Somehow, whether positive or negative, we were all impacted by the pandemic. Learn how to work on your financial budget and prepare your company.

Before discussing the financial budget itself, it is very important to understand what is needed: a strategic guideline. Without it, we end up navigating aimlessly, and the budget becomes just a piece within the management process, merely to state that it exists.

It makes no sense to spend time and energy creating a financial budget when people aren’t involved, engaged, and often even the board doesn’t provide the necessary support. Therefore, having strategic guidelines is essential.

Important Strategic Guidelines

Agility, pivoting, and execution are key requirements that will make a significant difference. Here’s an example of what they are and their importance as strategic guidelines:

In the “Talk with Investors” event hosted by Gestão da Crise Portal, Camila Farani from Shark Tank shared a very clear case: Cat My Pet, a company that was greatly impacted at the time due to the pandemic. In just two weeks, it managed to develop a gel alcohol to apply to pets that go outside and could potentially come into contact with someone infected with Covid-19.

Gel alcohol, in addition to providing sanitation, also has a property that is not harmful to animals. As a result, the company “exploded” with this innovative product, which is making a big difference in its portfolio.

For such success, the three previously mentioned strategic guidelines were necessary: strategic agility, the ability to pivot, and the foundation of it all, execution.

Financial Budget

In Londrina, we also had a success story. A cleaning materials company, when the Coronavirus cases started, immediately stopped all cleaning product production and focused solely on producing gel alcohol.

Of course, nowadays, everyone is producing the product, but the company stood out for being one of the first. When other companies started production, there was a shortage of raw materials, so their agility, pivoting, and execution were crucial.

This balance between mindset and awareness is very important. So, for all of this to be done in a very rational way and to bring the strategy into numbers, we need to use the tool of financial budgeting.

Methodologies for Financial Budgeting

How do you create this financial budget that will serve as the basis for making decisions quickly and pivoting? First, let’s review the most well-known methodologies:

Historical

The most common and widely used, but we must pay attention to the fact that, while many controllers and financial managers work with historical data in a very solid and accurate way, some merely base their projections on the previous year’s data and do not use any other foundation to forecast the future.

A financial budget is more than just this. It is the time to discuss strategies, analyze each account, and not just look at the history. Relying solely on historical data for your budget is not reliable, especially because your industry was impacted in some way during the pandemic.

Matrix

This is a very rich methodology, where there are guidelines for each expense area, horizontal and vertical analyses. There have been cases where companies reduced their fixed costs by 30%, which is not easy.

This type of financial budget will always point out areas of excess, but the problem is that cutting too many excesses can be harmful. In other words, if you cut too much, the structure of your company will not be able to handle changes, as the lack of structure will not be able to support it.

OBZ (Zero-Based Budgeting)

With the implementation of OBZ (Zero-Based Budgeting), there are success stories from companies that thrived, but there are also cases where companies almost collapsed. This method involves planning the financial budget as if the company did not exist beforehand.

The risk of making mistakes is very high when using OBZ alone, especially for first-time users. The recommendation is to use OBZ alongside historical data because later you can compare. After the second year of budgeting, OBZ becomes more mature and the chances of error decrease.

These are the three most well-known methodologies, each with its own advantages. But which methodology do we recommend for financial budgeting? The customized one.

We are in a period of uncertainties and an unprecedented scenario, and we don’t know how much this will impact in the coming years. It’s a time of many reforms, and we need to create a customized system where we can combine the three methodologies and create different budgets for different realities.

Key Components of Financial Budgeting

Here are some essential budget pieces for a financial budget:

1. Profit and Loss Projection by Business Unit

Many people talk about financial budgeting when they only have a P&L statement, but in reality, this is just part of the budget. We need a P&L as open as possible because the more you break it down, the more likely you are to identify waste or areas that can be optimized.

1. Contribution Margin Projection

Don’t allocate the contribution margin projection until after the consolidated P&L.

1. Balance Sheet Projection – Managerial Mode

Often, businesses focus on P&L and contribution margin but forget the balance sheet. The balance sheet is the proof of everything. It is what substantiates your P&L and provides important information such as working capital for the next year.

The balance sheet also provides the following items (4 and 5):

1. Cash Flow Projection

Cash flow should be projected using both the direct and indirect methods.

1. Net Working Capital and Financial Cycle Projections

By business area.

Companies that are doing very well right now did their “homework” to have an adequate capital structure to support this increase in sales. There is no point in having more sales without a proper capital structure.

Without the necessary capital, you either won’t be able to meet demand or will need to borrow from a bank, taking on expensive capital, where all the contribution margin goes to pay the interest. Therefore, sometimes selling more does not equate to the best strategy.

Who says this? The budget and these five key budget components.

 

 

Strategic Indicators in Times of Crisis

We’ve already discussed the first two strategic indicators, and now it’s time for EBITDAC:

EBITDAC

Did you see the mug that Amazon launched during the pandemic, adapted from EBITDA? It made quite an impact, became a meme, and sparked discussions in many companies about whether it makes sense or not.

Here at Value, we invite you from the controlling and/or finance departments to understand the adjustments to EBITDA during the pandemic. Below is a preview of the content we’ve prepared, and if you’re interested, you can access it by clicking here.

Creation of Scenarios

Finally, let’s talk about the foundation of the financial budget, which involves creating different scenarios. Among these scenarios, there are four that make sense for any company to be able to track what is happening in reality. These are the VUWI scenarios:

• V Scenario: This is the government’s belief: a very rapid economic recovery. It might make sense for you to project a scenario where recovery happens quickly.
• U Scenario: A bit more conservative, where the economic recovery will be a bit slower.
• W Scenario: The slightly more pessimistic view, suggesting that recovery won’t be fast or slow, but rather that there will be a lot of market oscillation due to this period of uncertainty.
• I Scenario: Essentially a scenario where things have collapsed, and we don’t know when they will return.

Financial Budgeting is with Value

Did you notice the complexity of a good financial budget? Thanks to it, your company will be prepared for any adversity that may arise in the coming years. Count on Value to help with the financial budget development for your business!

Let’s talk?