By Jim Sobeck
Do you do an annual budget and strategic plan for your business? If you are like most small-business people, the answer is probably “no.” It has been written that no one plans to fail, but most fail to plan. I have found this to be very true in my 35-plus years in business. I have found that most people just “wing it” and hope for the best. I find this especially strange as most small-business owners have personal guarantees with their banks and are betting their homes and their other assets without even having written plans for success.
A budget is simply a compilation of all revenues and expenses, by profit center, and for the entire company in total. In our company, we do a “bottoms up” budget, which means that the people who generate the revenue at each of our branches project what they are going to sell in the upcoming year and at what margins. Management then adds the expenses to the budget based upon the previous year’s expenses, an inflation factor, raises and any new expenses associated with new initiatives at that branch. We also then add corporate expenses to the budget. This includes senior management compensation, IT expenses, insurance, debt service, advertising, marketing, legal and accounting expenses, etc. We then spread the corporate expense over all branches so they can see what their profit is after they pay their share of corporate overhead.
Once we have the first cut of the budget, we review it to see if it looks too low or too high. Some branches are sandbaggers who turn in a budget showing only minuscule growth because they don’t want to be held accountable to an aggressive budget. Other branches are wildly optimistic and turn in budgets that are pie-in-the-sky. The job of management is to “massage the numbers” until we come up with a budget that is ambitious but achievable.
Why have a budget? Well, if you don’t know where you’re going, any road will take you there. If you have a budget you have something to measure yourself against, and if you have done the budget properly, coming up short of budget should be cause for examination of the reasons for the shortfall. It may expose substandard performers or an unrealistic plan. To me, going into the New Year without a budget is like playing a football game without keeping score. You have to have something to measure yourself against to know if you are winning.
On the other hand, a strategic plan is a document that begins with a SWOT analysis: a review of your strengths, weaknesses, opportunities and threats to your business. Once you have finished the SWOT analysis, you review your current initiatives and see how you’re doing against the goals you set. You look at which ones to continue with, adjust or drop. Then you look at new initiatives, as well as short-term, intermediate and long-term goals. While a budget is just for one year, most strategic plans that I have seen are for three to five years because some goals aren’t achievable within one calendar year.
We update our strategic plan quarterly so that we can see how we are doing against our quarterly goals. We also review the intermediate and long-term goals each quarter as well to make sure they’re still valid. Nothing makes a strategic plan more worthless than continuing to include goals which are no longer viable.
If you have put it off, this turbulent economy is a good time to make yourself do a budget and a strategic plan. Doing these may very well help get you through the challenging times we are presently experiencing.
Jim Sobeck is CEO of New South Construction Supply, a building products distributor based in Greenville with nine locations in the Carolinas and Georgia. He is the author of ““The Real Business 101: Lessons From the Trenches.”