Starting a company is fun, exciting, and scary at the same time. It’s natural to make mistakes as you go along your journey, it’s all part of the learning process. Pretending as if something doesn’t exist is not natural. Let me explain…
Managing and monitoring cashflow, monthly financials, taxes filings, and preparing budgets and forecasts are part of your fiduciary duty as an officer of the company. In too many instances the foundation of your company is ignored. The thought process is, “meh, it’s not that important, it’s just an unnecessary cost that can wait.” The truth of the matter is that not having control of your finances is costing you a lot more in the now and in the future.
It’s scary to run a business and not have a clear understanding of where your business is heading. It’s scary to run a business and not know if you can cover your payables for the coming week or month. It’s scary not knowing your profitability for any given time frame. It’s scary not having numbers to help you strategize your next move. It’s scary to file taxes on wobbly numbers hoping the CRA won’t come around asking questions.
As soon as you have your monthly financials in order it is now time to build your annual budget. There are several ways of putting a budget together. My least favourite budget is when the management team says, “I think we’ll spend this much next year.” My 2nd least favourite budget is a trend analysis budget. It’s basically a fancy way of tricking yourself as if you are preparing a budget.
To truly know your company and understand the impact of all the different levers you need to prepare a zero-based budget (ZBB). Think of it as if you are acquiring this company for the very first time. You want to understand every facet of the business, you want to eliminate all nonvalue add activities. You want to ensure bottlenecks are removed. You want to ensure every dollar you spend is bringing back a positive return. You want to scrutinize the importance and productivity of each employee. You want to understand which products are profitable, which products are drawing clients to your front door, which products are loss leaders.
You start building your company by putting your ego and perceptions aside, adding each expenditure in the P&L with quantitative and qualitative justification. For example, you have a salesperson whom you pay $75,000 in base salary and $30,000 in commission. The analysis you need to perform is:
1. How much did the salesperson sell?
2. How much profit did this salesperson generate (Sales- COGS – wages & benefits – direct SG&A)?
3.What can we do to help this person sell more products?
4.Where is this salesperson lacking, do we need to spend on training?
5. If yes, how much is the training, how much more revenue will this training help generate?
6. Is this the right salesperson moving forward?
7. If we modify the commission plan which pays out bonuses on hitting targets will that help motivate the incumbent?
8. Is it time to hire a 2nd salesperson and generate internal competition?
9. Can we handle more growth? What incremental expenses/resources will we require?
As you can see you have to ask yourself some tough questions. You must study the external market. You must evaluate your internal resources. You must self-reflect and self-criticize.
In the exact same manner, each major lever of your business needs to be scrutinized and based on the analysis you will enter an expense for the line item in your budget. Note: the changes to your spending patterns will impact your revenue upward or downward.
After you have assembled your annual profit and loss statement, balance sheet, cash flow statement by month it needs to be followed diligently. Do not throw your efforts into a forgotten drawer. If your business actual results deviate from the budget, understand why that is. If the variances are favourable, then try and understand why you are excelling. How do you maintain and build off this savings or growth? Is it possible there was an error in judgement when building the budget or was this an unforeseen event which worked in your favour. If the variances are negative, then you need to understand why the variances are negative. Was the budget too aggressive, were certain activities in the business neglected or forgotten? Is the root cause of a negative variance due to inefficiencies, theft, or incompetent staff? Is it possible to make changes in operations and achieve the budget?
As you can see a proper, well-thought-out budget will allow you to understand your business like never before. It will allow you to drive your business forward by making intelligent changes based on facts as opposed to perception. A budget is not a cost but it’s the foundation to help you eliminate non-value add activities and uncover areas of growth.
Good luck to you and your team on this year’s budget!