Budgets: avoiding the icebergs
Jan 1, 1999 12:00 PM, SOUND & VIDEO CONTRACTOR STAFF
"Extra! Extra! Read all about it! Titanic sinks. Great loss of life." In 1912, the Titanic sank, creating tremors throughout the world. Although many historians believe that the great ship sank due to arrogance by management, it's also true that, if the Titantic had been equipped with current electronic navigational tools such as radar and ground positioning systems, the disaster could have been avoided.
That's where Budgets come in. Budgets are like electronic navigational tools for your company3/4they let you see where you are and where you are going. Although reading about budgets may seem almost as enjoyable as undergoing a root canal, you need to pay close attention to this article. The future financial well being of your company may depend on it.
For most of us, developing and implementing a budget for our company is at the bottom of the priority list. Other things, such as Sales (not enough) and Production (too much work), are constantly commanding our attention. Besides, if everyone seems to be busy, we must be making money, right?
I learned better from personal experience. In the late 1980's, I owned a low-voltage contractor which was a sales and technical powerhouse. Even when revenue reached $11 million, we didn' t have a budget. With all this revenue and activity, we figured we must be making a lot of money3/4a lack of knowledge and arrogance that brought us to the brink of bankruptcy. Fortunately, by adopting the budgeting process and making significant changes, we not only avoided the bankruptcy iceberg, we also grew into one of the most profitable low-voltage contractors in the United States.
Why you need one Whether your annual revenues are $50,000 or $50 million, a budget is an absolute requirement. It' s not just a report with a collection of numbers. First and foremost, it's a discipline. It helps you to define the performance expectations for your company, and provides a mechanism to measure and track performance. Your budget determines the direction your company will take in the immediate future.
As part of a disciplinary process, a budget is invaluable because it functions as a guideline to measure your company's current financial performance, comparing actuals against budgeted items, and it also allows you to make projections, creating goals to achieve at established points in the future. Second, a budget allows you to grow by delegating and empowering your Managers to run their individual departments. Before our company began budgeting, most decisions (even the small ones) were made by the owners. That all changed after we implemented a budgeting program. Establishing departmental budgets gave Managers information about how much they had available to spend and provided tools to measure (and motivate) managerial performance. Budgets also enabled us to incentivize our Managers to find ways to increase productivity while expending fewer financial resources
Finally, creating a budget forces you to look at every line item in your financial statement, giving you an improved understanding about your business. With knowledge comes power, the kind of power that has positive impacts throughout your company.
Creating the budget Developing a budget is easier than you might think. When developing your first one, you should ideally start the process prior to the end of your fiscal year. This provides time to prepare your company for implementation on the first day of your fiscal year. Second, collect the income and expenses for each accounting category from your current operating year, and make reasonable educated assumptions about the change (usually an increase) for next year. For instance, you might estimate that the cost of technical labor will probably increase by 5% while administrative labor increases by 3% based upon planned end-of-year raises, while the cost of long distance telephone service will decrease slightly or remain flat. These categories should be adjusted accordingly as budgeted amounts for the next fiscal year.
You'll need to apply the same discipline to projected Sales revenue. Sales targets are often a function of what's in the proposal pipeline combined with where you want your company to be. If your sales force is stable and your market is growing, you should increase your Sales Budget to reflect the estimated regional growth rate of your industry niche.
The budgeting process involves accepting guidelines that may seem radical at first but, in retrospect, will become integral to running any business. First, you can never forget your corporate mission statement, maintaining customer service as the most important priority.
Second, eliminate the notion of sacred cows. Change is the operative word when you begin budgeting. Change means conducting a line-by-line review of every expenditure throughout your entire company and justifying every expense, including personnel costs. It is an essential part of the budgeting process and you'll discover things you never knew about your company, and save money in the process!
As an example, we implemented a new rule, requiring every internal contract to be bid out every three years, including accounting, telephone, insurance, and other overhead-related services. The bidding process helped us shave our overhead significantly and ensured that our account wasn't taken for granted by service providers.
When the steps above are followed, you'll have created your company's first budget. But the work doesn't end there. At my company, we learned that developing a useful budget is an evolutionary process3/4it's a mistake to expect overnight miracles or to become discouraged when your budget is less than perfect. Over time, you will learn the process and improve your ability to establish and hit your financial targets.
If you start the budgeting process now, you will increase profitability. But you will also create a more vibrant business as well as more free time to spend with family or focus on higher level issues. While the economy looks great for now, there's no telling where the next iceberg is hiding. Just ask Captain Smith of the Titanic.
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