As we approach the end of the fiscal year, private equity firms and their portfolio companies should be considering a end-of-year budget review. This practice serves not only as a review but as a strategic pivot point that you can use to bolster success in the coming year.
Before you begin reporting, read our article for best practices and advice on how to use your report as a strategic roadmap towards your future goals. We’ll cover how to perform a successful review and provide tips for how to pivot based on the results of your report. If you’re unsure where to begin or lack the resources to complete a comprehensive review, consider the value of a Growth Operators financial professional who specializes in reporting.
The 5 Steps of Year-End Budget Reporting
Begin with five steps below to ensure a successful budget review with a focus on critical financial areas:
1. Prepare and Collect Data
Begin by gathering all relevant financial data, including actual revenues, expenditures, cash flow statements, balance sheets, and profit and loss statements. Ensure that the data is accurate and comprehensive, covering all the financial activities throughout the year.
2. Perform a Detailed Analysis of Key Financial Areas
Revenue: Analyze the revenue streams against the forecasted amounts. Look for variances and trends that could impact next year's budgets.
Costs and Expenses: Review costs and expenses in detail. Identify areas where the company is over or under spending compared to the budget. Note changes in supply costs or interest rates.
Profits: Compare the expected profitability to actual results. This includes gross profit margins and net profit margins.
Assets and Liabilities: Examine the changes in assets and liabilities to ensure they align with strategic goals and financial health.
Cash Flow: Scrutinize cash flow statements to evaluate liquidity and operational efficiency. Ensure there is enough cash on hand to support upcoming projects and obligations.
3. Engage with Stakeholders
Engage with key stakeholders to discuss findings and gather insights. This should include department heads, financial analysts, and where applicable, board members. Their perspectives can provide additional context to the numbers and help to refine the analysis. In many cases, an external analysis can provide additional, valuable insights into your reporting.
4. Set Actionable Goals
Based on the analysis, set clear and actionable goals for the coming year. This may involve adjusting spending, reallocating resources, or revising sales targets. Ensure these goals are specific, measurable, achievable, relevant, and time-bound (SMART).
5. Document and Report
Compile a comprehensive report that summarizes findings, decisions, and action plans. This report should be clear and accessible so that all stakeholders can quickly understand the company’s financial health and the strategic decisions made. This reporting will prove an invaluable benchmark when reviewing in the following year.
5 Best Practices to Follow When Budgeting
As you perform the steps outlined above, keep these best practices in mind:
1. Evaluate Progress Towards Goals
Review your company's progress towards its revenue and profit goals for the year. If you're off track, identify changes you can make to perform better in the next year. Adjust goals if they seem unrealistic and set new ones moving forward.
2. Align Expenses with Income
Ensure your business expenses are aligned with your actual income, not just your budgeted income. If income is below projections, you'll need to adjust your budget accordingly. If income is exceeding expectations, adjust forecasts appropriately.
3. Conduct a Source and Pace Analysis
Look at the pace of spending across key funding sources to gauge if you're spending too fast, too slow, or on track. Identify any upcoming spikes or lulls in spending based on historical trends. Engage in conversations with budget owners to understand spending plans and make adjustments.
4. Keep Books Up-to-Date
Reconcile books monthly or at least biannually to save time, money, and stress at year-end. This provides financial insights to inform budget adjustments and cash flow management. Upgrade your budgeting and forecasting software to streamline this process and make reporting easier.
5. Be Mindful of Taxes
Does your updated forecast inform a new tax strategy? Look at your previous year’s performance and consider how taxes might change. If your business uses contractors, make sure you've collected W-9 forms from them to file 1099s. Requesting W-9s when starting a new vendor relationship is a best practice.
5 Common Reporting Mistakes
There’s plenty to consider in performing a comprehensive budget analysis. Here are common pitfalls to avoid:
1. Overlooking Small Variances
Small variances can indicate larger issues. Regularly track all variances to catch and address these early.
2. Failing to Adapt to New Information
Companies often stick rigidly to their initial budgets. Be flexible and willing to adapt strategies based on current financial realities, market trends, and forecasts.
3. Inadequate Stakeholder Engagement
Ensure that all relevant stakeholders are involved in the budget review process. This inclusion can provide diverse insights and facilitate smoother, cohesive implementation of changes.
4. Using Outdated Tools
Relying on outdated desktop accounting software instead of transitioning to cloud-based tools that provide real-time financial insights and easier budgeting/forecasting capabilities could slow you down and provide less insight.
5. Not Tracking Regulatory Changes
Local or global changes in regulations could impact your bottom line. Keep abreast of any regulatory updates that could impact financial reporting or operations and factor their impact into your strategic pivots.
9 Strategic Pivots for Portfolio Companies
When your budgeting reveals deviations from your planned financial trajectory, it’s time to consider strategic pivots to steer your company back on course. Below are some detailed, actionable steps that company leaders can take to ensure these adjustments are both strategic and effective.
When making these pivots, be sure to maintain transparent communication. Keep all stakeholders informed about why changes were necessary, what the expected outcomes are, and how they will be involved in implementing and adapting to these changes. Effective communication ensures alignment and commitment across the organization.
1. Perform a Comprehensive Variance Analysis
If your budgeting analysis reveals variances between your budgeted and actual figures, it’s time to look at both revenue shortfalls and unexpected cost overruns. Identify specific departments, projects, or products where these discrepancies are most pronounced to pinpoint where adjustments are most needed.
2. Revise Sales and Marketing Strategies
If revenue is not aligning with forecasts, reassess your sales and marketing strategies. Consider reallocating marketing funds to higher-performing channels or revising sales tactics to better meet customer needs and market demands.
3. Adjust Operational Budgets
If certain costs are running high, review and adjust operational budgets. This could mean cutting non-essential expenses, renegotiating supplier contracts, or implementing cost-control measures across departments. Focus on preserving or enhancing innovation and productivity while reducing costs.
4. Update Budget Forecast Based on Current Data
Update your financial forecasts based on the insights gained from the variance analysis and stakeholder feedback. A revised forecast will help set realistic expectations as you start the new year and serve as a benchmark for evaluating the effectiveness of implemented changes.
5. Implement Tactical Changes
Based on the revised forecasts and strategic discussions, implement changes. This might involve shifting resources to different departments, scaling back or ramping up certain projects, or even pivoting product development strategies to better meet global market trends.
6. Evaluate Risk Management
Enhance your risk management strategies to safeguard against further unforeseen variances. This might involve increasing your focus on contingency planning, improving financial resilience, and diversifying income streams to buffer against market fluctuations.
7. Manage Cash Flow and Debt
If you identify issues with cash flow and debt, take steps to improve cash management: collect outstanding invoices, refine your billing practices, and refinance high-interest debt or explore other financing options.
8. Leverage Data and Technology
Using technology to implement efficiencies and automations can save time and money and give you a competitive edge, especially over longer periods. Financial technology and HR software upgrades can improve the way management teams identify and solve problems.
9. Schedule a Mid-Year Review
Don’t wait until the year ends to plan for the next. Starting in May or June allows you to develop a more comprehensive strategy and implement smoother changes. Given that many organizations begin budget approvals in October, using the mid-year point to set preliminary plans for the next year gives leaders a head start.
This is the ideal time to outline major initiatives, capital expenditures, and staffing plans so that when October arrives, the budgeting process proceeds with precision and foresight. Look back on your mid-year benchmarks to inform your final decisions.
The Value of External Budgeting Experts
Comprehensive budget reviews can benefit significantly from external expertise. Consulting firms like Growth Operators specializing in finance, accounting, and HR for private equity companies bring a fresh perspective that internal teams may miss. They are adept at:
Identifying inefficiencies
Suggesting modern technologies
Implementing best practices that align with industry standards
Recalibrating company goals
Addressing Staffing issues
Unlocking cash flow
Recommending innovations
For many portfolio companies, hiring a full-time CFO or controller is not feasible. This is where fractional professionals can be invaluable. These experts step in to offer the strategic oversight and financial stewardship that these companies require during critical periods, such as during an evaluation. They help ensure that reporting, compliance, and forecasting are handled with the expertise needed to guide the company forward effectively.
Your Year-End Budgeting and Forecasting Experts
Don’t skimp on your budgeting. For private equity firms and their portfolio companies, these reviews provide golden opportunity to refine strategies, correct missteps, ensure alignment with financial goals, and plan for a profitable future. With the right expertise, companies can leverage their budgeting reviews into powerful tools for success.
Connect with Growth Operators today and pave the way for a lucrative fiscal year and beyond.