Right now my crystal ball is cloudy. I have a sense of where the macroeconomic indicators are pointing, but I can’t help clients determine precisely what’s ahead for them. BUT that doesn’t mean we can’t manage our businesses. If, like some of my clients, you have had a pretty good year in 2012 so far, but you can’t be sure how 2013 is going to go, try using this approach: budget for the last sustainable year you had and then fund the things you want to do to grow the business. Let’s take a look at what that means.
A sustainable year is one in which you put enough to the bottom line that you could save some for investing or emergencies. This should be 15% of revenue. If it isn’t, stay tuned and we’ll talk some more about why 15% is the key number in another blog entry. So if your revenue and or profits have been variable since 2008, pick a year when things were more stable and use that year as your baseline model for budgeting the next year.
If you’ve had unprofitable growth in the intervening years, this budget will likely require cuts and assumptions of reduced activity. This is okay. First, let me say that this is okay because the fiscal strength of the company is important and some pain to maintain a sustainable business, while unpleasant, still continues to provide for those who rely on the company. It is also okay, because we don’t intend to stay in this position; we’re just budgeting right now. If we’re successful, this disappointing budget won’t be the one we have to live with.
Now take a look at the decisions you had to make on paper to make the budget balance in a sustainable way with conservative assumptions about revenue, etc. You may like some of them and decide that they are an appropriate way to run the business. By all means, implement these.
You may also identify other changes that you would rather not make. Perhaps they risk customer satisfaction… or they just aren’t fun. Challenge these and identify circumstances where these could be reversed. Perhaps if you had a large commitment from a particular customer, you could avoid cutting the shipping department. Or if you were able to win a marquee account, you could establish momentum in a new product or service and avoid having to eliminate it. It could be anything.
Now set the goal for the business to accomplish those saving goals – the goals which, if met, could save jobs or products, etc. You probably experienced these situations early in the life of the business, if you started it – the one big account that changed your growth trajectory or the great review that brought lots of attention. Now rally the troops around this rousing goal, letting everyone know how important it is to win. Now you’ve motivated the team to win the big game, but you’ve also set the stage so that losing a single game or large account doesn’t threaten the sustainability of the business.
If you have the capital, this approach can be adopted at any time. Set the budget to the last sustainable levels and charge the organization with achieving success in order to release additional funds for growth oriented projects.
Have you ever tried this approach? If not, how do you budget and how do you stay sustainable?