On September 16, the Federal Reserve raised the federal funds rate by a quarter point to 3.75%–4%, its first increase since 2023 (Federal Reserve). Sixteen of eighteen officials projected another hike before year-end, and the 2027 dots split between more increases, a hold and cuts (CNBC). On Monday the 10-year Treasury touched 5.349%, its highest level since April 2002 (CNBC).
This is the backdrop for budget season in most $5M–$50M companies right now. And in most of those companies, the 2027 budget is being built the same way it was built in 2019: revenue up a percentage, expenses up a smaller percentage, EBITDA at the bottom, done.
That is not a budget. It is a forecast. A real budget answers three questions a forecast never asks:
· How much cash will the plan consume, and in which month does it run lowest?
· Where will that cash come from?
· What will it cost, and what conditions come attached?
If your 2027 plan cannot answer those three questions on one page, you do not have a plan your board, your lender or a future buyer can underwrite.
Why the P&L Budget Fails in This Environment
EBITDA is not cash. Everyone knows this, and almost every founder-led budget ignores it anyway.
Growth eats cash before it produces it. A company growing 25% that collects in 60 days and pays vendors in 30 days is funding its customers' balance sheets with its own. Add inventory build, a capex program, debt amortization, tax payments and an owner distribution, and a plan that shows rising EBITDA can still run out of money in the third quarter.
In a cheap-money world, that gap was an inconvenience. You drew on the line and moved on. In this one, the line costs more, and the cost isn't standing still. Prime now sits at 7.00%, and SBA 7(a) variable-rate caps run 10.00%–13.50% (Bay Street Lending). The Fed itself does not expect to reach its 2% inflation target until 2029 (CNBC). Any budget that quietly assumes cheaper money in the back half of 2027 is betting against the people who set the rate.
The irony is that capital is available. In the Fed's July senior loan officer survey, banks reported basically unchanged C&I standards for firms of all sizes, with significant net shares reporting narrower spreads for middle-market borrowers (Federal Reserve SLOOS). In private credit, Morgan Stanley notes that spreads on newly originated direct loans have widened, which means lenders are being paid more for risk again (Morgan Stanley Investment Management).
So the question for 2027 is not whether money exists. It is which money, when, at what price, and whether your plan is good enough to get it on your terms.
What I Learned When the Budget Was the Loan Document
I've written before about the acquisition we financed in 2008 with $20 million of mezzanine debt, mid-teens all-in, signed into the teeth of the credit crisis. The part of that story I don't usually tell is what it did to the budget.
Once that debt was on the balance sheet, the budget stopped being an internal document. It became the thing the lender underwrote, the thing the covenants were tested against, and the thing the board used to decide whether management deserved more rope. Every revenue assumption had to carry the cash coupon and the PIK. Every working-capital assumption had to show up in covenant headroom. A miss wasn't a variance to explain at the next board meeting. It was a conversation with a lender who held the keys.
Four years later, when we ran the sale process through Allen & Co., the same discipline mattered from the other side. Buyers did not underwrite our EBITDA. They underwrote our cash conversion and our capital needs. The plan we had built under lender pressure became the foundation of the equity story.
That's the lesson I bring into every budget engagement now. Build the plan as if a lender is going to read it, because sooner or later one will. Or a buyer.
The Five Components of a Capital-Plan Budget
1. Build three statements, not one
The budget starts with an integrated income statement, balance sheet and cash flow, built monthly. The P&L tells you whether the business makes money. The balance sheet tells you what it takes to make that money. The cash flow statement tells you whether you can afford it.
If your budget lives in a P&L-only spreadsheet, this is the single highest-value change you can make this quarter.
2. Drive working capital explicitly
Don't plug working capital as a percentage of revenue. Drive it from the operating assumptions that actually move it:
· DSO by customer segment, not as one blended number.
· DIO by product line or SKU family if inventory matters.
· DPO based on the terms you actually get, not the terms on the vendor's invoice.
· For Manufacturers – Utilization - the revenue line is limited by what the equipment can actually produce.
If you make things, check the revenue line against what your equipment can actually produce. A plan that requires 92% utilization on a line that has realistically run at 70% isn't a forecast. When I was running a plant with many machines costing millions of dollars we followed industry guidelines and budgeted 80% utilization, And when that machine runs at 70% you can almost see the money floating out the window. If your utilization percentage is a hope, the inventory and cash assumptions built on top of it will be wrong too.
Once you’ve nailed down these variables show what one week of improvement in each DSO,DIO and DPO combined with percentage increase in utilization is worth in cash. In most mid-market businesses, a disciplined working-capital program is the cheapest capital available. It is certainly cheaper than a 10% revolver.
3. Find the trough and set a liquidity floor
Every monthly cash forecast has a low point. Find it, name the month, and set a minimum liquidity floor the plan may not breach. That means cash plus undrawn, available borrowing capacity.
I usually start clients at roughly two to three months of fixed operating costs and adjust for seasonality, customer concentration and how quickly the cost base can flex. The exact number matters less than the discipline. The board should approve the floor along with the budget, and management should report against it every month.
4. Match the money to the use
The most common capital mistake I see in founder-led companies is financing long-term needs with short-term money, or using expensive equity for things debt should fund. The budget should include a simple sources-and-uses view that pairs each funding need with the right instrument. Once each need is paired with its source, the cost of capital stops being an abstraction. It becomes a line in the budget, and every initiative has to clear it.
5. Stress the plan before someone else does
Run the budget at your base case, and then run it again with rates up 100 and 200 basis points, revenue down 10% to 15%, and collections a week or two slower. Test every covenant monthly in each scenario. If a covenant breaks in the downside case, you've found a problem you can still fix in October. Found in July, it becomes a story you're telling the bank.
Then set triggers. Decide in advance what you'll do if the downside case shows up: which hires get deferred, which capex gets phased, when you draw the line. Bain's work on financial planning found that only 13% of 240 CFOs surveyed consistently achieved strong planning outcomes. The leaders tended to organize planning around business events rather than the calendar, and to make funding available outside the annual cycle (Bain & Company). PwC makes the same point from the CFO's chair: build policy scenarios and set triggers that let you reset strategy in real time (PwC).
A budget with pre-agreed triggers is a decision tool. A budget without them is a document you'll be defending.
The One Page the Board Actually Needs
Underneath all of this, the capital-plan budget rolls up to a single page. If I were sitting in your December board meeting, this is what I'd want to see:
· Operating plan: revenue, gross margin, EBITDA, by quarter.
· Cash bridge: EBITDA to operating cash flow to free cash flow after debt service.
· The trough: the lowest projected liquidity month and the approved floor.
· Funding plan: what capital is needed, from which source, at what estimated cost, and by when.
· Covenant headroom: projected compliance by quarter, base and downside.
· Triggers: the three or four pre-agreed actions if the downside case arrives.
That page changes the conversation in the boardroom. The question stops being "did we hit the number" and becomes "do we have the capital to execute the plan, and are we buying it at the right price."
A Q4 Calendar for Getting It Right
If your fiscal year ends December 31, there is still time, but not much.
· October: Convert the budget model to integrated three statements. Build the monthly cash forecast and identify the trough.
· Early November: Pair each funding need with its source. Open conversations with your bank or alternative lenders now, before you need the answer.
· Late November: Run the rate, revenue and collections stress cases. Test covenants. Agree on triggers with the leadership team.
· December: Present the one-page capital plan to the board alongside the operating budget and get the liquidity floor approved.
One more piece of timing advice. Raising capital, whether debt or equity, almost always takes longer than founders expect. If your trough is in the third quarter of 2027, the funding conversation should start in the first quarter, not the second.
The Real Question
Rates are higher than most planning models assume, the Fed is signaling it isn't done, and lenders are open for business but pricing risk carefully. In that environment, the companies that win 2027 won't be the ones with the most aggressive revenue line. They'll be the ones that know exactly how much capital their plan requires, where it's coming from, and what it costs, and that have already put it in front of their boards and lenders.
Your 2027 budget is a capital plan whether you build it that way or not. The only choice is whether you write it yourself or let your lender write it for you.
