In sports, keeping track of your score in comparison to a predetermined expectation is vital if you want to improve your game. Golfers have a handicap system, while most athletes have personal bests and records to measure themselves against.
In business, the equivalent is your annual budget. This is the financial plan you need to work to in order to achieve your goals, so it is vitally important. However, many business owners I meet haven’t got to grips with budgeting.
During this time of crisis, it’s more important than ever to have a robust budget. It will help you to understand your income and expenditure and how it will be impacted by this crisis situation. It will help you plan the actions you need to take to survive and grow. And importantly, it will support you in obtaining finance to help you through the coming months.
I hear a lot of excuses from MDs about why they haven’t got an effective budget setting process in place. Here are just some of them:
Lack of time
As MD of a business, you will always have too much to do and there will always be 101 other tasks demanding your attention. Right now, you’re probably under more pressure than ever. But if you are not able make time to do the important but not urgent work that will make the difference to your company’s performance, then you really need to look at how you are planning your time and what you are focusing on whilst in the office.
Uncertainty about the future
Particularly now, the future is uncertain, we don’t know how long restrictions will last and what the marketplace is going to be like in 6 – 12 months’ time. But in reality, life will go on. The economy will eventually recover, and there will be new opportunities for businesses that can adapt to the new normal. If you are proactive, you will find that you can influence the future, but if you are reactive, then you will always be a slave to it.
Not enough information
You are never going to know absolutely everything you need to know to in order to prepare your budget. Currently, that’s even more true. However, you always know enough to make a start, and by starting, you will begin to ask the questions that will lead you to learn more. A good place to start is what happened last year.
The only constant in life is change. You will always be pushed to and fro by the changing tides. But if you have no budget, then how will you know how far off course you really are? Every plane that flies has a flight plan. On average, the plane is exactly on that plan about 1% of the time, yet it nearly always arrives at the right place at the right time.
Lack of financial understanding
If you believe that budgets are just for accountants, you are wrong! Numbers are the key to business success. You can delegate the production of the numbers to others, but you must NEVER abdicate the responsibility for approving and monitoring them. More businesses fail because of a lack of financial understanding than for any other reason. If this is a weak area for you, find somebody who can help and advise you.
Steps to producing your annual budget
As an MD, you need to stop making excuses and take responsibility, accountability and ownership within your business. For you, here are my 6 top tips to producing an annual budget that will drive better business performance:
- Review last year’s results and ensure that you know each income stream and expense item inside out. This is a great opportunity to ask the magic “WHY” questions. Why is this so high? Why do we need to spend money on this? Why has this gone up, down or stayed the same?
- Set the sales and profit targets for the year but don’t just add on a percentage to last year’s sales – really think it through. Your market is much bigger than you imagine. As MD of a business, you need to set targets that make your team uncomfortable. Great leaders set great goals and then help their team to achieve them.
- Break the sales goal down into achievable chunks for each product or service line and calculate the appropriate cost of sales and gross profit for each. Don’t go chasing sales at the expense of profits! (Remember the saying, “Sales is vanity, profit is sanity.”) Make sure that your team also have a 12 month plan of how they are going to achieve their new targets. A budget without a plan is like a gun without a bullet.
- Get each department to review their overhead costs and set their budget for next year. Tell them that they can have as much money as they like, as long as they can show you clearly what the return on investment will be, and have linked it back to the sales figures in (2) above.
- Put the budget together on at least a month by month basis and compare the budget to last year’s actual results to ensure that it looks reasonable. Review and ask questions until you are happy that, on what you know today, it is good enough.
- Finally, each month, sit with your team and compare the budget to this year and last year’s actual results, to see where there are differences from your plan, and question the variances. Resist the urge to change the budget to fit the actual results – only do so if something major happens that materially affects the figures.
So now you know the steps to prepare a great budget, stop the excuses, take ACTION and budget your way out of this crisis!