Building a Board-Ready Business Budget – Part 2 Risk Analysis and What-if Planning

‍

When you prepare to present your annual business budget to the Board of Directors you need to walk into the room feeling confident and being fully-prepared. Think about your audience. What do they want to be aware of and what do they need to know?

The entire business budgeting process until now has been at a micro level. It’s now time to step back and convey the overall view of the operating and financial budgets and how they tie into the strategic direction that the Board has put forth.

Profit First

What is the bottom line? It’s where all eyes head to first.There’s no point in preparing your presentation for the Board and starting with explaining how management intends to execute the Board’s strategic plan, go into the assumptions and variances, or to talk about anything else. It’s all irrelevant at the onset. The bottom line must be addressed off the bat. Board members won’t be able to hear or absorb the details until they know, at the highest level, where you expect the financial disposition of the company to be at the end of the budgeted year.

Assumptions

After the profit projection is revealed, it’s time to address the high-level assumptions made. Whether you’re planning a vacation, building a house, or launching a rocket to Mars, assumptions are embedded into every plan created. Assumptions include timing, controllable choices and conditions, and a range of factors beyond your control.The balance sheet model of showing revenue then expense is the way to go. Your discretion is critical. What does the Board need to know? (Expect to keep coming back to that question.) The major initiatives added, changed or discontinued deserve mention.An example. You’re a professional services company and labor is your largest expense. What drives your labor cost? The volume of employees, cost of benefits (including healthcare costs), and taxes. Your revenue assumptions drive your headcount. Initiatives that impact your sales volume, which drives the headcount, therefore, need to be talked about before getting into much else

Risks

What are the risks inherent in your organization and those that could stop you from meeting your projections? The Board needs to be aware of significant risks that could affect the company’s bottom line profit.Think of the footnote disclosures you include in your Annual Report. Are there any pending law suits, fraud, or data breach situations under investigation or pending resolution? The Board should be made aware of these issues regardless of their materiality if they could impact the budgeting year being reviewed or the company’s reputation.Factors beyond your control such as interest and healthcare premium rate changes should carry with them a set of actions you have taken or will take to mitigate their risk. An example is shopping insurance plans with other carriers, considering raising deductibles or accepting coverage for your employees with a narrow network.

What-if’s

A budget plan presented to the Board is one collective document of the executive and management team’s best projection scenarios. Budget plans are static but there are limitless variations of scenarios that could occur.A Board Member may be privy to a potential acquisition of your best customer and wants to know what would happen if a significant portion of revenue is lost. The impact on production volume, profit margin, the bottom line, and cash flow would need to be considered. You’re able to prepare for this type of question by exploring a variety of ‘what if’ scenarios prior to your Board presentation. When scenarios can be evaluated with each major revenue and expense driver as well as with varying levels of severity, an intuitive answer will be available to you.

Discussion Preparation

Every Director has a different background and specialty. You’ll find that summarizing annual budget data into charts and graphs in a dashboard-type layout can be very helpful. Visuals can cut through barriers and are especially welcome when the alternative is weeding through a stack of financial statements.Thousands of choices are made during the business budgeting process. Participating in management discussions when significant decisions are made will prepare you for the types of questions that Directors on the Board could ask you. Be ready to articulate the reasons one initiative was chosen over another and what led to taking a more conservative stance on revenue projects than prior years and your experience in the Boardroom will be more valuable to both yourself and the Board.How much time do you typically take in running through What-if scenarios during the annual budgeting process?Now that you've learned about risk management and what-if planning, read our final part 3 to tie it all together!Businesses of every description rely on the Budget Maestro™ family of software solutions by Centage Corporation to improve the efficiency and effectiveness of their business budgeting and planning, financial forecasting, financial consolidation and reporting processes. For more information, take a tour of Budget Maestro, contact Centage, or call 800-366-5111 now.