Would you start your car without knowing where you want to go, how and when you’ll get there, and whether you have enough fuel and a wallet to pay for it? Unless you are wanting to enjoy the ride on a sunny day, the answer is most probably “no.” However, many small or mid-size business owners I talk to do not have a budget or a business plan in place. “I’ve never had a budget or a plan, why do I need them?” and “If I had them what would I do with them?” These are the questions most often heard. This article sets out to provide the answers.
Set your destination and calculate the route
“Begin with the end in mind” is an often heard and ignored bit of wisdom. At least once a year the business owner needs to think about where he wants it to end up financially. The business plan provides the destination and itinerary for the business. The budget when compared to actual results provides monthly pointers that answer the owner’s and management’s questions of “Are we on track?” and the inevitable “Are we there yet?” If actual results vary significantly from the budget, the owner and management team can analyze the results to answer “Where did we go wrong?” and take the actions to “Reroute.” The budget is an attempt to look into the future of the business. This is very different from financial reporting found on Profit/Loss statements and balance sheets that describe the history of the business.
“We used to hope to achieve our goals. Now we expect to.”
Another major benefit of a budget for the owner is the budget development process itself. A well-managed process will yield a clear purpose, define accountability, and improve business results. For instance, the owner and the sales team should set the monthly sales goals to add into the budget. That will make the sales goals clear and visible so the sales team knows that they will be held accountable to meet those goals, and if the goals are not met, explain why and what actions can be taken to still meet the goals. The same mechanism applies to other team members.
Implementing a budget, a comparison to actual results, and a monthly review also bring a discipline to the team. The team knows that they will have a regular “pit stop” that allows them time to review and reflect on how the company is doing, what is working well, what is not working well, and what needs to change, and to prepare for the next leg of the journey. This provides highly valuable information for shorter term planning of the business such as hiring people and buying goods to meet sales demands and managing cash needs for the next couple of months. Whether business is higher or lower than budget, the business may face foreseeable cash shortages as a result.
How to Develop and Implement a Budget
Even though we are late in the year, it is never too late to create a budget. Developing and implementing a budget can seem overwhelming to business owners who have not done so before. As the saying goes: “you eat an elephant in many small bites.” Below are some of the bites you can take out of your budget elephant.
- Organization is important. First order of business is to choose the person who will be developing the budget. Get outside help when in doubt.
- Start simple. It can always become more complex to meet your needs.
- Determine your primary financial and operational goals for the coming year (i.e., desired results). This can be as simple as a $10 million goal for sales, and gross/net profit percentages.
- Be realistic – optimism and pessimism have no place in the budgeting process.
- Think about investments: Do you want to purchase or lease new equipment and vehicles? Determine most likely timing and costs.
- What about employees? Do you want to add or reduce the number of people to follow business activity?
- Whenever possible, let your management team provide input on their areas of responsibility. This will help you understand your team’s thinking and make them “buy-in” to the budget so the team will feel responsible for making it happen.
- The person responsible for sales usually is the first to provide input because sales always drives the activity level for the business.
- All input is incorporated into forecasts for the monthly statement for profit & loss and cash flow as well as the resulting balance sheet.
- Verify that the budget is reasonable, that it matches your financial and operational goals, and that your cash or revolver position will be at a comfortable level throughout the year.
- Review the draft budget with your management team and obtain their buy-in to make it final.
- Throughout the year, you will use the budget as a benchmark for the monthly reports of actual results and during reviews with the management team. If used correctly, this information will help drive action, if needed.
In conclusion, business plans and budgets are the planned itinerary for the business and help the business owner and management team agree on a course and stick to it during their journey. Tracking actual business results and comparing them to the budget is the instrument closest to an actual navigation system for your business.
About the author:
Guido Vliegen is an accomplished C-Level executive, consistently performing as a business development strategist and international operations pioneer. He has extensive experience in management, and leadership and has demonstrated success even in the most challenging business environments. He has a multi-discipline background and extensive international sales, marketing, new business development, branding, and strategic planning experience.
Guido has broad experience in global sales, marketing, as well as research and development of sustainable technology and textile performance materials. He is a front runner at scaling and turning around organizations, and planning and executing mission-critical business initiatives.
Originally from the Netherlands, Guido has lived and worked in Europe and the USA. His career began as an industrial engineer at Hunter Douglas Europe developing and executing productivity improvement projects. Guido then broadened his experience by moving into marketing and sales management for Hunter Douglas, Verosol and TenCate Protective Fabrics. In 2005, Guido moved to Georgia, U.S.A. to drive the strategy and integration of a newly acquired large American business unit of personal protective textiles for TenCate.
With the highly successful turnaround and integration of this business unit completed in 2008, he transferred to TenCate’s Grass division where he earned the responsibility of managing the more challenging American synthetic turf business from its base in Dayton, Tennessee. In 2011, Guido was offered the position of Global Group Director for TenCate Grass making him the business leader for TenCate’s worldwide synthetic grass division. He drove the transformation of the business from a strategically struggling yarn supplier into a full-fledged leading supplier of components and finished products resulting in record levels of revenue and profit.
Guido holds an MBA from Eindhoven University of Technology. He presently lives in the Atlanta, GA metropolitan area and is a partner with B2B CFO®.