It's funny — I used to really like "bottoms up" budgets but don't much anymore.
❓ Why?
🤔 The future is a guess.
Doesn't matter how much sophistication you throw at it.
The best we can do is, "that feels right."
So, I'd much rather make my forecast model easy to use.
Really, it's the 80/20 principle.
Pick my 3-5 biggest line items and do some actual work there:
➡️Revenue
➡️Gross Margin
➡️Headcount
➡️Known Contracts
➡️Capex
The rest I'll just toss a growth assumption on there and let it ride.
I want to use the model to make quick decisions on the fly.
Even run a bunch of scenarios live on screen in a meeting (Excel with people watching?? Yikes 😬).
———
Now, this is considered a "top down" approach, but let me be clear...
It's 𝙉𝙊𝙏 a "shove down" approach.
I still want my team involved.
Buy-in on the line items.
And agreement that the implied KPIs are reasonable.
And if they're not, then we can 𝘲𝘶𝘪𝘤𝘬𝘭𝘺 make changes.
My team needs to be all-in and excited.
After all, a lot of bonus plans are contingent upon hitting budget.
So there's a sweet spot in there: "achievable growth"
* Enough growth that equity holders increase their value
* Achievable enough that my team gets a nice bonus
Win-win.
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At the same time, I don't want to bog my team down with an interminable "budget process."
After all, their best talents are out in the field, not on a spreadsheet (that's my job).
Remember — the model is an abstract representation of actions we need to take with the business.
The model is not the business itself.
Make it easy to use and quick.
Get back to taking action on the business.
Make it a win for everyone.
—Chris
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About Me -- I'm Chris. I help with M&A, FP&A, and teach financial modeling like a human, not a textbook. Here are the best ways I can help you:
- Learn the Basic 3 Statements
- Download my Advanced 3 Statement Model Template
- Learn to model like a Private Equity pro