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Business Planning, Forecasting, and Variance Reporting

After reading this blog, you should have a better understanding of the process for year-end Tax Planning, P&L planning, and variance reporting. This blog is a continuation of the summary video previously provided. If you have not checked out that blog, spend a few minutes viewing the intro.

This blog is meant to provide insight into various levels of planning activities business owners and executives should take. The use of the word “planning” in this blog is more in line with the thought of budgeting, which for a business is typically an annual activity.

As businesses grow, the level and sophistication of planning activities grow. For a small business (defined as $25 million or less), planning may be a simple exercise with just a few key stakeholders and a single spreadsheet model. On the other hand, large businesses are complex and involve many stakeholders along with various spreadsheet models, which may take days or weeks to complete. The information I am providing in this blog depicts planning activities typically taken by larger companies. Business owners and executives, should assess the proper level of planning to run a profitable business. As the intro video illustrates, the typical cycle of planning and variance reporting for a business with a fiscal year ending 12/31.

Year-end Tax Planning

Why do I start the planning discussion with year-end tax planning? Simply because tax planning involves accelerating expenses you foresee happening the following fiscal year. The goal of year-end tax planning is to decrease the current year taxes owed. Consider three ways to lower your business taxable income.

  1. Purchase this year fixed assets you plan to purchase the following year. In most cases you can write off 100% of that purchase. Even lease-hold improvement may be written off, but do consult with your CPA advisor on this.
  2. Write off any bad debt. If you are owed money for products or services and it is over 90 days past due, the chances of collecting are low. You may as well take the tax benefit now.

Open or contribute more to a qualified employee retirement plan. Not only is this a tax benefit, but certainly an employee morale booster. There are several types of plans, 401k is the most popular. However, don’t go rushing out to get into a plan, as there are many factors to consider such as fiduciary consideration, management fees, how much you will be able to contribute into the future, etc. Consult a plan administrator for advice.

P&L Plan (Budgeting)

I have been part of the annual planning process for very large companies, and every company had their own spin as to how they get this process done. However, there are some key steps every business takes:

  1. Create a sales plan. Sales drives the rest of your business. If you don’t sell, you cannot pay your employees or make purchases to produce and increase sales. A great amount of time should be spent strategizing to increase sales and how it lines up with the company’s overall goals.
  2. Develop a capital spend budget. Remember, you have a limited amount of cash, but an almost infinite desire to purchase additional property, equipment, and software. You need to prioritize your wish list. At the top of that list should be purchases needed to help deliver on the sales plan. Variables to consider in your capital spend:
    • What goal is it tied to?
    • Annual and total cost
    • Priority level
    • Responsible Party
  3. Budget your labor. Large companies plan for labor creating a Full-Time Equivalent (FTE) list and identify where are the most critical needs. Labor should also consider fixed vs. variable costs. Seasonal workers in your farm are an example of a variable workforce.

Forecasting and Variance Reporting

Forecasting and variance reporting are probably the two most important of these topics to implement in your business. After you develop your budget and move past your new fiscal first month, you should create a report showing your actual results and a forecast for the remainder of the year. The budget is a static view, but your forecast is changing according to new variables happening in actuality.

Forecasting

A Profit and Loss (P&L) forecast takes the actual costs already incurred for the closing month, plus a projection or forecast of total revenues and expenses that will land by the end of the fiscal year.

The illustration below shows the revenues and expenses by P&L classification across the various sectors of this vertically integrated company and a consolidated total. The left column for each company is the year-to-date actual, the middle shows the remainder of the year forecast (in this example is 6 months), and the right column shows the variance from forecast. 

Illustrative example:

Variance Reporting

As you can see in the illustration above, the variance column highlights favorable and unfavorable variances. This illustration is very simplistic, but models can be developed to flag variances given certain variables such as over (under) 10% and over (under) $10k. Additionally, Variance analysis should be completed on a periodic basis, preferable a monthly activity.

The purpose for variance analysis and reporting is to drive accountability and action. If your forecast is no longer meeting plan you have to start asking why? What variables changed? Who is responsible and what is the go forward solution? If circumstances have changed, you should be aware sooner than later and be able to pivot to get back on track.

Conclusion

As your business grows, the need for timely and proper planning becomes greater. There are various methods to complete these exercises, and tools you can create or purchase to help with the process. The objective is being able to adopt a process and refine it year after year.  

I am keeping this blog short and hopefully with digestible information to make you a smarter manager of your business. For more insight into this topic, or you need help developing your plan, tools, click below and schedule time with me.