Guident Newsletter – January 2017 – Issue 9
Does your Company have a GPS and if so, do you use it?
A few years ago I bought a GPS for my car and I liked it so much I bought one for my wife’s car also. Eventually we got GPS service on our smartphones and we tend to us that GPS more often. I recently bought a car that has a GPS as standard options and I like it even more. It works best when there is a detour or when I am going to a new client’s office and I don’t want to waste time guessing what route to take.
In Q4 or early in Q1 I work with my clients to create an annual operating budget. We look at past performance, we look at all costs (valid numbers will work the best but don’t let iffy numbers stop you), we look at revenues because most business owners will track revenue fairly accurately but may fall short on tracking operating costs. We identify profit centers for the business and determine the gross profit per profit center best we can with the data we have. The more valid the past data the more accurate the pro-forma annual budget can be. We determine what the business is actually spending on operating expenses “below-the-line”. Below-the-line is a term I use often and it includes all expenses that are not captured in cost of goods sold. This is done on a monthly basis to determine seasonality of the operation’s revenue, net income, and cash flow. Eventually we develop an annual cash flow budget allowing the owner to be proactive and react to any cash flow situations as soon as possible and often before they happen. This is great information to have when strategizing with your banker.
One of the biggest benefits to having this operating budget is planning where you want to take your business in the next twelve months, much like using a GPS to plan your next trip. The annual budget helps the business owner react when there is a detour in the master plan. Seeing how a changing market affects your financial performance and having the information to “pivot” early can prove very valuable. The first iteration of your operating budget may not be the most accurate, but the business owner will find that the current “actual data” collected to compare to the annual budget is going to be more accurate because the business owner is paying more attention to the numbers on a monthly schedule.
Not having an annual operating budget is like driving without a GPS. Worse yet, having an annual budget and not using it, after a few weeks or a few months, because the business owner perceives that “other things are more important” is like having a GPS, putting in the route, and not using the GPS as you drive. Most people wouldn’t take a trip without a GPS once they have used one.
Do you have a GPS for your business and if so, do you use it! Your GPS is your annual operating budget. Are you actually executing your plan on a daily basis? The most profitable businesses I know have an annual operating budget and annual cash flow budget and understand how the daily decisions on the shop floor or in the office will affect the financials compared to that budget. Every decision is a financial decision when it comes to establishing accountability to the actual versus budget report. It is never too late to start developing your annual operating budget and your annual cash flow budget.