For many, the word ‘budget’ is about as appealing as the word ‘diet’.
It seems to imply what you will go without, rather than what you will achieve.
To a successful business owner, however, the word ‘budget’ has a very different meaning.
It’s more like a map than a diet. It’s an outline of where you want to take the business, and what you need to achieve to get there.
Running a business without a budget is like a ship’s captain setting off on a voyage without a map. Sounds ridiculous, doesn’t it. Who would do that?
Yet this is, figuratively speaking, what many business owners do.
Successful business owners, on the other hand, not only set clear targets and budgets each year, they monitor them closely each month, even each week, and adjust them as they go throughout the year.
Here are 3 compelling reasons your business needs a budget, now:
One: 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 and you haven’t set clear goals for where you want to take it, it’s probably as good as it is ever going to get. At best, it will just meander along, subject to the whims and vagaries of the economy and general market conditions.
The first step in charting a clear course for growing and developing your business is objectively measuring ‘where it’s at’ right now.
And the numbers do tell a story.
It’s paradoxical that 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.
The numbers are just the signposts for the journey.
A factual look at the numbers that describe where your business is right now takes away all the subjectivity, opinions and ‘reasons’ (often excuses, disguised as reasons).
For your business, these factual numbers are the sales, the variable costs, the margins, the overheads, and, lastly, the profit. After all your work, this is the reward you’re left with.
Then comes the first of a series of ‘hard questions’…
- Are you happy with that profit?
- Is it worth it? Or are you dissatisfied? Then …
- What do you want those figures to look like?
Answer those questions, and you’ve just described where you want to be.
Two: What’s more important to treat? Symptoms or causes?
As you well know, sales don’t just happen. Costs don’t drop just because you want them to. Sales and costs are a result of other underlying factors. Put it another way, 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.
For example, underlying factors contributing to a sales (revenue) figure could include:
- the number of calls made,
- the number of customers walking through the door,
- the percentage of conversions of enquiries or walk-ins to sales, the dollar value of the average transaction, or simply
- where your marketing is targeted.
These are all called drivers. The sales figures are simply a result of these drivers. The same rationale applies to costs.
Once your drivers have been identified you can begin focusing on improving them.
That’s what will produce results in your business. No focusing on last quarter’s figures. That’s history.
It’s more fun to create history. And that is, in essence, what you are doing when you are in your own business. You are the captain of your own destiny, and you can steer it in any direction you want.
Note that word … direction. A key point is to have one.
You will enjoy how effectively the budgeting and planning process will get you crystal clear on your direction.
Three: Budgeting is not about accounting. It’s about being accountable.
Once you are clear on the handful of drivers that creates your business’ results, the next question is…
What are you going 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.
For example, if next month’s sales target is $120,000, that end-result figure is not your focus. Not on a day-to-day basis. Knowing the underlying drivers, your focus will instead become, for example:
- 25 calls per day (Driver No.1)
- At 80% conversion rate (Driver No.2), with
- Each customer buying an average of $300 worth of products (Driver No. 3).
Now you and your staff have a clear focus and are 100% accountable.
That’s good for them, and good for you and your business.
People in a business want a clear scoreboard and a ‘game to play’ so they know whether or not they are winning. Research has found that a lack of measurement in a job is demotivating to a staff member.
Knowing these drivers, and quantifying a target for each you can then ask questions like:
- Have the 25 calls been made today?
- If not, why not? Is the target realistic?
- Does the team need training?
- Do they need better telephone equipment or dialing software?
- Are we being effective and converting 80% of the calls?
As you can see, the power of the 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… us.
We work with a number of clients where, on either a monthly or quarterly basis, we act as a sounding board and independent party to ask you the hard questions about the drivers and the results. This focuses your mind, allows you to form a clear Action Plan to improve results, and then increases your chances of success because you know you need to report to us next time.
We look forward to helping you chart your course, helping to get a clear direction, and then keeping you and your business on course.
After all, you won’t end up at the ideal destination by drifting.