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Budgets: avoiding the icebergs

"Extra! Extra! Read all about it! Titanic sinks. Great loss of life." In 1912, the Titanic sank, creating tremors throughout the world. Although many

Budgets: avoiding the icebergs

Jan 1, 1999 12:00 PM,

“Extra! Extra! Read all about it! Titanic sinks. Great loss of life.” In1912, the Titanic sank, creating tremors throughout the world. Althoughmany historians believe that the great ship sank due to arrogance bymanagement, it’s also true that, if the Titantic had been equipped withcurrent electronic navigational tools such as radar and ground positioningsystems, the disaster could have been avoided.

That’s where Budgets come in. Budgets are like electronic navigationaltools for your company3/4they let you see where you are and where you aregoing. Although reading about budgets may seem almost as enjoyable asundergoing 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 atthe 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 alow-voltage contractor which was a sales and technical powerhouse. Evenwhen revenue reached $11 million, we didn’ t have a budget. With all thisrevenue and activity, we figured we must be making a lot of money3/4a lackof knowledge and arrogance that brought us to the brink of bankruptcy.Fortunately, by adopting the budgeting process and making significantchanges, we not only avoided the bankruptcy iceberg, we also grew into oneof the most profitable low-voltage contractors in the United States.

Why you need oneWhether your annual revenues are $50,000 or $50 million, a budget is anabsolute requirement. It’ s not just a report with a collection of numbers.First and foremost, it’s a discipline. It helps you to define theperformance expectations for your company, and provides a mechanism tomeasure and track performance. Your budget determines the direction yourcompany will take in the immediate future.

As part of a disciplinary process, a budget is invaluable because itfunctions as a guideline to measure your company’s current financialperformance, comparing actuals against budgeted items, and it also allowsyou to make projections, creating goals to achieve at established points inthe future. Second, a budget allows you to grow by delegating andempowering your Managers to run their individual departments. Before ourcompany began budgeting, most decisions (even the small ones) were made bythe owners. That all changed after we implemented a budgeting program.Establishing departmental budgets gave Managers information about how muchthey had available to spend and provided tools to measure (and motivate)managerial performance. Budgets also enabled us to incentivize our Managersto find ways to increase productivity while expending fewer financialresources

Finally, creating a budget forces you to look at every line item in yourfinancial statement, giving you an improved understanding about yourbusiness. With knowledge comes power, the kind of power that has positiveimpacts throughout your company.

Creating the budgetDeveloping a budget is easier than you might think. When developing yourfirst one, you should ideally start the process prior to the end of yourfiscal year. This provides time to prepare your company for implementationon the first day of your fiscal year. Second, collect the income andexpenses for each accounting category from your current operating year, andmake reasonable educated assumptions about the change (usually an increase)for next year. For instance, you might estimate that the cost of technicallabor will probably increase by 5% while administrative labor increases by3% based upon planned end-of-year raises, while the cost of long distancetelephone service will decrease slightly or remain flat. These categoriesshould be adjusted accordingly as budgeted amounts for the next fiscal year.

You’ll need to apply the same discipline to projected Sales revenue. Salestargets are often a function of what’s in the proposal pipeline combinedwith where you want your company to be. If your sales force is stable andyour market is growing, you should increase your Sales Budget to reflectthe estimated regional growth rate of your industry niche.

The budgeting process involves accepting guidelines that may seem radicalat first but, in retrospect, will become integral to running any business.First, you can never forget your corporate mission statement, maintainingcustomer service as the most important priority.

Second, eliminate the notion of sacred cows. Change is the operative wordwhen you begin budgeting. Change means conducting a line-by-line review ofevery expenditure throughout your entire company and justifying everyexpense, including personnel costs. It is an essential part of thebudgeting process and you’ll discover things you never knew about yourcompany, and save money in the process!

As an example, we implemented a new rule, requiring every internal contractto be bid out every three years, including accounting, telephone,insurance, and other overhead-related services. The bidding process helpedus shave our overhead significantly and ensured that our account wasn’ttaken for granted by service providers.

When the steps above are followed, you’ll have created your company’s firstbudget. But the work doesn’t end there. At my company, we learned thatdeveloping a useful budget is an evolutionary process3/4it’s a mistake toexpect overnight miracles or to become discouraged when your budget is lessthan perfect. Over time, you will learn the process and improve yourability 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 timeto spend with family or focus on higher level issues. While the economylooks great for now, there’s no telling where the next iceberg is hiding.Just ask Captain Smith of the Titanic.

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