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Your Budget is Meaningless – –

By December 20, 2013Blog, Building Value

Unless you understand where the numbers come from.

I’m betting this means that many of you either don’t have a budget, or have a budget created by someone else that you only look at when you absolutely have to – meaning when some finance person (accountant, banker, etc.) tells you to. Since we are approaching the beginning of the year, there’s probably someone telling you that “it’s that time again!”

It’s no secret that many business owners (small and large) dislike finance and finance people. They’ve got no sense of humor, they dress funny, and they speak a different language. Even when they work for you – raise your hand if I just described your accountant.

And it’s true that some finance people don’t have a clue about how finance relates to your business – they just follow the rules/formula/one-size-fits-all approach and it either works or it doesn’t.

So you might be tempted to just leave the budgeting to the finance people and wash your hands of the whole thing. After all, who needs a budget and regular reporting anyway? Banks, maybe. Eventually investors, but once you get that big, you won’t have to worry about it at all, right?

WRONG.

Creating and reviewing your budget regularly are one of the most beneficial things you can do for your business. And you, the owner, are the ONLY one to do it – although it’s perfectly okay to include others (like sales and production managers, and your internal finance staff once you have them) in the fun.

Why? Because in order to really understand what’s happening in your company and how you can create value (for yourself, your employees, and any investors you might eventually take on), you have to fully comprehend where the money comes from – aka sales – and how much it costs to get in the door – aka expenses.

Creating your budget requires you to understand how your product gets made, how it gets sent to customers, and how/when/where/why those customers buy it. It helps you rate the importance of any one element, like a particular customer or a supplier. And, it helps you understand the most likely place that things can go wrong (hint – it’s usually where you have trouble getting a good estimate of cost, or units sold, or something similar). And reviewing your budget regularly shows you whether things are working the way you expected them to.

Not surprisingly, all of this is very important knowledge for an owner – whether it’s related to finance or not. In fact, I think that the least important result of any budgeting process is the budget itself. That’s why your budget is meaningless – if it’s just numbers.

For example, if you budget $1,000 in sales in January, but you’re not sure exactly how those sales will come about, what actions can you take if you only sell $900? If your sales budget is based on having 5 clients that each buy $200 worth of product ($1,000), and you only have 4 clients who purchased $225 each ($900), you have learned something important about your customers – each one spends more than you thought. So missing the budget is actually a good thing, because it helps you understand your clients, and perhaps take advantage of an opportunity in the market.

Now wouldn’t you have felt silly if you’d chewed out your sales reps for missing their target?

Likewise, if you expected to sell $1,000 to 5 clients, but instead you sold $1,100 to a single client, is this cause for rejoicing or bad news? It’s a great month, but it is a risky way to run your business. You’d better be looking for additional clients, pronto, otherwise if/when this one disappears, so does ALL your business. Be kind of silly to buy that sales rep a beer and tell him to quit looking for new clients, right?

Ultimately, a budget without a process behind it is just a set of numbers. The value of your budget comes from the education you get each time you create it and the feedback you get each time you review it.

Big companies pay big money to set up intricate management systems with all sorts of bells and whistles that tell them how they’re performing (these are often called KPIs or Key Performance Indicators). You can do the same without all the expense – all you need is to make your budget work for you!

Do you use a budget? Does it work for you? Tell me why or why not in the comments!

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