In all 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. Yet the moment I mention budgets to the MD’s I work with, I can see their faces fall. It is like asking a child to write a thank you letter to their grandparents!
So before we start looking at how to prepare a great budget, let’s examine the excuses for why business owners don’t prepare budgets:
- “I don’t have time” – you are right, as the MD of the company you have lots to do and there will always be other tasks demanding your attention. However, 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.
- “I cannot predict the future” – you are right, the future is uncertain, but in reality, how different was this year from last year or the year before? Also, 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.
- “I cannot get all the information” – you are right, you will never know absolutely everything you need to know to in order to prepare your budget, but 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.
- “Once I do it, things change” – you are right, life is constant change and you will always be pulled to and fro, 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 and 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.
- “Nobody looks at them” – you are right, if you are not excited about your budget and look at it regularly, why would anybody else? You have to lead by example and make sure key people have helped to produce the budget and therefore have ownership of their part of it and a stake in achieving it.
- “They are for accountants, not MDs” – here, you are wrong!!! Numbers are the key to business success. You can delegate the production of the numbers to others but NEVER abdicate the responsibility for monitoring them. More businesses fail because of a lack of financial understanding than for any other reason.
I think this list covers most of the excuses I have come across when working with business owners, but I am sure I have missed a few, because people who live in a world of “blame, excuses and denial” will always find a way to get out of things that they don’t want to do. However, for those who truly take responsibility, accountability and ownership within their business, 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. Please don’t just add on 10% to last year – that is just lazy and weak. Your market is much bigger than you think and as MD, you need to set targets that make your team squirm a little and say, “ I am not sure how we are going to do that!” Great leaders set great goals and then help their team to achieve them.
- Get your sales team to 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 actuals 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 to success!