How CPAs Tackle Budgets and Forecasts

The expertise of certified public accountants goes beyond double-checking figures in a company’s ledger; it extends to mapping out plans to achieve a business’s long-term goals.

By João-Pierre S. Ruth, Contributing Writer On Aug 9, 2018

When a business brings in a certified public accountant (CPA) to pore over its financial books, the relationship can involve much more than a simple review of the numbers. Doing the math on revenue and expenses basically shows whether or not a business is in the black.

The real heavy lifting that CPAs do can lead to a better understanding of what a business may be capable of if it forms fiscal plans and sticks with them. A few experts from Grant Thornton, Sax LLP, Mazars USA LLP, and Raich Ende Malter & Co. LLP share their insights on how working with CPAs on budgets and forecasts can help businesses grow and cope with the unexpected.

Bringing in a CPA is akin to tapping a free agent to help the team get ahead in crucial times. Naturally, these accountants have a deep understanding of how financials should be recorded and presented. They also have broad business expertise they can apply in a variety of ways. “The benefit that CPAs have is they work in a lot of different industries and they see a lot of different clients,” says Daniel LaForge, audit manager with Grant Thornton.

He says CPAs can bring awareness of macro-level events to their clients of which businesses might otherwise not be aware. For example, there may be regulatory changes or industry shifts that have not yet presented themselves in the client’s market – but it is only a matter of time until they do. “CPAs take in knowledge from working with one client and it helps them with other clients,” LaForge says.

Part of the job, he says, is to test and review the budgets the client has already developed and then challenge that budget. Accountants will have questions for their clients on growth rates and who are the major industry players. A CPA will also do more than just discuss numbers with the resident finance staff at the business.

An auditor, he says, might have conversations with the sales team or other personnel on the operations side to get a clearer picture of how achievable the company’s financial expectations are. For instance, if the finance department calculates a budget built on their assumptions for revenue growth, the sales manager might have a more grounded figure for how rapidly business is scaling up.

Budgets Must Be Tough Enough for the Unknown

Even after a budget or forecast is developed, there is still a need for adaptability on the company’s part. “A budget is only as good as the day it was made,” LaForge says. Events such as a longstanding customer going out of business can occur, which, in turn, drastically disrupts the budget. Those types of incidents make it important for companies to take fresh looks at their budgeting and forecasting processes each year, he says. That way the business can see if its plans were effective when the unexpected occurred. “Doing lookbacks to see how budgets were done in prior years is helpful,” LaForge says.

Preparing for the unknown, as challenging as it sounds, is not impossible, according to Joshua Chananie, partner at Sax. Reviewing past performance for previous hiccups can help a business plan to build up a cushion of cash. “It isn’t a hard and fast dollar amount,” he says. “It could be a percentage. Maybe a 5 percent or 10 percent cushion.”

Along with planning for the unknown by looking at the past, Chananie says overall budgeting is based on observing other prior trends. Understanding past expenditures along with prior revenue a business brought in helps to plan for changes in the current year. For example, there can be steep costs associated with bringing on new clients as the business expands to accommodate the greater workload. Some major clients might want to have some reassurance that the business has accounted for these costs and will be able to deliver as promised.

There could be other types of capital commitments in the making, such as the purchase of new equipment, new buildings, and the hiring of more staff. Such changes must be prepared for as budgets are created, keeping in mind that the unexpected will shake those plans up. “You have to lay out the known and unknown factors and make certain assumptions for both,” Chananie says.

Financial Strategies are Not Strictly Set in Stone

A savvy CPA will keep companies from falling into the habit of forgetting until the end of the year about the budget they created. While it can seem like a budget is a quota the business is racing to keep up with, Chananie says it can be used as a management tool that is part of periodic company meetings. Certain modifications to that budget should also be expected. “If there are known changes that happen along the way, say a new customer or a lost customer, or a significant increase in the cost of a material for manufacture, you can account for that throughout the budget,” he says.

Allowing a budget to change too often can be counterproductive, says Jason Pourakis, partner in the New Jersey office of Mazars. “The one thing I advise my clients never to do is review the budget on a monthly basis and then change the budget accordingly,” he says. “You’re losing your vision of what strategy you want for the coming year.”

Pourakis says a budget is still a living document and, when it is done correctly, it should include certain assumptions that are tied to goals for the business. He recommends his clients review and revise budgets on a quarterly basis or maybe twice per year. That way they can assess how far off they are from the budget and work on remedies. Companies should resist immediately redrafting a budget each and every time there is an issue. “At that point, why did you invest the time putting together a budget for the upcoming year?” he asks.

Working with Clients to Achieve Goals

The role of the CPA often includes serving as a business advisor to some degree, Pourakis says. This includes connecting with clients multiple times throughout the year to better understand what their business is doing and if they are cyclical or seasonal. CPAs can come into play to help align the client’s strategic goals closer to what they should be doing in terms of a budget and forecast. “A lot of times, budgets are done because everyone feels it has to be done,” he says. “It’s not really done the way it should be, which is to create a tool to plan out the next year, the next three years or the next five years.”

Laying out expectations for a company can go beyond budgeting and lead to a forecast for its fiscal performance. This creates a barometer for potential growth and development the business might achieve – if everything goes according to plan and the calculations are reasonable, of course.

Pourakis says forecasting is important for investors and potential investors who want a sense of the potential for the business in the years to come. A forecast can also be tied to the valuation of the company because it creates a picture of the returns that might be realized. Forecasts are also subjective, Pourakis says. Political and economic risks can create changes that are hard to predict beyond a certain point. “If the forecast extends more than three years, how valid can it be?” he asks.

Forecasts can be especially desired by other third parties such as banks, says John Boykas, partner with Raich Ende Malter & Co., because of the insight they offer about a business’s prospects. This is of particular interest for lenders who want to know they will be paid back in a timely fashion, he says.

Whether it is formulating a forecast or a budget, Boykas says that is just the first step CPAs take in working with businesses. “We want the budget to be a roadmap for our clients to get to their goals,” he says.

Understanding those long-term goals of business owners can be just as important to a CPA as seeing historical financial information. When a profitability analysis is performed, a CPA can take into account the types of contracts that were fulfilled by the company and delineate who performed the jobs well and who the project manager was. This can lead to a correlation that can help the business discern who on their staff is the best fit for certain work that comes their way.

There are times when a CPA must show business owners when they have gotten way off track compared with the plans they put on paper. This could be a matter of not meeting revenue goals or even exceeding budgeted expenditures not related to unexpected costs. For instance, a company might make plans to reduce expenses by switching to a different service provider or exiting an unprofitable market. If the business owner does not follow through on those plans, the results will show up in their financials. That is when a CPA needs to talk tough about the numbers. “Sometimes it’s just a matter of holding management’s feet to the fire,” Boykas says. “In some cases, they just need a gentle reminder.”

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