Last month I recommended an approach to budgeting. To summarize:
- Regard your budget as a tool rather than a weapon.
- Consider first "how to score" (key metrics), then "how you're scoring" (key reports) and finally, "how to better your score" (performance improvement).
This month, let's consider a few ideas about how to establish a plan, communicate objectives and develop accountability for results.
Document assumptions: What are the critical "must-haves" for the planning year? Will sales be equal each quarter? Do you plan to hire or reduce client-facing personnel? Will you be increasing inventory throughout the year? Before establishing a budget, take time to document key assumptions. What level of sales do you expect from each individual or team? What type of results will constitute success? What do you expect from the competition? What critical level of sales will get your business to a profitable level of operation? What do you want the year to look like when it's over? What do you need it to look like? When you document assumptions, results later in the year can be compared to the environment in which those assumptions were first created. Has your management team ever looked at the fourth quarter budget and wonder "How on earth did we ever think that?" When assumptions are recorded, management can review previous expectations and respond accordingly. A plan is useless without context. Documenting assumptions allows a management team to make credible adjustments by evaluating the initial performance plan in light of expectations at the time.
Sales goals vs. budget revenue: How does your business measure sales vs. revenue? When setting annual sales goals, give careful thought to when sales will be recognized as revenue in your income statement. Is there a lag between taking an order and confirming a sale? Is it a product sale or a service contract? How much revenue can be recorded immediately vs. what must be recognized over the life of the contract? Be sure to start with a plan for gross sales, and then back into the revenue that will be recorded from sales activity. What products and services will comprise total revenue? It's not enough to plan for a certain level of sales activity. Be sure to categorize major product and service lines, because revenue recognition, reserves and return rates can vary significantly.
Accountability review: Be intentional about comparing performance results against budget on a quarterly basis, and more frequently if desired. There will be variances: even the best laid plans are strategic guesses that were based on information available at the time. Consider variances both above and below expectations and decide whether or not you need to react to the difference. Again, if assumptions were documented as discussed earlier, consider what has changed, and whether or not the change is reasonable. Some companies employ a forecast in the second half of the fiscal year to compare actual results to budget to the most likely outcome. A triangulation of these three elements provides the best picture of changes and trend. By examining what changed – and considering the reasons why, managers can best determine which group within the business is accountable to respond and keep performance on track.
Bob Koncerak is the EVP/CFO of Touchmark National Bank. This column is provided by Touchmark to address your business financial questions. Touchmark is a commercial bank with offices in Doraville, Norcross and Duluth. To send us a question, visit www.touchmarknb.com and click on Ask Us A Question.' We'll do our best to respond to all inquiries and post selected responses in this monthly column.
