budgeting-planning

Files (4)

• README.md
• SKILL.md
• evals.json
• variance-templates.md · references/

SKILL.md (first lines)

## Key principles

1. **Budget is a plan, not a constraint** - A budget is a hypothesis about the
   future. When reality diverges from plan, the job is to understand why and
   update the forecast - not to defend the original numbers or cut spending
   mechanically to hit a line. A budget that nobody updates is just a document.

2. **Rolling forecasts beat annual budgets** - An annual budget is stale the
   day it is published. Rolling forecasts (typically 12 or 18 months forward,
   updated monthly or quarterly) keep the financial view current with business
   reality. Many high-performing FP&A teams use the annual budget for target-
   setting and rolling forecasts for operational decision-making.

3. **Variance analysis drives learning** - The value of budgeting is not the
   budget itself but the discipline of comparing plan to actuals and asking
   "why?" Every significant variance is a signal: market changed, assumption
   was wrong, execution slipped, or an opportunity emerged. Variance analysis
   without root-cause investigation is just arithmetic.

4. **Zero-base periodically** - Incremental budgeting ("last year plus 5%")
   locks in historical inefficiencies. Zero-based budgeting (ZBB) forces every
   dollar to be justified from scratch. ZBB is expensive - do it for a full
   business unit every 3-5 years, or for cost categories that have grown faster
   than revenue for two consecutive years.

5. **Headcount is the biggest lever** - In most knowledge-work businesses,
   60-70% of operating expenses are people costs (salaries, benefits, payroll
   taxes). Headcount planning is therefore the highest-leverage FP&A activity.
   Model headcount at the individual role level, not in aggregate - aggregate
   headcount budgets hide timing assumptions and grade-mix shifts.

---

## Core concepts

### Budget types

| Type | Description | Best for |
|---|---|---|
| Operating budget (OpEx) | Revenue, COGS, gross margin, operating expenses, EBITDA | Annual planning cycle, P&L management |
| Capital budget (CapEx) | Long-lived asset purchases: equipment, infrastructure, software licenses | Investment decisions, depreciation schedules |
| Cash flow budget | Operating + CapEx + financing cash flows | Liquidity management, runway planning |
| Zero-based budget | Every line item justified from zero each cycle | Cost discipline, restructuring periods |
| Rolling forecast | 12-18 month forward view, updated each period | Operational decision-making, investor guidance |

### Variance analysis

Variance = Actuals - Budget (favorable if positive for revenue, negative for
expenses; adverse if the opposite). Three decomposition layers:

- **Volume variance** - driven by more or fewer units/transactions than planned
- **Price/rate variance** - driven by a different price or unit cost than planned
- **Mix variance** - driven by a shift in the composition of revenue or cost

### Rolling forecasts

A rolling forecast extends the planning horizon by one period every time one
period closes. Instead of a fixed year-end target, the team always looks the
same distance into the future. Cadence options:

- **Monthly with 12-month horizon** - high effort, high accuracy, used by fast-
  growth companies where 3-month-old assumptions are obsolete
- **Quarterly with 4-6 quarter horizon** - balanced effort, used by most mid-
  market companies
- **Annual reforecast** - minimum viable; update the annual budget once (e.g.
  at mid-year) to reflect H1 actuals

### Cost centers

Cost centers are organizational units tracked for expense accountability but
not directly linked to revenue. Categorization matters for allocation:

- **Direct cost centers** - produce the product or service (engineering,
  manufacturing, customer success delivery)
- **Indirect cost centers** - support the business (HR, finance, IT, legal,
  facilities)
- **Shared services** - serve multiple business units and require allocation

---

## Common tasks

### Build an annual budget

Use this template sequence to construct a bottom-up operating budget:

**Step 1 - Revenue model**
```
Revenue = Volume x Price (by product / segment / channel)
- Prior year actuals as base
- Growth assumptions by segment (market data + sales pipeline + management targets)
- Pricing assumptions (list price, discount rate, mix shifts)
```

**Step 2 - COGS and gross margin**
```
COGS = Variable COGS + Fixed COGS
- Variable: unit costs x volume (hosting, payment processing, direct labor)
- Fixed: depreciation, facilities tied to delivery
Gross Margin % = (Revenue - COGS) / Revenue
```

**Step 3 - Operating expenses by department**
```
For each department:
  Headcount costs = (salary + benefits + payroll tax) per FTE x planned FTEs
  + Timing of new hires (partial-year cost for mid-year starts)
  Non-headcount = software, contractors, T&E, marketing spend, etc.
```

**Step 4 - EBITDA and cash flow bridge**
```
EBITDA = Gross Profit - OpEx
Cash flow = EBITDA - CapEx - working capital changes - debt service
```

**Step 5 - Scenario analysis**
```
Base case: most likely assumptions

From mkurman/zorai, MIT.

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