It is similar with budgeting. If we formulate a plan that takes into account sales, costs, historic data, projected growth and reserves for unanticipated costs or events, then we will be much more able to steer our company along the pathway of most probable financial and operational success. In order to plan where we wish our company to go, we need to know where it has been and where it is. This may sound simple, but knowledge of direct costs as a percentage of sales and which fixed costs must be covered, allows us to understand what increased sales contribute to our company's financial success and how critical it is to our company to maintain a specific level of revenue before cost-cutting is necessary.
A budget is a road map for the future operations of a business. It should be challenging, but realistic. It should not be developed just by the owner or company president and accounting personnel. Managers should be involved, as their ideas on possible areas of sales growth and cost containment will contribute to a more accurate budget while making them part of the team.
When a budget is developed, the job isn't done - it has only begun. Each month, actual results of operations can be tracked against the budget to determine what differences have occurred, why they have happened and to adjust sales efforts and costs accordingly. Just like when a road is under construction and you must take a detour to get to your destination, a loss of sales or increase in costs may push you off target for your company's budgeted profitability, but it presents an opportunity to adjust your plan and take a parallel path to achieve financial goals.
A budget should be detailed enough that it is clear where responsibility lies for different lines of business, increasing sales, selling ancillary products or services, reducing direct costs and controlling fixed costs. This accountability will ensure that employees are working smart and in the best interest of the company. If we pay our employees to 'do their job' and they don't have definite benchmarks and goals to achieve, a certain percentage of them will do okay, but not come anywhere near their potential. It's similar to parents giving their children an allowance without requiring any chores be done. Soon the kids figure out that it is very easy to collect that allowance regardless of whether they help around the house or not. Most employees want to work hard - they just need to know what is expected so they can aim high.
We have focused on the uses of budgets within a company, but others also may have use for our budgets. When seeking funds from investors or a lending institution, it is customary to present a three-to-five year budget. Figures are presented along with underlying assumptions. It is important to avoid excessive optimism, use historic figures as a guide while anticipating changing market and economic conditions, allocate direct and fixed costs properly, and to outline possible unusual costs which could occur.
An old proverb says that 'if you fail to plan, you plan to fail.' Companies may have great products or services, but if they don't know what sales volume and direct cost percentage is needed to cover fixed costs and provide a return on investment to their owners, it is highly likely that 'all of a sudden' cash will be tight, no one will know how to adjust to changing conditions and a crisis will be underway. Don't be caught like the football team without a game plan or the driver without a road map. If you or your clients aren't budgeting or the budget isn't really emphasized and used as a tool to review performance and for cost control, then now is the time to begin using the budget as a business success plan.
Nperspective has assisted many clients improve their business results through implementing the right size budgeting system. Contact Russell Slappey at 407.448.1781 or slappey@npcfo.com for a complimentary consultation.
