Most companies with sales under $10 million, and some much larger, don't use budgets to help them meet profit goals. CEOs and operating owners reason the effort to learn how to build, and then use, a workable budget is just too much. They seem to feel it's more frustrating than just hoping the numbers will all work out, if they only sell enough widgets or services or whatever.
No need to quote business failure rates among companies in this size range, nor the steady stream of survey findings that say lack of good management practices is usually to blame when a company falls short of its potential. Instead, it would be more productive to follow some tips to make budgeting easier. Even if you've never done it before, or at least never done it successfully.
The overriding principle: Profit planning, or budgeting, is far and away the most effective way to consistently meet profit targets and avoid costly surprises. It helps you invest your resources to best advantage, based on careful consideration rather than the urgency to make a move "today."
CEOs or business owners need to decide it's time to begin controlling the bottom line with some of the same tools they use to control the top line. Especially since these days the bottom line is more controllable than the top line.
Here are eight tips for your consideration:
- Take the time, take the team. A budget is not the forecast you put together on the weekend to impress your banker. It must be the result of coordinated input and effort by you and your top management team. That makes it a project that requires some time and thought, just like any other important project your company takes on.
- It takes a little practice, like any new tool. Regardless of how tough it may be to estimate the future, your forecasting accuracy will improve, and you'll be better able to control the results, if you actively use a budget. Practice does make (almost) perfect.
- Any business can be budgeted. The only question is how much practice it takes to strike a balance between time invested and forecasting accuracy. If you doubt this, remember that virtually every startup business had to be forecasted to get financial backing, including those trying to do something that had never been done before (making budgeting even more challenging).
- Use a Gantt chart - an expanded timeline - to track deliverable dates for budget completion. As with any project management tool, it will tell you if you've scheduled too much to be completed in too short a time, given other business activities that also require your team's participation.
- Don't try to budget to the last penny. Accurately predicting actual results is not the objective, nor is the creation of an immovable object. It's all about giving your company a direction to use for course corrections, and at the level of detail where it matters. If you try to forecast every little expense, the detail will drive you crazy.
- Make the tradeoffs when necessary. You have a finite amount of resources available to you. If you must spend money for something you didn't budget, then decide what budgeted expense can be removed to "finance" the new item. Without that discipline, you will almost always overspend, because there are always good reasons to spend money. They don't always produce more profit, however.
- You need both profit and cash flow targets. Every budget should have profit targets and cash flow targets, because the two bottom line measures are very different and they require different kinds of attention to control them. If you doubt this, know that every year businesses with smashing profit pictures go out of business for lack of cash.
- Three questions to powerful results analysis. At the end of each month, with budget comparisons in hand, ask your team these key questions:
- How are we doing compared to budget? Why did actual results differ from the plan?
- What must we do NOW to have a better result next month? How can we keep the positive differences and avoid more of the negative ones?
- What are we learning that will make next year's budget better?
If you follow these 8 tips in your financial forecasting and reporting, you will find your income statement more informative, your bottom line more appealing, and your peace of mind more comforting than ever before.
Congratulations. Doesn't that feel good?
Gene Siciliano, CMC, CPA, is an author, speaker and financial consultant. As president of Western Management Associates, Siciliano has spent more than 20 years helping his clients build financial strength. His book, "Finance for Non-Financial Managers," is available in bookstores and online. More information is available at www.GeneSiciliano.com.