Now if this isn’t a thrilling topic, I don’t know what is. Cue the eye-rolling! Yet, the B-word is a vitally important tool for small business owners for three primary reasons:
First, an annual budget allows the business owner to go through the exercise of laying out a prediction of what the coming fiscal year could look like, and then plan strategy and action plans accordingly. This is about being as prepared as possible for all eventualities. It maps out the financial course for the prescribed period. I am a fan of annual budgets with 3- to 5-year financial plans built out with less detail, and a Big Hairy Audacious Goal (BHAG – thanks Jim Collins) set for a long-term target.
Second, a good budget establishes key targets that the business, and those operating within it, are meant to influence, achieve, or beat. It is vital that these budgeted goals are clear, shared, understood, and followed up on. Targets should provide stretch, ensuring that the business aims to move forward and show improvement in needed areas; however, targets should never be unattainable in full or in part.
It’s very easy to make a business look great on paper during the budgeting process, but there is no value in setting unrealistic financial goals. Doing so, and I have seen this on many occasions, only tends to lessen the confidence of lenders and investors when actual performance falls short of lofty targets. On top of that, the team becomes demotivated and loses faith in the process.
Budgets should be achievable, but not too easily. Stretch is good, but out-of-reach objectives are demotivating. Targets should challenge the team to make necessary changes and execute at the highest level. Bonuses are most effective when awarded based on meeting or exceeding budgeted levels. I like to push hard in key areas where I want to see performance improvements, but I will build in a little ‘oops’ factor in other areas to give the team some relief and maintain a feeling of achievement. If budgets set goals that are consistently out of reach, you will lose your team.
Third, the budget brings objectivity to the measurement of success and makes accountabilities clear. Measuring actual financial performance against budgeted levels brings much-needed objectivity to the table. I recommend weekly tracking of Critical Numbers and then a firm monthly review of Profit and Loss statements against the budget, both for the past month as well as year-to-date.
In doing this measurement, it’s important to remember that actual vs budget is not the only consideration. Be sure to look at prior years’ performance to gain a proper perspective.
Considerations for Writing a Budget:
1) Get Your Team Involved – You may want to delegate writing parts of the budget to Department Heads. At the very least you need to consult your team, do some up-front fact-finding, and get them to provide key assumptions. The objective of this? Buy-in!
2) Prior Years’ Performance – Use as a baseline and to ensure reality is properly factored in. Prior years are to be considered, but they do not form the budget itself.
3) Internal Considerations – This includes annual action plans, objectives, capital needs, and team capacity. What internal commitments need to be reflected in the budget both in terms of revenue generation and on the cost side?
4) Industry Norms and Standards – Where do we stand when compared to the rest of our industry in terms of financial performance?
5) External Trends – What is happening ‘out there’ that we need to think about and take into consideration – economic, political, technological, competitive market, and so on?
6) Needs of Ownership – At what level do we need the business to perform to fuel growth, create opportunity, stay healthy, and satisfy our financial commitments? Treat your budget ‘wholistically’ by looking at the entire picture you are painting and not getting bogged down in each GL line or month. The goal is to secure the year-end bottom-line profit that you are striving for. If one area is behind, then you need to find ways to not only influence those underperforming areas but to identify strong areas that you can push to overperform to compensate for any lagging areas.
Bonus B’s:
Be Bold, Not Reckless.
· Push hard on changes for the greater good and in support of your guiding principles – do not be tempted to compromise your company and personal values.
· Take some risk in support of your people; break industry norms that hold people back.
· Drive hard on sustainability and stewardship in support of local producers and suppliers and lessen your environmental footprint.
· Stand firmly by your concept and product, do not let the external noise water down what you do. There is too much vanilla out there as it is. Stand out from the crowd by being true to your differentiators.
Both, and…
· Either-or/dualistic thinking that is stuck in rigid beliefs is not going to get you where you need to go. Nothing is truly black and white. New challenges must be met with new thinking.
· Seek ‘Third Way’ solutions to the issues and opportunities. This requires that everyone shares a common vision, that all key players remain open, are willing to listen to all stakeholders and have the courage to adopt new ways of doing business. Take the best of all positions and see if something truly innovative and effective can come out of it. No rigidly-held position can deal with complex issues, especially if the position is ideologically based. The ‘both/and’ approach is far more difficult than ‘either/or’ thinking, but I believe the results will be far more effective. Compromise is not a dirty word if the intention is to come up with something new, better, and more complete. In this case, compromise is the necessary, and exciting, road to go down.
Until next time!