The term “budgeting” is just as attractive as the term “dieting” is to many small business owners. They translate it as having to sacrifice or go without, instead of using it to measure what they can achieve. Successful entrepreneurs translate it to mean something very different. They view it more like a road-map, rather than some fancy management tool or gimmick. They see it as a necessary process to help them work out where they want to take their business and what they need to do to reach their goals.
Operating a business without budgeting is similar in many ways to an airline pilot taking off without directions or a map. I know it sounds ludicrous and you may be thinking that no pilot would do such a thing? It would spell disaster, wouldn’t it? But in my experience, that’s similar to what many small business owners do.
Successful entrepreneurs don’t rely on luck to reach their destination. They plan, they set clear goals and budgets to achieve them and then regularly monitor them. They revise their forecasts regularly as new information comes to their attention or if they need to adjust spending, etc.
If you’re not convinced yet, I’ve listed three persuasive thoughts on why you need to budget:
1. The Road Map
If you’re unhappy with your business’ performance, maybe it’s time to do something different. If you haven’t developed your road-map or set clear goals, how will you know when you arrive? You’ll probably continue to wander from one thing to the next relying on luck, better market conditions and a better economic outlook.
“If you don’t know where you are going, you’ll end up someplace else.” – Yogi Berra
Successful entrepreneurs don’t rely on luck or wander aimlessly. Nor should you. Take the 1st step and take stock of where you’re currently “at” so you can plan your course and develop your business.
Your financial performance will often paint a very vivid picture. For many business owners, it will trigger warning signs but for some it’ll simply just confirm they need to re-evaluate their direction.
Realising and acknowledging your current position and where you’d like to end up is a key to your success. Your “numbers” are simply sign-posts on your road map. Looking closely at your numbers indicates your current performance and offers fact – they remove subjectivity, excuses, opinions, etc.
And sometimes it’s not nice to see! It can resemble looking at old school photos and comparing yourself to what you look like now. It might not be a welcome sight!
For many businesses, these numbers commonly relate to revenues, return on investment, liquidity, fixed costs, variable costs, profit margins, etc.
Successful entrepreneurs scrutinise the numbers and ask themselves tough questions about what they are telling them. Questions such as:
• How happy am I with the returns that my business is giving me?
• Which areas do I need to focus on to (further) improve my numbers?
• What’s my break-even point?
• How solvent is my business?
• What figures were I expecting and what figures will I expect to see in the future?
If you can answer these, congratulations, as you’ve just outlined where you’d like your business to be. You’ve developed your road-map for success.
2. Symptoms & Causes
What’s more important to treat? Symptoms or causes? I’m sure you’d acknowledge that sales don’t just come flooding through the door or that fixed costs and overheads decrease just because you’d like them to. They are symptoms of causes – your sales, fixed costs and overheads happen as result of decisions you make and other associated factors.
“Symptoms, those you believe you recognise, seem to you irrational because you take them in an isolated manner, and you want to interpret them directly.” – Jacques Lacan
The budgeting process incorporates a number of activities, including strategy and question and answer sessions. It helps to identify warning signs (such as cash deficits) and their principal causes, as well as help to quantify the associated symptoms. For example, associated factors that influence sales may include the:
• Number of enquiries (or leads) or telephone calls made;
• Percentage of enquiries (or leads) that are converted into customers;
• Number of repeat sales made to customers;
• Average sale amount per service or product;
• Marketing and sales channels you use
• And so on.
These are often called “sales drivers”. Your sale revenue is primarily derived from the outcome of such drivers. Your business’ overheads are no different.
For example: The rent you pay is likely be influenced by your location or because you require additional warehousing to retain sufficient stock. Salary expenses may be blowing out of control due to additional over-time incurred for urgent orders or your staff are not as productive as they should be. Clearly it’s the underlying drivers that shape your sales or overheads, not the other way round. The budget process compels you to identify these business drivers and then quantify them, which is just as important as the budget itself.
Why, you may ask? When you have identified the drivers, you’ll be able to focus on exploiting those that will deliver the best results and addressing those that don’t. Remember, Yogi Berra’s quote. You’re responsible for creating your own destiny and like the airline pilot you’re the one holding the steering wheel. You can choose which direction you want to steer your business.
It’s important to know where you’re going and have directions and a road-map. Successful entrepreneurs have them and they embrace how budgeting can give them greater clarity on the road ahead.
3. Accountability, accountability, accountability.
Budgeting isn’t bean-counting- it’s more to do with being accountable for your success. When you know what key drivers influence your financial performance, the next step is doing something about them.
Your budget won’t simply produce your sales target. But it will certainly help you to identify and quantify the sales drivers that will. If your next quarter’s revenue goal is $240,000, that number isn’t your primary focus. Identifying and quantifying the associated drivers should become your focus. For example, a telemarketing campaign designed to sell a company’s new monthly search engine optimisation service may have the following drivers:
• 5,000 calls made over 90 days;
• 8% of calls result in new customers (“conversion rate”);
• Customers subscribe for 12 months;
• Service is $50 per month per customer.
Note: 5,000 x 8% x 12 months x $50 = $240,000.
These numbers should now give you more clarity and focus. You should take this a step further and make someone accountable for each one.
“Accountability breeds response-ability.” – Stephen Covey
Successful entrepreneurs keep scoreboards. They want to know whether targets are being met and results are being achieved. Identifying drivers and then quantifying targets for each of them changes behaviour and focus. It will help develop questions, such as:
• How many calls did we make today and are we on track to achieve 5,000 by the end of the quarter? And if not, why not?
• How much training and briefing do I need to provide to help “close the deal?”
• Do we have the right number of people to be able to deliver our service?
• Will we make decent margins?
As can be seen, significant benefits can be evidenced during the process to prepare it. It provides direction and focus. And when it’s prepared, it becomes an extremely useful tool which can be used to allocate individual accountabilities for the targets selected.
If you’ve decided to wrestle back control of your business and would like to improve its financial performance, develop your road map. After all, “If you don’t know where you are going, you’ll end up someplace else.”