By Brian Bach
Nov. 15, 2012
There is a quote from Alice in Wonderland: “If you don’t know where you’re going, any road will get you there.” Unfortunately, this is often the approach business owners take when it comes to business planning or budgeting.
When we talk with business owners on planning or budgeting we get agreement almost 100 percent of the time it’s a valuable tool and they should have one. But our experience shows that only 2 out of 10 companies actual prepare and utilize a budget in their planning process.
This is baffling because you would never think of taking a long car trip if you haven’t set a destination and determined the most efficient travel route. So why would you sit down each morning to run your business without a plan on where you want to go financially?
So we decided to take a closer look at this baffling question of having a need but not acting upon meeting that need and here are some burdens and benefits we uncovered:
- Not Important to Management - people are usually buried in their day-to-day activities where little or no importance is placed on planning. Fighting fires and reacting to emergencies are a way of life. In a working environment of action and reaction, people can’t see how you can follow a plan because there is no order to their daily activities.
- Don’t’ have the time, discipline or expertise to create - creating a budget requires setting aside time to gather and analyze the data. It takes discipline, dedication and focused energy to examine and uncover the story behind the numbers. It also takes knowledge, expertise and understanding on how information is collected and presented while interpreting the important relationships as a result of the analysis.
- Management style is not accountability based - often we see managers are reluctant to hold employee’s accountable. If employees are steady workers and not causing trouble why rock the boat by setting targets and then having to confront them when they are not met. In some cases managers are not included in setting the targets and have no ownership in meeting the goals. They perceive the targets as subjective and designed by management to as sticks to be used for underperformance.
- Creates a Setting for Planning – takes management away from their short-term, day-to-day activities and causes them to think about how to improve the company’s future competitive and financial position.
- Looks at Profitability and Assumptions - determines where a company is making the most profit and where to reduce or stop investing in unprofitable areas. It also allows management to reexamine market and business assumptions and make strategic changes if needed.
- Sets Financial and Operational Performance Goals - allows employees to participate in setting targets to measure individual, department or divisional goals. You now have a way to provide ongoing feedback of actual to budget and make corrections as you move through a year. This is also an ideal time to design compensation plans that reward goal achievements.
- Determines Financing and Cash Flow Needs - a well prepared budget will determine additional financing and/or working capital needs so funding facilities can be put in place ahead of time to meet new demands.
While clearly the benefits are compelling, the above reasons for not preparing or using a budget are really a reflection of management culture or style. They just don’t incorporate forward thinking or planning when operating their business. Experience shows until you think and act differently about your business, nothing changes.
Experiencing the benefits of using a budget requires business owners to have the desire and discipline to create and utilize this important tool on an ongoing basis. Going through the motions of creating a budget and not using it to measure against monthly performance is a waste of time. It’s like planning a trip and throwing away the map!
We find business owners agree that budging is important and helpful, like exercise and losing weight, but are reluctant to take the time, have the discipline and make it a priority so they can actually experience the benefits.
As CFO’s working with many companies, we have seen clients make dramatic improvements in their businesses simply by managing the business with an appropriate budgeting tool. When the data is in front of you, you have the ability to make critical decisions and take decisive actions that have a tangible impact on future results.
Kraig Kramers, a renowned author and national speaker sums up forecasting like this: “Everyone should put their CFOs on the bow of the ship with binoculars rather than the stern, where they’re tracking accounting numbers in rear-view mirrors. Management should be asking and enjoining others in discussions of the future, using “what if” and “what do you see” and “what could or is likely to occur” kinds of dialog.”
Budgeting, a burden or a benefit? It really depends on where you want your company to go. If you look closely, you’ll find “not any road will get you there.”
Brian Bach is Director at Michigan CFO Associates. With more than 25 years of CFO experience he brings practical and cost effective financial management expertise focused on improving profits and cash flow. He can be reached at (586) 586-3285 x205 or [email protected]