Steps to Estimate a Budget Figure

July 2008

Last month, we talked about how important it is to back up your budget projections with as much evidence as possible. Yes, we are completely guessing about the future, but we might as well do a good job of it.
Let’s talk this month about steps of creating a meaningful projection from scratch. I’m not talking about taking last year’s numbers and adding 5% for inflation. That is a cheesy way to budget! I am talking about thoroughly thinking through each significant line item and doing the best you can to get it right—“right” being a loose term.

STEP 1: Find out as much as you can about the subject

Become an expert on the numbers you are projecting. That is what management expects, you know.

You don’t want to find out during an executive meeting that you left a key piece of information out of your projection that could have easily been resolved by talking to Carl in Logistics or Maria in Purchasing. Don’t you just hate it when everyone looks at you and goes “Duh? Everyone knows that!”?  
Here are some ideas for getting to know your subject:

1. Interview those in the know
2. Observe the process in action
3. Read formal documents—plans, policies and procedures, laws, regulations
4. Benchmark against other similar entities
5. Review historical information
6. Google for articles, leads, experts, trends

Due diligence begins here. Have you ever heard someone say of executives, “Those guys are up on a pedestal; completely out of touch with reality.” Get out of your cubicle and go touch and hang out in reality for a while, your numbers will be so much better for it.

STEP 2: Break the subject into manageable, bite-sized chunks

Now that you know your subject better, you know what it is composed of and you can now break it into manageable bite-sized chunks. The more finite the subject, the easier it is to project. For instance, it is nearly impossible to project worldwide revenues for IBM or revenues for the entire State of Texas with just one simple calculations or piece of evidence.

But it is much easier to project revenue from the sale of server model XJ11 in Los Angeles, California or federal grant revenues for school bus upgrades in Travis County. The more finite the subject of your budget, the better.

If you are having a hard time projecting a number, the problem is probably that you have not broken the item down enough. It is still too big. You are trying to eat an entire elephant in one bite, when all you should be working on is the left tusk.

For instance, let’s say that you are a budget analyst for a golf course and country club. You could be ultra lazy about your projections and just take last years’ numbers and use those. That would work if everything about your world was going to behave exactly the same way as it did last year. But, that hardly ever happens, even in a staid country club environment. The sand is constantly shifting under your feet—on and off the golf course—and you have to make assumptions about the behavior of a variety of factors in order to do your projections.

The first thing you have to do is break the country club revenue up into its component parts. Why? Because each component behaves differently and is driven by different variables. Here are some sources of revenue that I can imagine for a golf course and country club:

• golf cart rental
• golf course fees
• golf shop sales
• caddy fees
• buckets of practice balls
• membership
• snack bar sales
• bar sales
• wedding/special events
• catering
• valet parking

Each of these costs behaves differently and is affected by different factors. For instance, weddings and special events are not going to behave in the same way that golf course fees behave. Weddings tend to occur only on weekends and can be a bit seasonal. Most folks don’t want to get married in August in Texas or February in North Dakota.

STEP 3: Think through everything that could impact the item

Now that you have a finite bit of your world to work with, think what would make this number move? What would make it fluctuate? What do we have to assume in order for it to be stable? These become your budget assumptions. But watch out, here is where the process can turn you into a donkey!

Wait, wait. I meant to say budget assumptions make an ASS out of U and ME (ASSUME, ASS-U-ME, get it?!?). Whenever someone begins a sentence with, “I assumed so and so…” you know you are in for an excuse that denies accountability for the significant screw up that just happened. “I assumed you were going to meet me at the west end of the mall.” “I assumed you didn’t want that collection of old Beatles records anymore, so I gave them to Goodwill. You hadn’t listened to them in ages.” “I assumed that you knew that your request for the trip to the conference in Vegas will never fly with management, so I never passed it on.”

Budgets are predictions of the future. And in order to make a prediction of the future, you have to take many variables into account. And these variables that you rely on to act in a certain way are called assumptions. And assumptions can really hang you up, because they often turn out to be wrong.
Here are some things that come to mind for me when thinking about relevant assumptions for the golf fees:

• Number of members of the country club
• Seasonality/weather
• Capacity of the golf course
• Planned maintenance
• Health of the local economy
• Demographics of the local economy
• Competitors actions
• Planned tournaments and special events
• Marketing ability and capacity

Here are some variables to consider for the events/banquet facility

• Country club membership
• Dates the banquet hall is open to the public
• Demographics of country club membership
• Capacity of the facility
• Competitor’s actions
• Planned special events and tournaments
• Use of the facilities by staff
• Marketing ability and capacity
• Health of the relevant economy

This isn’t even considering the revenues from food and beverage sales during events—just the rental of the banquet hall. (And I am sure that, as a person who has never run a country club, that I am missing a few key assumptions.)
Another thing to note regarding assumptions is that the maturity of the product makes a huge difference to the accuracy of your assumptions. If you are trying to predict behavior in the first year or first few months of the product or service’s existence, you are shooting in the dark. You have no clue how the item is going to behave and what variables exist that could affect you. The first few years of any business or any product introduction tend to surprise you and come out of left field. So, don’t be too hard on yourself if every one of your guesses and assumptions ends up being wrong.

At this phase, it is important to document your key variables and your assumptions about the behavior of each variable. For instance, your assumption regarding country club membership could look like this:

Country club membership has been declining by 1 to 2 percent each year for the past ten years. We assume that, because our membership is aging (65% of our members are in their late 70s) that this trend will accelerate to 3% over the next two years.

Reference to DEMOGRAPHICS OF MEMBERS on page A-3
Reference to MEMBERSHIP TRENDS on page A-4

STEP 4: Estimate the numbers

Get out that handy Excel spreadsheet and play with different versions of your future. I always like to go with the worst case scenario! (OK, that is my conservative accounting training rearing its ugly head… choose whichever scenario resonates with you and your team!).

STEP 5: Document, document, document

Write everything down so that you can refer to it in case you

1. Forget how you came up with the numbers
2. Suffer the scrutiny of a doubting executive
3. Want to be able to do this again next year