The Expert CEO

Halloween’s approaching, and given the recent economic upheaval, the kids at your door aren’t the only scary thing this time of year—completing your company’s budget (if you’re a December fiscal year end) has got to be high on the spooky list.  Capital constraints and the financial crisis mean more early stage companies need to become cash flow positive as soon as possible, and more established firms need to weigh the risks and rewards of new opportunities.

Developing a revenue and spending plan that meets the conflicting objectives of all constituents—investors, management, employees, and customers has never been an easy task.  Yet certain constants can make the process more manageable, and I’ll touch on a few of those here.

Set Objectives – Having a really clear sense for your critical objectives before you commence the process, and communicating those priorities clearly among the process participants will reduce the pain considerably.  Reaching a meeting of the minds at the board level prior to creating that first draft will minimize the number of iterations and time to reach the goal.

Provide Guidance – The ‘who’ and ‘how’ of the budget cycle can have a profound influence on how successful the exercise turns out, and how painful it is to complete. Identifying early the key executives whose input is most valuable is essential. Generally, a high-integrity budget will result from the combination of a top-down and bottoms-up process, not exclusively one or the other.  Providing them with clear, up front guidance, such as top line growth, profitability and cash flow objectives increases the likelihood that their initial responses will form the key components of a reasonable first draft.

Useful Tools – Most small companies use spreadsheets for budgeting.  When I was the CEO of Pillar (later acquired by Hyperion / Oracle), we pioneered the use of online budgeting and planning solutions, but they required a substantial investment of time and money to implement.  More recently, SaaS solutions streamline the budgeting process and improve collaboration while enabling you to develop a more logical budget.  One example of such a tool is Adaptive Planning (www.adaptiveplanning.com) (full-disclosure—I’m such a fan of Adaptive’s solution I joined the board of directors).

Cushion – In the very best of times, building cushion into a plan is a wise strategy – but its more critical now.  Providing some cushion in the sales forecast and operating expenses gives you the flexibility to deal with inevitable glitches without suffering the embarrassment of “unfavorable” performance lines in your board presentation.

Balance Risk vs. Growth – Regardless of company size, economic downturns exacerbate the natural tensions between managing for growth and pressures to minimize risk and manage cash.  Few seasoned CEOs look back with regret when, in difficult times, they targeted slow growth to optimize cash flow, while the ranks of overly optimistic but unemployed CEOs are legion.

In the end, today’s CEOs have all the responsibility, if only partial authority, when it comes to the budgets they sign up to.  And the CEO’s compensation will be based wholly or in part on the results. The takeaway message: extra focus on the budget development process is especially critical in this challenging environment, so spend the time and use technology wherever possible to optimize the outcome.  Then use your powers wisely to see that the goal is met!

A few relevant links:
To Survive, Net Start-Ups Slow Their Metabolism, this very relevant article by Brad Stone and Claire Cain Miller provides some good advice for start ups.

Tips for Conserving Cash – Penny Herscher describes some tips for companies looking to extend their runway
Missed the Numbers – Harvard professors examine the career consequences to CEOs and CFOs of failure to meet earnings expectations and measure the impact on compensation and job security