PROFESSIONAL SERVICES: Budgeting beyond the numbers
For many business owners, the new year brings the dreaded task of budgeting–a time-consuming chore. And, if you’re like most business owners, you grudgingly and quickly try to come up with accurate projections. Still, when the new fiscal year gets underway, you find that your budget isn’t precise or useful. What has gone wrong?
Two common problems can sabotage your budget: relying on historical numbers to project future needs and not tracking performance. Rethinking the entire budgeting process will eliminate these pitfalls and build a more useful budget. And while you’re at it, you can upgrade your software or computer equipment to make budgeting and other tasks more efficient.
Avoid deadly errors
A fundamental error many companies make is basing the new budget entirely on the previous year’s numbers. This is the path of least resistance and also the road to oblivion because it leads to a budget based on the same old thinking. A strong budget’s starting point must include an analysis of all product lines and services. Ask:
? What alterations do existing products and services need?
? Which should you eliminate?
? Which will sell at higher levels?
And don’t forget the new products and services you’re rolling out:
? What will their impact be?
? What about their affect on sales and marketing?
? How will the work force and the physical plant and facilities support the plan?
Answering these questions is not a one-person job. Get your key players involved, including accounting, sales and plant management. Only when managers have input into the budget will they buy into it and make it work.
In fact, the budget should be only one part of a complete business plan–that you revise annually to guide every aspect of your company’s strategy and operations. In most cases, your plan should cover at least the upcoming three years.
Diligently track your budget
But even if your new budget is more realistic, a greater problem may be that you have no way to periodically gauge progress. Many companies fail to provide an on-going mechanism to track and analyze results. This destroys the entire budgeting process.
To correct this, equip your company to regularly track the budget against actuals–preferably monthly or quarterly. Then you can pinpoint trends as they develop and adjust immediately.
Fore You, a family-owned professional golf shop, had focused for years on selling new clubs, believing them to be its main profit generator. But after adding monthly tracking to its budget process, the company discovered it was operating on outdated information. As the business had gradually reduced prices on clubs to compete with discount outlets, gloves had emerged as the real profit leader. So Fore You boosted its bottom line by gearing more promotional and service efforts toward gloves and other high-margin items.
Evaluate financial software
Planning your company’s budget is the perfect time to analyze the systems and software supporting your finance department. But make sure you don’t create problems with new equipment or programs. Before you begin, work with your financial consultant–one who knows the different packages and options, as well as how to customize them–to identify your needs and map out the budgeting and planning process.
How much will you have to upgrade? Don’t worry. In most cases, you won’t need to start from scratch. Unless you have a highly-specialized business, many off-the-shelf software packages have just enough applications for your needs. Make sure the scale of the package fits your business. Finally, don’t forget to train people after your software or equipment is installed.
Upgrading is likely to require some investment. But it’s well worth it if the improvements enhance your budgeting process and bottom line.
Re-engineer the process
All too often, business owners see budgeting as an arduous task; one that does little to provide a return on investment. Instead, they should view it as a process of discovery that can unearth information crucial to ongoing growth.
If your current process and its results do not match up, call for assistance on re-engineering your budget. Maximizing its value will ultimately increase the value of your business.
George Freeman Jr., CPA, AM, is Office Managing Partner for the Traverse City and Gaylord offices of Plante & Moran. He is involved with the family succession and wealth transfer, as well as the real estate and construction services groups within the firm. BN