5 Questions to ask your CEO prior to building the budget
A business’s operating plan is one of the most crucial financial records a company has. Basically, maintaining a good short-term and long-term operating plan, helps serve as a compass as you grow your company. It will keep your cash flow in check, provide insights on return on investments, help you decide when to accelerate or pull back on investments and how to navigate as the business environment changes.
There are different ways to build and plan a budget, but in order to create one that will serve you and your company the best, you will need to strategize before you act.
Every business owner or finance professional tends to have a slightly different process, approach, or way of budgeting. Many finance professionals tend to use the same template of a budget they have created in the past, and tweak it.
Besides the possible errors, the main thing you need to keep in mind is that not all businesses are the same (although some parameters are found in nearly every budget).
Even if you have dealt with many budgets in the past, creating the right budget that caters to the specific needs of your business, is key to a successful planning process.
Here are a the five questions you’ll need to ask your CEO prior to starting building the budget:
1) What’s the objective of the operating plan?
Is this an internal/management plan? A base plan or stretch plan? Is it for the board or external investors? For capital raising or for measuring performance?
Answering this will drive the model parameters and key performance indicators (KPIs) as you build out the budget.
2) What is the business model?
In other words, what do you sell? Who do you sell to (target market)? And how do you sell (Go-To-Market)?
These questions will help you determine how your budget should be built. Different product and selling models could affect current and also future revenues and cash flow streams. GTM plans will drive investment areas discussions and capital needs.
3) What are the long-term key growth drivers?
This is a loaded question. However it is a strategic question that needs to be answered. A business needs to understand different levers it has to drive its long-term growth. Should it invest in R&D to differentiate products? Should it invest in Sales to land as many new customers as possible? Should it invest in Marketing to stand out amongst the crowd?
4) How do you measure your success (KPI’s)?
What will be the key performance indicators serving as checkpoints that your business is on the right track or under vs. exceeding the plan.
Does success mean having the fastest growth of your industry? If yes, YoY revenue growth could be sufficient for some businesses, but not others. For example, in the SaaS business world, revenue will be a trailing indicator; bookings may be the more relevant indicator.
Another question to answer is, whether success means actual spending less than the plan, growth at all costs or capital efficient growth only.
5) How often should you recalibrate the plan?
If your business is already up and running, it’s easier to make assumptions for the future based on prior years data point and by following the recent trends of your business. However, it is good to recalibrate your plan as well as KPIs as your business grows and/or conditions change
Answering this question will close the loop on a planning cycle as you try to answer question #1 above.
These questions are rarely approached when first building a company’s budget. This can result in a lot of cycle time on adjusting templates that just weren’t right for the business. So, schedule a 1:1 with your CEO, ask her/him these five questions.
Jony Hartono serves as an advisor to Budgeta. He has over 20 years of combined experience in corporate finance, planning and corporate development. He is operationally focused and has worked for both start-ups and established companies.