In some way, whether positive or negative, we have all been impacted by the pandemic. Learn how to manage your financial budget and prepare your business.
Before discussing the financial budget itself, it's crucial to understand what's essential: a strategic guideline. Without it, we drift aimlessly, and the budget ends up being just another piece within the management process, merely a confirmation that one exists.
It makes no sense to dedicate time and energy to putting together a financial budget where people don't participate, aren't engaged, and often even the board of directors doesn't provide the necessary support. Therefore, having strategic guidelines is fundamental.
The important strategic guidelines
Agility, pivoting and execution These are requirements that will make a big difference, so I'll give an example of what they are and their importance as strategic guidelines:
Node Talk with Investors carried out by the Portal Crisis ManagementCamila Farani, from Shark Tank, presented a very clear case: the Cat My Pet, a company that was extremely impacted at the time due to the pandemic. In just two weeks, it was able to develop an alcohol-based hand sanitizer for pets that go outside and may come into contact with someone infected with Covid-19.
In addition to providing sanitization, hand sanitizer also has properties that are not harmful to animals. Consequently, the company has experienced a boom with this innovative product, which is making all the difference in its portfolio.
Such success required the three strategic guidelines mentioned earlier: agility strategic, the condition of pivot and the basis of everything that was execution.
Financial budget
In Londrina, we also had a success story. A cleaning supplies company, when the Coronavirus cases began, immediately stopped all production of cleaning products and focused solely on the production of hand sanitizer.
It's clear that everyone is now producing the product, but the company stood out for being one of the first. When other companies started production, there was already a shortage of raw materials, so its agility, pivoting, and execution were crucial.
This balance between mindset And understanding is very important. So, in order for all of this to be done in a very rational way and to be able to translate the strategy into numbers, we need to use the tool of... financial budget.
Methodologies for a financial budget
How do you create a financial budget that will provide the foundation for you to make agile decisions and pivot? First, let's analyze the most well-known methodologies:
Historical
The most common and widely used approach, however, we must be aware that while many controllers and financial managers work with historical data in a very well-founded and effective way, there are also those who base their projections solely on data from the previous year and, without any other basis or foundation, project the future.
A financial budget is more than that; it's a time to discuss strategies, analyze accounts one by one, and not just look at the historical data. Creating your budget solely based on historical data isn't reliable either, as your sector was impacted in some way at some point during the pandemic.
Matrix
It's a very rich methodology, a guideline by expense category, horizontal and vertical analyses. There have already been cases of companies that reduced their fixed expense in 30%, which is not easy.
This type of financial budget will always point out where there is excess, but the problem is that cutting too many excesses ends up being harmful. In other words, your company will lack the structure to cope if any changes occur, as the lack of infrastructure will not be able to handle it.
Obz
With the implementation of ZBB, zero-based budgeting, we have success stories of companies that have been very successful, but we also have cases of those that implemented it and almost collapsed. This method consists of planning the financial budget as if the company did not exist beforehand.
The risk of error is very high if you only use zero-based budgeting (ZBB), especially for those doing it for the first time. The recommendation is to use ZBB in conjunction with historical data, because then you can simply compare them. After the second year of budgeting onwards, the ZBB becomes more mature and the chance of error decreases.
These are the three best-known methodologies, and each has its own strengths. But which methodology do we recommend for financial budgeting? customized.
We are in a time of uncertainty and an unprecedented scenario; we don't know how much this may impact the coming years. It's a time of many reforms, and we need to create a customized system where it's possible to incorporate the three methodologies and implement different budgets for different realities.
Parts for the financial budget
Here are some of the essential budget components for a financial budget:
1) Projected Income Statement by Business Unit
Many people talk about a financial budget when they only have an income statement, when in reality this is only part of the budget. We need an income statement that is as transparent as possible, because the more transparent you are, the greater the chances of finding waste or something that can be cut.
2) MC Projection
Do not prorate the contribution rate projection; leave that for after the consolidated income statement.
3) Balance sheet projection – managerial approach
Many times they prepare income statements and cash flow statements but forget about the balance sheet. The balance sheet is the ultimate proof; it's what underpins your income statement and will provide you with important information: the working capital for the coming year.
The balance sheet provides you with items 4 and 5 below.
4) Cash flow projection
Cash flow in both models: direct and indirect methods.
5) NGC Projection and Financial Cycle
By business area.
Companies that are currently doing very well are doing so because they've done their "homework" in having an adequate capital structure to support this increase in sales. Having this increase is pointless without a proper capital structure.
Without the necessary capital, you will either be unable to meet demand and lack the funds for raw materials, or you will seek a bank loan for a very expensive sum, where all the contribution margin goes towards paying interest. Therefore, sometimes selling more is not necessarily the best strategy.
Who says that? The budget and those five budget items.
Strategic indicators in times of crisis.
We've already discussed the first two strategic indicators; now it's EBITDA's turn:
EBITDA
Did you see the mug What did Amazon launch in the midst of the pandemic, adapted to EBITDA? It had an impact, it became... meme and has led many companies to discuss whether it makes sense or not.
We at Value invite you, from the controlling and/or finance area, to understand the adjustments to EBITDA during the pandemic. Check out a preview of the prepared content below, and if you are interested you can access it by clicking [here]. here.
Creating the scenarios
Finally, let's talk about the foundation of the financial budget, which consists of creating the scenario. Among these scenarios, there are 4 that make sense for any company to be able to monitor what is happening in reality. The scenarios VUWI:
Scenario VThat's what the government is believing: a very rapid economic recovery. Perhaps it makes sense to project a scenario where there's a recovery that fast.
Scenario UIt's a bit more conservative, where the economic recovery will be a little slower.
Scenario WThe slightly more pessimistic view suggests that things won't happen too quickly, nor too slowly. On the contrary, we will have a long period of market fluctuation due to this scenario of uncertainty.
Scenario IBasically, it's down and we don't know when it will be back up.
Financial budgeting is what Value does best.
Have you grasped the complexity of a good financial budget? Thanks to it, your company will be prepared for any adversity that may arise in the coming years. Count on Value to prepare your company's business budget!
