Several years ago, an acquaintance of mine bought out the company he had been working for, together with four other managers.
To raise the capital they needed, they went all-in and re-mortgaged their houses.
It was an enormous personal risk, so why did they do it?
Because the company’s budget stated that the following year sales would rise rapidly, and they would quickly recoup their investment.
Unfortunately sales stuttered, and 18 months later the business was in trouble.
In this case, whoever drew up the budget (possibly one of those managers…..) was guilty of a classic and very common error. They had assumed a rise in sales, but the budget didn’t say how this was going to happen – what they had to do to achieve their goal, how much they would need to spend or where they would have to invest.
So it never happened…..
Your budget is worthless if the figures it is based upon are no more than wishful thinking.
To create an effective budget, you need to work differently.
Start with the question: “What do we want to achieve, and how much will it cost us to get there?”
So for example, if we want sales to rise by 20%, what do we need to have in place? Do we need to hire two more sales people? Buy a certain amount of equipment or give a particular department more funds?
The actions you need to take become your budget.
When that happens, the end point – that 20% rise in sales – is no longer an optimistic dream, but the natural consequence of your game-plan. And it becomes an entirely reasonable figure upon which to base your budget.
Don’t get me wrong: Optimism in business is great. It can sustain you through some of the darkest times your business will face and if there’s one thing for sure, you will face some dark times.
But when it comes to budgets, you don’t need optimism. You need realistic, concrete plans.
All the more so if the stakes are high – for example, if you’re re-mortgaging your house!
If you would like to formulate a useful, realistic budget for your business, please get in touch.
With a good budget, you are far more likely to see the growth you want.
