AV Matters - From The Stimson Group

Looking Around the Corner - Part 2

Key business issues you can't avoid in 2011

Last month we looked at trends - alliances, mergers, channels - all good stuff to think about. This month we I want to emphasize the connection between long range plans to short term business decisions. The Business Plan is your roadmap for the coming 12-18 months that takes into account the trends you have decided are relevant to your business. Of course, a majority of us will decide that long range is too far away to make any adjustments in our business plan (or to even make one), but those folks would be wrong.

Let me start with a simple premise: When we make a decision that falls outside of our budget, we are being reactive. When we change our budget to accommodate our evolving perception of the future, we are being proactive.

Business Plans are intended to convert long-range Strategy into short-term Tactics. Budgets are the tool within business plans that allow them to become powerful agents for progress and change. Without a budget, we start the year with some good ideas but no executable plan. Too many companies build a budget and use it simply as a measuring stick, but not as a business tool. For budgets to matter, your team must have

Access to the information
The power to make policy that helps fulfill the plan
Control over spending decisions within their purview.

Here are three key budget elements that managers should participate in developing and should have discretion in executing:

Quality of Service Overhead Expenses
This is a fancy way of describing supplies. This is a much more powerful tool than it sounds. Audiovisual companies need a steady stream of expendables to keep the machine moving. Too often management uses supplies as a cost constraint - control supply costs as an artificial means to save money. What I typically find is that supply cost controls end up costing more in labor than they save. Companies need to understand what reasonable costs are and then explain extraordinary variances when they occur.

For integrators, supplies generally include all the cable, connectors, and accessories that are difficult to itemize or budget on any given project. (kudos to those companies that feel they do a great job of estimating and therefore stocking these items). Rental-stagers also burn through a lot of cables and connectors, but they also have a lot of incidental supply expenses that are difficult to predict. In both cases, I see a lot of man-hours spent trying to stretch supplies, find supplies, waiting on "just-in-time" supplies, and otherwise not having the item in the worker's hand when it's actually needed. Budgets allow managers and supervisors to be more proactive in ordering regularly used supplies in anticipation of need. Budgets also empower them to purchase unplanned needs without a burdensome approval process.

Capital Budgets
Major purchases need to be capitalized over time and as such require a different budgeting process. Owners or management should set annual budgets as a percentage of revenue of the previous year and then allow their teams to propose purchase items. I recommend that these proposals come with a complete bill of materials including personnel time required to assimilate the purchase (eg: a projection testing and repair center would require staff time to fabricate in addition to the hardware and tools). For products to be used in rental applications, the proposal needs a return on investment analysis that includes the expenses the purchase is intended to offset, the potential new revenue, and net pricing strategy for products it might replace.

When capital budgets are approved, they should include a timeline. Supervisors can prepare for purchases based on that schedule and Managers can include a budget review in that plan that triggers the go-ahead to make the purchase.

Personnel Costs
One of the most challenging of decisions and follow-throughs is payroll related costs. Raises and new hire decisions occupy an inordinate amount of management time. Budgets can help alleviate this burden by setting milestones and trigger points. Revenue should drive headcount and profit should drive payroll size.

I recommend establishing cost of living and merit-based raises to take place in the middle of the budget year. This gives management six months to validate the success of the year and it also allows the costs to accrue monthly in advance to help soften the change in cash that comes with raises and bonuses. Treat cost of living raises an an across the board expense - ie: apply the amount equally as a percentage of salary to all employees. Merit raises are treated as a pooled expense. For instance, a company can establish a pool equal to 1-2% of all payroll. This fund would be distributed as a discretionary raise to deserving individuals (some may not get a merit raise).

Placing the pay raise decision in the middle of the year allows you to make adjustments that reflect the team's performance against the overall budget. It avoids the need to track hire dates or other milestones that can be easily overlooked when things get busy.

Checks and Balances
At no point in this process are we simply letting staff run amok with their budgets. Good planning means continual analysis of results. Approvals are part of any purchasing process, and the purchase order system should be transparent enough to monitor expenses against the budget. Supervisors will still need to explain extraordinary costs and managers will need to inform the team when timing issues affect the firm's ability to spend the budget. Cash flow is still the most important metric and when cash is short, there are bigger issues at hand than following a budget.

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