Most business owners find that doing a budget is a tedious exercise. And, sometimes the budget ends up having little in common with what the actual year ends up being. So, why bother? There is more to it. It is all about measurement.
If you don’t measure it, you can’t manage it or improve it.
First, I suggest preparing two scenarios when putting together a budget – an expected case and a worse case. However, in some cases it is important to put together three – best case, expected case, and worse case budget.
The “expected case” shows the plan for the business that you are confident will happen.
The “worse case” plan identifies the areas of greatest risk and shows what is necessary to do if these risks come about. I refer to this as the backup plan that is well thought through beforehand and rolled out if necessary. It is much better to think through and strategize about what to do in the event something happens than simply deal with a problem or crisis as it is unfolding.
Where there is real upside potential, preparing a “best case” scenario is important because establishing challenging but attainable goals is a good thing.
The budget is the road map. Next – what do you do with this?
Second, Add Key Performance Indicators.
KPIs are an important part of the company’s strategy. Measuring the right KPIs and creating actionable items from the data can elevate a company above the competition. These metrics are not typically found on a P&L report.
I find that a daily “Flash Report” produced at the start of the day is really helpful, and it gets addictive.
Look at cash first – deposits, balances projected deposits (typically for the next day), payables in process, and projected payables – how much cash will you have to pay out over the next week.
Next, pick a few drivers. What are the crucial metrics for the business? For example, figure out what drives sales and measure it. Maybe it is the number of sales calls, the number of web site inquiries, sales of a particular product, etc. This will be unique to your business. For many businesses tracking inventory, especially certain important items, is mission critical.
Carefully look at the trends.
Get the reports, each day – at the start of the day.