Why business budgeting is more about being accountable, than it is accounting.
For many, the word ‘budget’ is as appealing as the word ‘diet’. It seems to imply what you will go without, rather than what you will achieve.
For a business owner however, the word ‘budget’ has a very different meaning. It’s more a plan than a diet. It’s your outline of where you want your business to be and how you plan to get there. Running your business without a budget is akin to not turning on Google maps when you’re in a foreign city. Yet, this is figuratively speaking, what many business owners do.
Successful business owners not only set clear targets and budgets each year, they monitor them closely each month, and adjust them throughout the year.
Here are three reasons why your business needs a budget:
1. If you don’t know where you’re going, how do you know you’re not already there?
If you’re not satisfied with how your business is performing, unless you set clear goals for where you want to be, this is probably as good as it’s ever going to get. At best, your business will wander along, subject to the whims of the economy and general market conditions.
The good news is that your business no needs to wander along.
The first step in growing and developing your business is measuring ‘where it’s at’, right now.
As a business owner, you know that your numbers tell a story. They act as a health indicator of your business.
For some, they are a wake up call. For others, they confirm your starting point. A large part of the value in a business budget is not in the numbers themselves, it’s in the realisation and acceptance of where you are and where you want to be.
A factual look at the numbers that describe where you are right now takes away the subjectivity, opinions and reasons (often excuses, disguised as reasons). For your business, these numbers are the sales, the variable costs, the margins, the overheads, and the profit. After all your hard work, this is the reward you’re left with.
Now, ask the hard questions…
Are you happy with your profit?
Is it worth it? Or are you dissatisfied?
What do you want those figures to be?
Answer these questions and you’ve just described where you want to be. You’ve just taken the first step to ensuring your success.
2. What’s more important to treat? The symptom or the cause?
As you know, sales don’t just happen. Costs don’t just drop because you want them to. Sales and costs are a result of other underlying factors. In other words, they are symptoms of causes. The business budgeting process quantifies the symptoms and by asking a series of ‘what leads to this number’ questions, it also identifies the underlying causes.
Underlying factors contributing to a sales (or revenue) figure may include:
- the number of calls made
- the number of customers walking in the door
- the percentage of conversions of enquiries or walk-in sales
- the dollar value of the average transaction
- where your marketing is targeted
These are called drivers. The sales figures are a result of these drivers and costs are no different. For example, rent paid may be a result of the storage required to maintain stock levels. Wages costs may be blowing out as a result of overtime paid, but underlying that may be inefficient staff, a lack of clear processes, or both.
So in reality, what came first was not the sale or the cost, but their underlying drivers. The budgeting process forces you to name and to quantify these underlying drivers. One of the most value aspects of preparing your budget is identifying the underlying drivers. Why? Because you can focus on improving them. Improving them will in turn, improve the results in your business. Don’t focus on previous figures, they’re history.
3. Budgeting is not about accounting. It’s about being accountable
Once you are clear on the drivers that create your results, the next question to ask yourself is ‘What are you doing to do about it?’.
Your budget won’t just give you a monthly sales target for example, it will help you quantify the drivers that will produce the result.
Let’s break this down. If next month’s sales target is $200,000, that end-result figure is not your focus….well not on a day-to-day basis anyway. Knowing the underlying drivers, your focus will instead become:
25 calls per day: Driver #1
80% conversation rate: Driver #2
Each customer buying an average of $500 worth of goods: Driver #3
Now, you and your staff have a clear focus and are 100% accountable, which is good for them, good for you AND good for business.
People in business need a clear scoreboard and to know the rules so they know whether or not they are winning. Research has found that a lack of job measurement is demotivating to your team. Knowing your drivers and quantifying a target for each, you can then ask your team questions like:
- Have the 25 calls been made today?
- If not, why not? Is the target realistic?
- Do you need more training?
- Do you need better resources?
- Are you focused?
- Do you need more guidance to prioritise your tasks?
- Or a combination of these?
- Are we being effective and converting 80% of calls?
- If not, why not?
The power of a budget is in the process of preparing it, and then the budget itself is a tool to hold you accountable to the measurable indicators you’ve chosen. An added layer of accountability is your MBA team.
Setting your course if a power process that you’ll enjoy. It creates focus and therefore, results in your business.
Got questions? We’ve got answers! Call us on 1300 667 897 to find out more about business budgeting.