• The annual operating budget is a PE-backed CFO’s 12-month commitment to their board of directors.
  • The annual operating budget should possess an optimal blend of ambition and practicality. Unrealistic targets can create business-wide disenfranchisement and reduced productivity.
  • Great CFOs align with their sponsor to ensure each budget is a one-year slice of an overarching investment plan.

The annual budget serves as the navigational keel of a business. 

An expertly planned budget requires input from every facet of a company. A detailed budgeting process plays a crucial role in driving alignment across the business on expectations for the ensuing year.

PE-backed CXOs should apply several foundational best practices around the annual budget. These include identifying the theme of the budget, properly sequencing budget-related activities, aligning the budget to near-term objectives dictated by the investment thesis and BOD, and viewing budgeted targets through the lens of an operator.

Identify the Budget Theme

PE firms acquire companies with a logical beginning, middle, and end in mind.

Many hold periods follow the same basic rhythm.

  • In the beginning, the company tackles inefficiencies identified during the diligence process and makes investments to propel the business towards its full potential.
  • Towards the middle of a hold, the company builds sales momentum, fortifies its operations, and expands market presence.
  • At the end of a hold, the company seeks to cut superfluous costs and further optimize EBITDA.

A CXO’s understanding of how their sponsor views the company’s position on the investment timeline is crucial to designing an effective annual budget.

This alignment helps finance chiefs identify the ri...