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Finance for Non-Financial Managers
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them, e.g., employees, production equipment, advertising dol-
lars, office supplies, and so forth. In fact, the bulk of the budget
will look a lot like the detailed income statement from Chapter
4, with separate pages of detail for each department or division
from which budget accountability is expected.
A well-prepared budget will be as detailed as necessary to
track all the material sources of revenue, all significant planned
expenses, and the cash flow effect of that activity. It should also
include expected changes in the balance sheet as a result of the
flow of money, because balance sheets are the basis for many
performance measurements, as you learned in Chapter 7, and
because they are also the tools used by lenders to measure
compliance with loan agreement covenants. The annual budget
is the focus for this chapter, because it’s the most useful and
most used of the financial estimating tools. However, it’s not the
only technique for estimating the company’s financial future.

Tools for Telling the Future: Budgets, Forecasts,
Projections, and Tea Leaves

There are lots of labels you may hear for financial plans. Some
folks will tell you this is the “correct” name for this kind of plan
or that kind of plan. But, in reality, it doesn’t matter what you
call it as much as what you intend to do with it. It won’t matter
to the owners of your company whether you call your plan a
“budget” or a “forecast” or a “projection”—as long as you hit it
on the money. (Of course, if you call your plan “tea leaves,”

Forecasting Rather than Planning
Forecasts are often prepared by companies that don’t
use annual budgets, when they find they need a tool to
help them see into the immediate future.This is a risky situation, but it
happens a lot in small businesses, where executives don’t appreciate
the value of a formal planning system, but still recognize they can’t
assimilate in their heads all the factors that influence their immediate
financial future.