious numbers and some have been altered for illustration purposes only.

Figure 1

• Column A lists out the P&L categories used in your workings so far.
• Column B is the actual year-to-date April figures for each P&L category, plus some percentages for reference.
• Column C is the forecast derived for the May and June months for each P&L category.
• Column D is the current full year forecast for each P&L Category, plus some percentages (Column B plus C).
• Column E is the budget movements in “Inflation/Price”, “Volume/Mix” and “Productivity” improvements for each P&L category you have determined.
• Column F is the next financial year budget as computed by each P&L Category, and reflects the sum of column D plus the three sections of column E. Percentages are also illustrated for reference and comparison purposes.

Looking at all the information you have complied, you will have determined a Profit before Interest and Tax (PBIT) figure in Row 1. How does it look? Does it make sense? Is the year-to-date figure correct and does it match your actual numbers? Is the current year forecast reasonable given you are coming towards the end of the financial year? Do the ‘price’ and ‘volume’ figures look reasonable and does the ‘productivity’ total saving figure in Column E Row 1 agree with your Strategic Plan initiatives?

If you are happy with what you are seeing, you need to add a few more rows to the spreadsheet as noted below, Figure 1, Rows 1 to 5. Row 1 is the Profit Before Interest and Tax (PBIT) as per above.

If you have borrowings, loans or a bank overdraft for your business, you will be paying interest to the applicable financial institution/s. Row 2 is where you show the interest expense you are forecasting and budgeting to pay. Subtracting the interest expense amount from your PBIT will give you Profit Before Tax (PBT), refer Row 3. Applying a standard tax rate of say 30%, you will determine your Tax Expense in Row 4.

Subtracting tax expense from PBT gives you Profit After Tax (PAT), Row 5. This is possibly the most important number you have! Is it positive? Does it look reasonable? Does the number give you the desired Return on Investment you identified in week 7? You should recall that you need to be making a return on your investment (ROI) to reflect the risk you are taking. If you are not achieving your target return on business investment, you need to have a plan to get you there, if not in this budget year, at least in the medium term.

If you are not making that required return on investment, what areas can you focus on to get to that required level of return? Can you aggressively budget more sales growth harder? Increase prices further? Do some cost cutting? Make further productivity improvements? Or a combination of all of the above? Is it something that needs to be done over a number of years?

SUMMARY

Use this week to pull together your first draft forecast and budget Profit and Loss (P&L) and look at where you are at insofar as Return on Investment (ROI) objectives. Review and adjust your forecast and budget accordingly to come to a final P&L forecast and budget and provide a sound foundation for business success.

As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Next week we will look at phasing your final budget by month ready for the new financial year so you can start comparing actual results for each month against your budget.

Ross

Last week you completed your first category of budget overhead expenses: Production and Distribution Overheads.

This week, we move onto the second and final category of budget overhead expenses: Selling and Administration Overheads. Every business needs to sell to survive and every business will have administration costs to incur. So this overhead category will apply to all entities whether they are manufacturers, distributors, service entities or start-ups.

SELLING AND ADMINISTRATION OVERHEADS – EXISTING BUSINESSES

Selling Overheads include costs such as Sales and Customer Service personnel costs, Marketing costs, Mobile phones, Motor Vehicles, Travel and Entertainment, Advertising costs, Samples, Promotions and Website costs. Administration Overheads will include Accounting, Administration, IT and HR personnel costs, General management costs, IT Costs, Legal Fees, Stationery, Office Equipment depreciation etc. The process and concepts that follow are equally applicable to both types of overhead costs and to all entities that incur any of these types of costs. It basically mirrors the process you followed to develop your Production and Distribution Overheads previously.

Your accounting system should already be reporting the actual costs as separate line items so this is your starting point for your current year forecast and then budget. A simple spreadsheet will again be useful for preparing the forecast for the current financial year and budget for next financial year. Collect the year-to-date (YTD) actual costs by category. Let’s assume you have YTD actual costs for the 10months to April, refer Figure 1, Columns A and B below. Next you need to forecast the next 2months costs. A simple pro-rata using YTD Actuals can work if you have no other information to go on, refer Column C below. Adding these two numbers together gives you your current year full year forecast, refer Column D.

Next, add another 3 columns to your spreadsheet and put in ‘inflation’, ‘volume/mix’ and ‘productivity’ columns representing movements from your forecast to your budget figures (refer Figure 1 column E). ‘Inflation’ would reflect known EBA or payroll rate increases from year-to-year and inflation projections. The ‘Volume/Mix’ column would be any volume variations that will affect costs, eg product launch and marketing costs of new products, and other known variations such as depreciation increases through increased capital expenditure. The final column is the ‘productivity’ and cost saving initiatives you are budgeting for as reflected in your strategic plan.

Adding your current year forecast dollars to your ‘inflation’ increases, ‘volume/mix’ increases and ‘productivity’ savings (Figure 1, Column E) will give you a budget Selling and Administration Overhead budget for next year, refer Figure 1, Column F below.

As a point of reference, some companies have a target percentage-of-sales ratio they use to cover these Selling and Administration Overheads to ensure that these overheads stay in control.

START-UPs

If you are a start-up, hopefully your research will have identified the overhead resources you will need so you can sell your products/services and run your business. Put some values around the resources required to derive a simple budget for these costs for the next financial year.

SUMMARY

Use this week to develop your Selling and Administration Overhead Budgets and continue building the budget picture to provide a sound foundation for business success.

As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Next week we will pull together all the Profit and Loss forecast and budget data you have completed so far and add in some last pieces to come to your draft current year forecast and next year budget Profit and Loss statement.

Ross

Last week you completed your cost of sales budget, and hence determined a key metric: budget gross margin. A key take away from last week was the need to ensure you budget to make a gross margin that will cover your budget overheads and make a sufficient budget profit.

This week, we move onto the first of those budget overhead categories: Production and Distribution Overheads. Note the topic this week will not be relevant to service entities, but it is relevant to entities that are product focussed either as manufacturers and/or resellers/distributors.

PRODUCTION AND DISTRIBUTION OVERHEADS – EXISTING BUSINESSES

Distribution Overheads will apply to both manufacturers and distribution/reseller entities.  Distribution Overheads include costs such as Warehouse Labour and Freight Outwards. Production Overheads will only apply to manufacturers and are the factory costs not already picked up in cost of sales (direct labour and variable overheads) and are relatively fixed. Major categories of Production Overhead costs include Production Supervision Labour, Stores Labour, Maintenance Labour, Repairs & Maintenance (R&M), Rent and Plant Depreciation.

The process and concepts that follow are equally applicable to both types of overhead costs and to all entities that incur any of these types of costs.

Your accounting system should already be reporting these costs as separate line items so this is your starting point for your current year forecast and then budget. A simple spreadsheet will be useful for preparing the forecast for the current financial year and budget for next financial year. Collect the year-to-date (YTD) actual costs by category. Let’s assume you have YTD actual costs for the 10months to April; refer Figure 1, Columns A and B below. Next you need to forecast the next 2months costs. A simple pro-rata using YTD Actuals can work if you have no other information to go on, refer Column C below. Adding these two numbers together gives you your current year full year forecast, refer Column D.

Next add another 3 columns to your spreadsheet and put in ‘inflation’, ‘volume/mix’ and ‘productivity’ columns representing movements from your forecast to your budget figures (refer Figure 1 column E). ‘Inflation’ would reflect known EBA or payroll rate increase from year-to-year and inflation projections. The ‘Volume/Mix’ column would be any volume variations that will affect costs. eg Waste, and other known variations such as depreciation increases through increased capital expenditure. The final column is the ‘productivity’ improvements you are budgeting for as reflected in your strategic plan.

Adding your current year forecast dollars to your ‘inflation’ increases, ‘volume/mix’ increases and ‘productivity’ savings (Figure 1, Column E) will give you a budget production overhead for next year, refer Figure 1, Column F below.

START-UP’s

If you are a start-up, hopefully your research will have identified the overhead resources you will need to run your factory and/or distribute your product. Put some values around the resources required to derive a simple budget for these costs for the next financial year.

SUMMARY

Use this week to develop your Production and Distribution Budgets (as applicable) and continue building the budget picture to provide a sound foundation for business success.

As always, if you need some help or guidance, don’t hesitate to call me on (03) 9554-3128.

Next week we continue with Overhead Budgets focussing on Selling and Administration Overheads.

Ross