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What Makes a Good LBO Candidate
Discover the key financial, operational, and strategic traits that make a company an ideal Leveraged Buyout (LBO) candidate in this comprehensive guide.
Imagine it's January 2020. Your business is doing well, but you want to stay ahead of your finances for the next year. So, you create a static budget, thinking it will get you through the upcoming year.
But then comes March…
And the chaos ensues.
So, where did you go wrong? The answer is simple. Devising a plan for the upcoming year can help you keep an eye on your expenses, sales, and revenues to ensure ideal financial performance. But static budgets do not account for market fluctuations, business disruptions, and unprecedented threats and opportunities.
That's why your business needs to stay prepared with a rolling budget. This dynamic approach to budgeting offers more flexibility in the planning and decision-making process by allowing you to align or realign your spending and resource allocation at routine intervals.
Let's look at what rolling budgets are and how they can benefit your organization.
A rolling budget involves expanding on your current budget. This means that instead of creating traditional budgets at the start of every new accounting period, your business will forecast events and update the budget every month or every quarter.
A Rolling budget (also known as a continuous budget) helps you prepare for the future by examining the past. It is built with a short-term contextual focus, enabling you to strategize and adjust as the fiscal year develops.
Let's take an example. After a company concludes one operating period, the company's stakeholders will perform the budget planning for its new budget period. This means the rolling budget plans for a year out or whatever duration the company sets.
With these rolling forecasts, the stakeholders can adjust the annual budget to make changes using the information gathered through spending analysis and market conditions.
There are six types of rolling budgets.
The first budgeting step is creating a sales budget because all other financial plans are built around this. When creating this, you need to forecast the company's sales according to the value and volume. So, you must consider the following:
You can also apply the rolling technique when creating a financial plan for your production sector. This budget will be based on the sales budget. Your production manager will account for the overall production volume relative to the demand and conserves the inventory. They will also consider the cost of production, including:
The overhead budget includes two categories- fixed overhead and variable overhead. The fixed overhead considers all the uninterrupted or constant costs, such as fixed employee salaries. Whereas variable overhead plans for fluctuating expenses, such as energy bills. The overhead budget accounts for all the ongoing business expenses, including:
The financial budget estimates the business's long and short-term plans to continue operations optimally. This budgeting type focuses on the right areas to invest its excess cash flow to get the best return.
You can use the rolling budget technique here to find additional cash within your financial plan, which you can then invest in an area that requires funding.
The capital expenditure budget accounts for capital expenditure, including all the costs associated with purchasing and maintaining machinery, land, or equipment.
The master budget is the combination of all budgets. It is traditionally formed after gathering information from department heads and top-level managerial employees.
You can apply the following methods to form rolling budgets:
To create an incremental budget, your finance team adds or removes a particular percentage of the amount from the previous year's budget. The modification is made after reviewing last year's figures to determine the current year's budget.
Activity-based budgeting enables organizations to cut activity costs to optimize the final profit. This approach creates a financial plan for all the activities the business needs to perform to meet its annual objectives. For instance, a business with the goal of generating $40 million will need to determine the activities that can allow them to meet the target.
As the name suggests, zero-based budgeting starts from scratch. This means the budget does not consider an activity, department history, overhead expenses, or revenues.
On the contrary, the financial plan is created with consultation from activity managers, each of whom provides data with its experience and justification. Zero-based budgeting is the ideal option for organizations looking to identify cost-cutting areas.
Kaizen budgeting is a method that identifies areas to cut costs in operations or production. With this approach, the production or operation quality is not compromised. Instead, the approach focuses on finding ways to perform the task more efficiently to reduce expenditure.
The method integrates estimated cost reduction into business planning. Although Kaizen budgeting yields the best results over a longer duration, it significantly improves efficiency, quality, and productivity.
The 12-month budget period format enables your company to eliminate out-of-date budgets to improve its accuracy. A 12-month rolling budget adds an additional month to the forecast duration every time a month is closed. This allows businesses to build a strong plan for the next year based on the actual performance of the current year.
Your business can divide the finances into the following areas:
Variable expenses are costs determined by the volume of production and sales. As a result, they are modified and updated routinely. The production and sale volumes are further decided by considering external factors, such as inflation, and internal factors, such as the company's growth.
The rolling budget also considers the firm's fixed expenses. These include predictable costs, such as the worker's salaries, factory rent, and loan repayment. However, the fixed costs are also susceptible to change over time, so the rolling budget considers the variation.
Continuous budgets are also affected by some additional costs, including:
· Payments made to shareholders
· Interest payments for loans
· Other non-operational expenses
Implementing rolling budgets would be highly beneficial for businesses that operate in a dynamic industry to ensure all risks related to market fluctuations are mitigated. With rolling budgets, you can consistently adapt to all the future estimates related to the deviations in the industrial, economic, and business sectors to create an accurate budget. As a result, you can efficiently assign resources to meet the business's financial objectives.
Although adopting rolling budgets will offer some flexibility, they are quite different from flexible budgets. While rolling budgets are created to provide updated and accurate plans for a company, flexible budgets aim to inform the management about budget control processes, so the firm can make wise decisions.
Let's take a look at the main difference between the two.
Flexible budgets are created to adjust the allowable cost levels to meet the activity level. The budget creation follows cost analysis of the fixed and variable expenses so that the budget can be flexed accordingly. This type of budgeting is typically carried out to manage specific subdivisions of budgeting.
The rolling budget model has a twelve-month budget period, created several times over the year on a quarterly or monthly basis. The main objective of this budget is to revise the plans, predict changes in the market, and create a plan for the upcoming months. Rolling budget reviews the activity level, costs, and revenues.
A rolling budget can be a great initiative if your business is frequently subjected to economic, financial, and industrial change. The technique gives you the advantage of altering the budget on a quarterly/half-yearly/monthly basis after considering new market data.
The evaluation of the rolling budget takes place towards the conclusion of each budgeting period, allowing you to consider the short-term context when planning ahead. The financial plan provides a comprehensive understanding to your department managers and clarifies their goals and responsibilities for the next term.
Unfortunately, creating a rolling budget is initially more costly than a static budget, as you need to hire experienced staff to analyze the market fluctuations. That said, the budgeting option will be more effective and financially savvy in the long run.
So, if your organization is looking for an effective budget model that considers short-term market changes, creating a rolling budget can work effectively for you.