It is that time of year again. I am on my second or third pass of budgets for our OpCos at this point. The final budget will be approved next week at the latest. How do we budget for our OpCos?
1. Previous Year – At this point we are 90%+ certain about where 2023 results will end up.
2. Base Year – Assuming the structure we are ending 2023 with, what will that produce and cost to operate in 2024. Add in any contractual changes (rent, insurance, etc).
3. Proposed Budget – This comes from the CEO and CFO. It includes any proposals for investments, changes to structure, pay raises, firings, etc.
4. Cost/Benefit Analysis - For each change in the budget a cost/benefit analysis should be presented. Why are we making the change? This could be to increase sales, to become more efficient, to lower turnover, etc. Each change should have an associated KPI.
5. Maintenance Cash Flow – What is our projected maintenance cash flow for the year. This is derived from the Base Year mentioned in point 2. The formula we use is:
+ Profit
+ Depreciation
- Maintenance CAPEX (replacement of balance sheet item)
+ Financing for Maintenance CAPEX
- Debt Repayment
- Tax Payment
+/- Significant change to Working Capital
6. Cash Flow analysis of Growth CAPEX – Any approved item from point 4 that requires CAPEX is summed and we verify if we can self-fund growth or need financing or investment from HoldCo.
7. KPI Measures – We compare the projected KPIs from the proposed budget to our established KPIs for the company including gross margin, net margin, cash flow conversion, etc. This is a final check that the proposed budget is “drawing within the lines” of our established KPIs.