I must admit that up until recently, I was not a proponent of budgets. As the former Chief Financial Officer (CFO) of various companies, I made it part of my job to teach all executive staff to read and understand financial reports during our monthly reviews. Keeping a budget on top of that simply seemed unnecessary.
The monthly repetition of gathering and reviewing financial reports became a very powerful teaching tool. It allowed those who weren’t as financially literate to read and understand that information just like an accountant. It was extremely important to me to ensure all department heads and managers truly understood what the numbers meant, because only then would they be able to focus on the key performance indicators (KPI’s) crucial to the success of the company and apply it to their department.
I knew I was succeeding as the CFO when I would hear members of the team talking to their colleagues or subordinates using the terms that they learned from my reports and meetings. When I would hear employees discussing different KPIs or accounting terms, it meant that what I was sharing was seeping into the fabric of the company and the employees were consciously (and even subconsciously) being mindful of how their decisions would impact the bottom line and cash flow.
As long as this was happening, I never felt like I needed a budget. In fact, with companies such as those I worked for, I feared that a budget would do the opposite of what we intended by encouraging bad behaviours. For example, it isn’t unusual for people to spend money before the year end because they haven’t used their full budget allotment. People often think they should spend every dollar while they have it - instead of when they actually need it - because they fear it will be cut from their next budget.
But these are circumstances that are more commonly found in large companies. My feelings on budgets changed dramatically 2 years ago when I started my own consulting business and began working with small business owners.
Most small businesses do not have an accounting system to collect timely and accurate financial data. Instead, many seem to treat the accounting of daily activities as an unimportant afterthought, a necessary evil, or as nothing more than just another expense. Most small business owners only review their financial statements once a year - at tax time.
The reality is that many of these owners are unable to read their financial reports and don’t understand the value of using that information to improve their bottom line and cash flow. That is why I now believe that budgets are necessary for most small businesses.
So how do you determine if your company needs a budget? If you can’t answer “yes” to the next five questions, then you need a budget.
Question #1 - Is your financial information being entered daily and accurately?
There’s activity occurring in your business every day. Much of that activity includes sales or purchases that need to be entered into your accounting system.
Do you have a system in place to ensure the timely entry of this information? If you do, are you confident that your chart of accounts is accurate? In other words, is that information being entered in the proper accounts?
If your information is not being entered daily, there’s a greater risk of losing it. It’s very easy to misplace invoices and other paperwork on an already cluttered desk during a busy day. It’s also problematic when information is being entered daily into the wrong accounts, something that typically occurs because the accounting system was set up improperly and there is no one on the team to monitor it. The result is having reports with little value - garbage in, garbage out.
Question #2 - Are you reviewing your financial reports on a monthly basis?
I have been teaching non-accountants to read financial reports for over 20 years. The most effective way is to meet on a monthly basis to review those financial reports in person. It’s all about repetition. The more someone is exposed to this information, the more they understand what they are looking at.
Operating your business becomes far easier when you can use your financial reports to help predict the future.
Question #3 - Do you know the KPIs that drive revenue and profit in your business?
There’s typically three to five KPIs that indicate your business is doing well. If you had your whole company focus solely on these indicators, I’m confident that your business would be profitable.
Knowing what these KPIs are can take time. You’ll also need to understand how to read your financial reports, because only then will you begin to see which revenue and cost drivers are impacting your company.
Question #4 - Do you have a strategic plan?
It’s extremely important to have a strategic plan. Without one, you’d be doing a disservice to yourself and your business by wasting money. It’s also important to communicate your strategic plan with the whole company because your employees can’t read your mind.
A strategic plan will provide a clear focus on what is most important for your company. It will also make it easier for your employees to work together to accomplish your plan.
Question #5 - Have you set goals to accomplish your strategy?
Achieving a strategic plan won’t happen simply because you created one. It will remain an unfulfilled dream or wish - unless you map out the concrete steps needed to take to make it happen.
To accomplish your strategy, start by setting clear and concise goals. Then you can assign accountability for those goals, meet regularly with the employee responsible and set deadlines to make sure that everything stays on track.
Now, tally up your responses to these five questions. If answered “yes” to all of them, then you’re probably managing well without a budget. From my experience, however, most small business owners would answer “no” to all five of these questions - a clear indication that they need a budget.
A mentor of mine always says, “If at least three clients ask for the same thing, you should make a product out of it.” Considering I have been asked far more than three times, I decided to create a simple tool that helps small business owners develop their budget.
This tool calculates your break-even point in sales dollars by year, month and week. It also forecasts your bottom line using a variety of scenarios specific to your business (for example, if your revenue is expected to increase or decrease in a certain time frame, or if you need to make a major investment in an advertising campaign or new equipment, etc.).
As with all of the services I offer, I will teach you how to use this tool so that you can use it every year from this point on by yourself. To start with, however, you’ll get the benefit of my 20+ years as a Certified Public Accountant and a Certified Management Accountant - meaning I have the expertise to ensure all of your financial information is accurate and I can show you how to use it to improve your business operation, bottom line and cash flow.
So if you answered “no” to the five questions above, then you now have the opportunity to start 2017 right by learning to put together a budget. It’s a simple task that can have wide-reaching benefits for your business, including improvements to your cash flow and income, a stronger focus on what’s most important for your company and better communication within your team. If you are not currently using a budget, I expect that this tool can help you achieve a return on your investment of at least five times in the first year alone.
This budget tool is available as part of a budgeting package, which you can get online through my website for $2,017 - however, listeners of my podcast can get it at almost half price until December 15th at only $1,017 (that’s a $1,000 discount).
But I am only offering 25 of these budgeting packages at this special rate, so send me an email at tony@youretheexpertnow.com to reserve your spot and make 2017 your most lucrative year yet.
I hope you have a great day!