Until last month, it had happened only twice in my 25 years of serving 233 companies as their senior financial manager. And last month it happened twice. Totally spontaneously, two of my clients were approached directly by legitimate prospective acquirers in their respective industries.

Neither of these companies had been groomed for a sale, and the owners in both cases are somewhat ambivalent about the prospect of relinquishing their life's work. But without the likelihood of natural succession through a younger generation of family or well-qualified company managers, the age-50+ owners in each case are considering the advancing calendar and their waning energies.

So they have decided to enter the buy-sell process. Given their strong industry familiarity, the acquirers were able to short-circuit the discussions about markets and products, brand and reputation, and move their inquiry quickly to the other essentials: management and finance. The management issues are fairly low hurdles — both suitors are significantly larger companies with strong management reserves to fill my clients' gaps and accelerate their growth curves.

Within just a few conversations, then, the matter boiled down to its essence: the need for a well-documented financial history as context for a credible financial projection. One client, for whom we have supervised finance and accounting since 2000, was readily able to produce the requested three years of budgeted vs. actual results, in month-by-month spreadsheets, with all of the key variances annotated along the way. For our other, more recent, client company, which continues to struggle with a legacy of untimely and inconsistent financial reporting, the latest financial reports were 90 days old and lacking the context of a budget.

In the first case, discussions with the prospective acquirer have accelerated, and an offer may be on the table by the time that you read this. In the second case, in a meeting last Friday, the hopeful acquirer suggested "it will probably be a lengthy process" and suggested an extended period of "developing ways of working together."

It didn't have to be this way for Client Number Two!!

Basic budgeting can be done simply. The essence is contained in this quote from a Starbucks coffee cup that found its way to me last weekend:

"In my career I've found that 'thinking outside the box' works better if I know what's 'inside the box.' In music (as in life) we need to understand our pertinent history… and moving on is so much easier once we know where we've been."

— Dave Grusin, award-winning composer and jazz musician

For smaller companies engaged in budgeting, the "pertinent history" to which Grusin refers is contained in the Income Statement, the record of revenues and expenses for the previous twelve months. The vast majority of smaller company managers with whom I have worked, when first confronted with their company's income statement, have a hard time identifying the various categories of revenue and expense. Much less can they specify what creates the month to month, or year to year, variations in these accounts. Far too often, it's the Staff Accountant who has the answers, and he or she waits forever to be asked.

The simple steps, then, are as follows:

1. The Sales Manager, working with the Staff Accountant, determines the expected revenue increases (or decreases) based on existing accounts and from surveying potential new accounts. He/she also does a similar analysis, product by product (or service by service), factoring new offerings in order to project total revenues for the coming year.

2. The Staff Accountant lists all of the expense accounts (from the Chart of Accounts) with a description of the types of revenues and expenses included in each account.

3. The Senior Accounting/Finance Manager assigns responsibility for each expense account to one or more members of the Management Team to —

1. Assess what was spent in each account during the past year (did we get useful value from these purchases?) and
2. Project what will be spent in each account during the coming year (written assumptions about these expenses help the review process)

4. The Management Team as a whole reviews and adjusts:

1. The results in 3b
2. The personnel requirement for the coming year — timing and compensation of additions/reductions
3. The appropriate additions to Property, Plant, and Equipment (capital expenses); and
4. The Marketing Budget (will the proposed advertising, trade shows, Internet, etc. drive Revenues to the desired level?)

5. The Staff Accountant totals the results for the various accounts to determine the expected Profit or Loss.

6. The Management Team then decides whether the Bottom Line is realistic, achievable, and acceptable. If so, it gets etched in stone; if not, it's back to Step 4 in search of agreement.

That's it. That's all that's required for basic budgeting. It can be done in a week if everyone shares the load. Then it's up to the Staff Accountant to estimate — within the total year's budget — the expected revenues and expenses by month and to track the actual results.

Of course, if you're not getting timely monthly results, and the Management Team is left to operate in the dark, then the Bottom Line can easily spiral out of control. But that's a topic for another day, or perhaps for a New Year.