Page 176 - Finance for Non-Financial Managers

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The Annual Budget: Financing Your Plans
Financial plan The generic label for any kind of estimate of
the future in financial terms.As such, budgets, forecasts, and
projections are all financial plans.Aside from the generic usage, 157
this term is most often used in a long-term business plan to identify the
financial effects of all the activities discussed in the plan. So, in Chapter 9
we referred to the dollars-and-cents representation of our long-range
plan as a financial plan.The resulting definition: an integrated, multiyear
plan of income, expenses, cash flow, and balance sheet changes.
Projection Estimate that is less detailed than a financial plan and
usually covers a shorter period of time, typically prepared to demon-
strate expected financial results over a few months or a year, perhaps
for a special purpose such as a bank loan or to test the continuing
validity of a budget or long-range plan. It may not include an integrated
balance sheet, but it will almost always include a P&L projection or a
cash flow projection, depending on the focus.
Forecast Typically a very short-term view of the next few weeks or
months, perhaps to use to test the validity of the operating budget
under a set of conditions that might not have existed when the annual
budget was created. Short-term cash forecasts are typically not very
detailed.A forecast might also be used as the starting point in budget-
ing, such as producing a sales forecast that will form the basis for the
sales budget.

you may have a credibility problem, even with great results.)
Most of these variations differ principally in the level of detail
they contain, the depth of work that went into their preparation,
and the period of time they cover. Still, it’s worthwhile to know
the most common usage, if for no other reason than because
these are the definitions we are using in this book.

How to Budget for Revenues—the “Unpredictable”
Starting Point

Every budget preparation cycle should begin with a revenue
forecast. This is so for very valid reasons. Revenue typically
drives the business and determines the level of growth and the
degree of success that the business may anticipate. The level of
revenue determines the magnitude of investment that manage-