Improve your Budgeting and Forecasting with a Virtual CFO

Any business owner will soon discover the benefits and challenges of accurate budgeting and forecasting, no matter how small your business may be. But many small business owners do not grasp the value of hiring a Virtual CFO to get this done; rather, they stick to working with their accountant.

Whether you are a sole trader selling coffee out of your own van or a small goods trader with a burgeoning foot in Korea, Vietnam, and other overseas markets, the quality of your budgeting and forecasting is a reflection of the real success of your endeavours. We all envision profit, and we can all instinctively point to the strengths and weaknesses of our brand. But vision and instinct do not compensate for a detailed financial picture of just where your business is at and where you can expect to be in both the short and long term. And this financial accuracy is a Virtual CFO’s bread and butter. They can examine a business owner’s assumptions and go beyond an accountant’s specific skillset to give you a budget and financial forecast that you can build your future around.

Even if the idea of outsourcing a CFO sounds attractive, many small business owners feel that this option is beyond their scope, and perhaps an extravagance. After all, why not work together with your bookkeeper or accountant when drawing up a budget and forecast?

A CFO is a hefty expense. Outsourcing a CFO need not be. Particularly when focusing on a budget and forecasting, you can narrow the objectives of your Virtual CFO to control the cost. And the service provided by an outsourced CFO exceeds that of an accountant or bookkeeper because they manage the entire process, from start to finish.

The process of accurate and exact budgeting and forecasting with your accountant includes a number of actions. If you were to approach your accountant with the desire to improve your forecasting, he or she would first ask you to draw up the budget. Most accountants manage profit and loss and compliance; they see their clients once or twice a year to manage their tax returns. Unless your business is large enough to have an in-house accountant or accounting department (a significant expense in itself), your accountant is not equipped to collect the data needed for an accurate budget. So you, as the business owner, will need to do this yourself.

First, you’ll need to determine your sales expectations. Your sales and marketing personnel can give you the value of expected sales figures for the coming year, which will form the basis of how you allocate funds in your budget. You will then need to measure the projections against last year’s actual earnings, and use this to determine how much income you can expect to earn and where in your business these funds need to go. It’s important to remember, however, that sales people often work toward bonuses. If they give you less-than-optimistic projections for future sales, this will make it easier for them to meet their targets and thus more likely to earn a bonus. So you are faced with an important question, a financial question: how accurate are my sales projections, and how do I measure this accuracy?

Once you have compared your projected business earnings with last year’s actual earnings, you can begin to allocate resources for your budget. This largely means forecasting the ways you can best earn income over the coming financial year. Will your sales be driven by products or services? What is the timeline for these sales (so as to determine cash flow)? If you plan to boost sales by 20%, for example, do you have the human resources and assets to do manage this over the course of this timeline? All these questions require you to collect data from your business and staff. You will need to discuss resourcing forecasting with your operations, production, and human resources people, and include perhaps the impact of R&D and government rebates. How will you measure the numerical values provided by them?

Now you are ready to draw up a monthly budget of sale and costs. You again need to balance you projected expenses against the actual expenses you faced last year. In many ways, the financial evaluation of such projections is reliant on your income, profit, and loss figures from previous years. But do you have the financial expertise to interpret numbers from the past in a way that accurately forecasts for the future?

Once you have a monthly budget showing forecasted income and expenses, you need to double check it with your suppliers to ensure the sales targets and prices meet their expectations also. Then, you can return to your accountant. He or she will evaluate this budget by testing the assumptions you have made. All the numbers you come up with, from sales to expenses, are based on assumptions you have about your business and its future. Your accountant needs to have the skills to tests these assumptions with a great deal of detail; incisive analysis of your budget will measure KPIs by hour and dollar against costs and billing. As mentioned, many small businesses rely on accountant whose expertise lies in tax compliance. Does your accountant have the financial and business experience, not just accounting experience, to test your budget accurately?

Your budget and forecasting: a number of steps, and a great many questions. It is easy to be vague or hopeful with details and figures. This cumulates into a vague and unhelpful budget. A Virtual CFO knows this, and has the high-level expertise to counter this. He or she can manage this budgeting and forecasting process from start to finish. They will manage, test, and measure figures and assumptions cast by you, your accountant, and all other key stakeholders in your business. You may be surprised with the difference such accuracy and expertise can provide. Your business may be seen in a whole new financial light. This in turn will ensure your business plans are not based on hopes, conjecture, luck and a bit of financial acumen. Rather, your business can move forward with a firm financial plan.

Calibre Business Advisory invests more time than most firms into finding solutions for our clients. Contact our business advisors and tax accountants to discover new options for your business in Australia and beyond.

Important Disclaimer: Readers should not act solely on the basis of the material on this page. Items herein are general comments only and do not constitute or convey advice. Legislation and proposals of legislation are also subject to constant change. We therefore recommend that formal advice be sought before acting in any of the areas. This news article is issued as a guide to the readers. Calibre Business Advisory Pty Ltd and its associated entities disclaims any losses that may be incurred as a result of the reader undertaking any action based on this article.