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Dreams and budget planning

By Ronaldo Ramos*

A detailed budget planning that is aligned to the partners and company’s central values is vital to fulfilling the manager’s dreams. It is necessary to consider the shareholder’s wishes in all its dimensions: financial return, perpetuation, family income, growth, sustainability, corporate, social, and environmental liability, innovation, market, and diversity.

The dreams must be put in terms of critical factors for success and performance indicators, with short, medium and long term identification. The event horizon can range according to specific business characteristics and depending on the company’s financial health and the magnitude of imminent risk. The greater the awareness of threats, the shorter is the planning period. 

These objectives, drawn by the partners, must be shared, validated and accepted by leadership and collaborators. As to build and organization on track and committed, ensuring implementation of strategic thinking in its multiple levels. 

It is better to be prepared for an imaginary risk – one that does not materialize, but has a relevant probability – than to be caught by surprise. If the crisis is not addressed properly, we end up mining the company’s outcomes or going down drastic roads towards financial downfall. 

We must always keep in mind that budget planning represents an exercise where everyone thinks, plans, and identifies opportunities and risks together. We must also anticipate and define courses of actions to mitigate uncertainties and potentiate opportunities.

A round of budget planning can be done once a year and cover multiple periods. Such as a more detailed version for the following year and an indicative, that can cover periods between 3 and 5 years, depending on the venture. Some managers and entrepreneurs fail to be this thorough, alleging that the market’s dynamicity and volatility reduces the practicality and relevance of this long, expensive and complicated task.

The complete process can take up to 3 to 4 months and should be ready for final approval before the beginning of the regarded time period. The round should involve every decision maker, including partners, counsel (if there is one) and directors. The business key departments should also be represented, since their corresponding leadership will be responsible for setting plans of action.

It is best to leave all coordination to the financial director if he is capable of gathering technical plans from each department and identify opportunities, risks and mitigations, as well as questioning assumed premises, reflecting his observations to the final approvers. A solid financial formation and a certain dose of general business knowledge are essential attributes.

Each leader’s basic role is to identify what is possible to fulfill production, sales, investment, and profitability goals defined by the partners, council and CEOs.  Furthermore, the business maximum potential should be checked, as well as recommending investments and productivity programs, with the outlining of operations risks – be they of commercial, technical, circumstantial, political, compliance or any other nature that could have a significant impact in results. 

The models outlined during planning must be capable to identify the financial impact of the above mentioned in every line within the financial statements, from the main quantitative performance indicators. This way, a sales increase must have the expected or mitigated capital impact; a production increase must have the considered corresponding resource allocation; the release of a new product’s ramp up and start up phases must be outlined.

Plans of actions can go beyond current business resources. Some can be limited or discarded in time according to the situation. Restricting plans, cutting investments, increasing debt, capital calls, and preparing to go public or to sell are alternatives brought up from a well carried out budget planning. 

Tax and financial impact resulting from debt increase or from regulatory change, cost reduction opportunities and operational excellence programs, an overview of synergy and new structural organizations, and benefits and demands of automation investment: everything must be incorporated to the model. As the practice gains credibility, the budget planning becomes an important tool for a well informed and conscious decision making. 

*Founder of CEOlab