[IMGCAP(1)]The old adage that there are two sides to every story remains true today, especially as it pertains to accountants.

The discipline of accounting is built on the fact that assets = liabilities / owner’s equity, a two-sided equation. However, when a budget, plan or forecast is prepared, typically it’s done in a vacuum with little, if any, regard for both sides of this equation.

The budgeting, planning and forecasting process focuses almost entirely on the income statement and treats the balance sheet and cash flow as an afterthought, not really connecting the three main reporting functions. That’s ironic since it’s the cash flow that is used to make critical decisions.

In order to build a comprehensive budget, plan or forecast, all three reporting components need to be synchronized and that can only happen when the two-sided equation is taken into account. Accountants and their financial counterparts can better prepare their budgets, plans and forecasts by creating a link between all key financial statements (profit & loss, balance sheet, and cash flow) and this starts during the budgeting process.

As anyone involved in the budgeting and forecasting process can tell you, there is a lot of tension when it comes time to put together a budget. Employees recognize it is for the good of the corporation, but no one likes to go through the process of lobbying for funds and justifying expenditures. There are, however, three steps that one can take to ease the process and be sure the budget accurately reflects the organizations needs and is thus linked across all three financial statements.

Establish a benchmark first: There isn’t much opportunity to forecast if you don’t know what you are currently dealing with. Long before the budget season begins, take the opportunity to meet with the sales and operation teams. For the sales group you can ascertain what volume or percentage of sales they can commit to for the next quarter in order to begin to map out a current forecast. With the operations teams, you can discuss how expenses and spending are progressing so far. For example, the marketing department may need to know the number of sales leads in the pipeline in order to adequately determine the need for catalogs. Even further, they need to know the revenue response rate per catalog and the average order size to properly forecast where and when sales will be coming in and how that can be translated into the catalog budget for next year.

Automate where you can: Budgeting is an incredibly time-intensive process and the opportunity for errors is boundless, especially when Excel is involved. How many times have you sent out an Excel document to be filled in, only to have people add templates, row and columns? And how many days did you have to spend undoing their “kind” edits? No wonder why it won’t upload into the general ledger system! Budgets are complex. Identify the places where you can automate the process to reduce errors and save your sanity.

Understand the cash flow impact: Cash is the lifeblood of your organization, and the statement of cash flows is the barometer by which management, lenders and investors measure the strength of your cash flow. Your ability to produce accurate and timely cash flow statements, and to perform analysis based on those accurate and up-to-date reports, is highly for assessing both the current health of your organization and making key business decisions. Knowing the timing, amount and predictabil¬ity of future cash flows should be an essential component of the budgeting and planning process at all companies.

When discussing the budget with the operational business leads, remind them that profit may be great, but cash flow can be dramatically different. The budgeted profit might look good on paper, but if it’s at the expense of negative cash flow for the first four months of the year, it doesn’t work.

Once your budget process has yielded acceptable annualized net income results, you must begin to analyze your balance sheet and cash flow on both an annual and monthly basis to truly understand what is happening in your business.

The key to analyzing your P&L, balance sheet and cash flow together is to prepare them in unison. Building your financial statements in concert provides you with the ability to quickly and accurately change your P&L and have the changes flow through the balance sheet and cash flow immediately.

John Orlando is CFO of Centage Corporation, a developer of business budgeting and forecasting software.

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