Why budgeting shouldn’t be such a taboo subject
The term “budgeting” is just as appealing as the term “dieting” to many small business owners. They translate it as having to sacrifice or do without, rather than using it to measure what they can achieve. Successful entrepreneurs translate it to mean something very different. They see it more as a roadmap, rather than a fancy management tool or trick. They see it as a necessary process to help them determine where they want to take their business and what they need to do to achieve their goals.
Running a business without a budget is similar in many ways to an airline pilot taking off without directions or a map. I know it sounds ridiculous and you may be thinking that no pilot would do such a thing. It would be a disaster, wouldn’t it? But in my experience, that’s similar to what many small business owners do.
Successful entrepreneurs do not rely on luck to reach their destination. They plan, set clear goals and budgets to achieve them, and then regularly monitor them. They revise their forecasts regularly as new information comes to them or if they need to adjust spending, etc.
If you’re still not convinced, I’ve listed three persuasive thoughts on why you need to budget:
1. The roadmap
If you’re not satisfied with how your business is performing, maybe it’s time to do something different. If you haven’t developed your roadmap or set clear goals, how will you know when you’ll get there? It will probably continue to drift from one thing to another depending on luck, better market conditions and a better economic outlook.
“If you don’t know where you’re going, you’ll end up somewhere else.” -Yogi Berra
Successful entrepreneurs don’t rely on luck or wander aimlessly. You shouldn’t either. Take the first step and take stock of where you currently are so you can plan your course and build your business.
Your financial performance will often paint a very vivid picture. For many business owners, it will trigger red flags, but for some it will simply confirm that they need to reassess their direction.
Realizing and acknowledging your current position and where you would like to end up is the key to your success. The “numbers” from him are simply signs on his road map. Looking closely at your numbers indicates your current performance and offers facts – they remove subjectivity, excuses, opinions, etc.
And sometimes it’s not pretty to watch! It can look like looking at old school photos and comparing yourself to how you look now. It may not be a welcome sight!
For many companies, these numbers commonly relate to revenue, return on investment, liquidity, fixed costs, variable costs, profit margins, etc.
Successful entrepreneurs look at the numbers and ask hard questions about what they are telling them. Questions like:
• How happy am I with the returns my business is giving me?
• What areas do I need to focus on to (further) improve my numbers?
• What is my break-even point?
• How solvent is my business?
• What numbers did I expect and what numbers will I expect to see in the future?
If you can answer these, then congratulations, as you have just outlined where you would like your business to be. You have developed your roadmap for success.
2. Symptoms and causes
What is more important to treat? Symptoms or causes? I’m sure you’ll recognize that sales don’t pour in through the door or fixed costs and overhead go down just because you want them to. They are symptoms of causes: Your sales, fixed costs, and overheads occur as a result of the decisions you make and other associated factors.
“The symptoms, those that you think you recognize, seem irrational to you because you take them in isolation, 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 identify warning signs (such as cash deficits) and their main causes, as well as helps quantify associated symptoms. For example, associated factors that influence sales may include:
• Number of inquiries (or leads) or phone calls made;
• Percentage of inquiries (or leads) that become customers;
• Number of repeat sales made to customers;
• Average sales amount per service or product;
• Marketing and sales channels you use
• Etc.
These are often called “sales drivers.” Its sales revenue is mainly derived from the result of such drivers. Your business overhead is no different.
For example: the rent you pay is likely to be affected by your location or because you need additional storage to keep enough inventory. Salary expenses may be out of control due to extra overtime incurred for rush orders or your staff are not as productive as they should be. Clearly, it’s the underlying drivers that shape your sales or overhead, not the other way around. The budget process forces you to identify these business drivers and then quantify them, which is just as important as the budget itself.
Why, you may ask? Once you’ve identified the drivers, you can focus on exploiting the ones that will deliver the best results and addressing the ones that won’t. Remember, the Yogi Berra quote. You are responsible for creating your own destiny and, like an airline pilot, you are the one holding the wheel. You can choose in which direction you want to run your business.
It is important to know where you are going and to have directions and a road map. Successful entrepreneurs have them and accept how budgeting can give them greater clarity on the path forward.
3. Accountability, accountability, accountability.
Budgeting isn’t counting beans, it’s more about being accountable for your success. When you know which key drivers are influencing your financial performance, the next step is to do something about it.
Your budget will not simply produce your sales target. But it will certainly help you identify and quantify the sales drivers that will. If your next quarter’s revenue goal is $240,000, that number is not your primary focus. Identifying and quantifying associated drivers should become your focus. For example, a telemarketing campaign designed to sell a company’s new monthly search engine optimization service might have the following drivers:
• 5,000 calls made during 90 days;
• 8% of calls result in new customers (“conversion rate”);
• Clients subscribe for 12 months;
• The service costs $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 need to take this a step further and make someone responsible for each one.
“Responsibility breeds responsiveness.” -Stephen Covey
Successful businessmen carry markers. They want to know if the objectives are being met and if the results are being achieved. Identifying the drivers and then quantifying the goals for each of them changes behavior and approach. It will help develop questions, such as:
• How many calls did we make today? Are we on track to hit 5,000 by the end of the quarter? And if not, why not?
• How much training and information 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 get decent margins?
As can be seen, important benefits can be seen during the manufacturing process. It provides direction and focus. And when it is prepared, it becomes an extremely useful tool that can be used to assign individual responsibilities for selected objectives.
If you’ve decided to take back control of your business and would like to improve your financial performance, develop your roadmap. After all, “if you don’t know where you’re going, you’ll end up somewhere else.”