Kill The Budget
To many people in business, one method for achieving profitability is to establish a company budget to control expenses and limit spending.
To the entrepreneur, the word budget is clearly a word financial people use to put controls on the spending habits of company management, usually the owner. As a practicing CPA, I know never to speak to my clients about establishing a company budget. It will produce the greatest amount of lip service and absolutely no results.
Even when entrepreneurial companies prepare the dreaded budget, the process is usually for not more than one or two years. The mantra within the company during this two years is, don't bust the budget. However, they don't bust the budget; they ill it. They bust the budget so often that the members of the management team begin to believe it's a useless exercise. Let me make clear that I have one caveat about budgets: Large companies use them effectively to provide financial accountability of lower level management. They work.
Entrepreneurial companies have great flexibility; decision making is usually done at the top, and if top management wants something they get it. No budget in the world will control the entrepreneurial management of small companies.
THE ENTREPRENEUR'S DEFINITION OF A BUDGET
I know it's unusual for a CPA to say, Kill the budget. But Kill It. I have the most powerful alternative to budgeting. And I am not using the word powerful lightly. Read on.
EVERYONE WANTS TO TELL YOU WHERE YOU'VE BEEN
How nice it is that everyone wants to tell you where you've been. Think about the amount of money you'll spend on CFO's, controllers, bookkeepers, outside accountants, and a myriad of other advisers who will counsel you on your financial past. Yes, they will tell you your sales were up or down. As if you didn't know. They'll also counsel that you spent too much here and maybe not enough there.
You'll spend thousands of dollars analyzing what you did. What is the major problem with this exercise? You cannot change the past. It's not possible.
How much do you spend to find out what you will do? Does anyone help you see the future? Do you want to know what lies ahead? Do you want to know how long your precious cash resource will last and when it will run out? Do you enjoy the anxiety produced from the fear of not knowing what is going to happen? Do you sleep well? Has anyone given you an educated read as to your financial future?
3 A.M. AND STARING AT THE CEILING AN AWFUL NIGHT
A number of years ago I started a software company that developed a specialized program designed to help management forecast future financial activities by predicting profit or loss, and cash flow of their business. The main premise of the program was to provide an understanding of how long cash will last and if a profit will be made. Having this information would provide management sufficient time to secure funds to keep the business running if cash was becoming scarce.
I started my company with about $200,000. I knew it would be more than enough to get the company into a profitable position. After several months the burn rate of cash was far beyond my expectations. I was just about out of money. My resources were tapped out. It was a nightmare. What made it worse was I was the managing partner of a very successful CPA firm in Southern California. We had never had a cash flow problem and had never run out of money. Here I was having a new experience the pain of running out of money. It was awful. The anxiety was beyond anything I had ever felt during my business career. I knew it was just days before my dream was to end.
Have you guessed it yet? I developed a software program designed to predict profit and cash flow, and I hadn't used it for my own business. Here I was a CPA telling people how important it is to predict profitability and cash flow and not following my own advice. Shame, shame on me for not practicing what I have preached for so many years.
I immediately jumped out of bed, threw on some jeans and headed for my laptop. I needed to get a handle on just how long the little cash I had would last. I entered my assumptions, crunched the numbers' and was shocked to discover that the disaster I was sure of was at least three months away. Suddenly, there was no more anxiety; I had some time left to fulfill my dream. Best of all, I had the time to do what was needed to get the resources and keep the company going.
So now, by my own experience, I discovered sleepless nights are not unusual. In fact, they are all-too-common. Whenever I ask entrepreneurs if they have ever had a cash flow nightmare as I described, I get a resounding yes.
LEARNING COMPASSION
The lesson I learned was not only to abide by my own financial philosophy, but to also be more compassionate as it regards the struggle entrepreneurs face while pursuing their dreams.
Every business operating in today's complex world must have a dynamic financial plan. A plan that changes as circumstances change. A plan that will forecast the financial future of the business. A plan that will tell management on a regular basis just how much cash they will need and when they will need it. A plan that will tell you what your company's cash balances will be at the end of every month for the next twelve months. A plan that will forecast the economic implications of management's decisions. A plan that tells management what lies ahead.
Do you want to sleep at night?
THE MOST POWERFUL TOOL IN THE WORLD is the ability to see and manage the future.
Not too long ago, I was a guest speaker at a business event. I asked the audience my standard question: There is only one thing in life that you can manage. What is it?
Silence, as the audience thought for a moment. The answers began:
Time, one man shouted.
Money, from another.
Myself, was the final answer I heard before the room fell silent again.
Ladies and gentlemen, I began, The only thing you can manage is the future. Every decision you will ever make will only impact the future. We spend so much time and so many resources looking at the past, yet we live for the future. The more we know about the future the more effective we can be at managing it.
Knowing what the future holds is powerful. And it is yours for the asking.
To many people in business, one method for achieving profitability is to establish a company budget to control expenses and limit spending.
To the entrepreneur, the word budget is clearly a word financial people use to put controls on the spending habits of company management, usually the owner. As a practicing CPA, I know never to speak to my clients about establishing a company budget. It will produce the greatest amount of lip service and absolutely no results.
Even when entrepreneurial companies prepare the dreaded budget, the process is usually for not more than one or two years. The mantra within the company during this two years is, don't bust the budget. However, they don't bust the budget; they ill it. They bust the budget so often that the members of the management team begin to believe it's a useless exercise. Let me make clear that I have one caveat about budgets: Large companies use them effectively to provide financial accountability of lower level management. They work.
Entrepreneurial companies have great flexibility; decision making is usually done at the top, and if top management wants something they get it. No budget in the world will control the entrepreneurial management of small companies.
THE ENTREPRENEUR'S DEFINITION OF A BUDGET
- A method of worrying, in advance, about what you are going to spend.
- A method of worrying about what you spent after you spent it.
- A method of saying no to somebody's request to spend money.
- An orderly system of living below your means.
- A useless exercise to keep the bean counters happy.
- A financial process that takes a lot of time and is always wrong.
I know it's unusual for a CPA to say, Kill the budget. But Kill It. I have the most powerful alternative to budgeting. And I am not using the word powerful lightly. Read on.
EVERYONE WANTS TO TELL YOU WHERE YOU'VE BEEN
How nice it is that everyone wants to tell you where you've been. Think about the amount of money you'll spend on CFO's, controllers, bookkeepers, outside accountants, and a myriad of other advisers who will counsel you on your financial past. Yes, they will tell you your sales were up or down. As if you didn't know. They'll also counsel that you spent too much here and maybe not enough there.
You'll spend thousands of dollars analyzing what you did. What is the major problem with this exercise? You cannot change the past. It's not possible.
How much do you spend to find out what you will do? Does anyone help you see the future? Do you want to know what lies ahead? Do you want to know how long your precious cash resource will last and when it will run out? Do you enjoy the anxiety produced from the fear of not knowing what is going to happen? Do you sleep well? Has anyone given you an educated read as to your financial future?
3 A.M. AND STARING AT THE CEILING AN AWFUL NIGHT
A number of years ago I started a software company that developed a specialized program designed to help management forecast future financial activities by predicting profit or loss, and cash flow of their business. The main premise of the program was to provide an understanding of how long cash will last and if a profit will be made. Having this information would provide management sufficient time to secure funds to keep the business running if cash was becoming scarce.
I started my company with about $200,000. I knew it would be more than enough to get the company into a profitable position. After several months the burn rate of cash was far beyond my expectations. I was just about out of money. My resources were tapped out. It was a nightmare. What made it worse was I was the managing partner of a very successful CPA firm in Southern California. We had never had a cash flow problem and had never run out of money. Here I was having a new experience the pain of running out of money. It was awful. The anxiety was beyond anything I had ever felt during my business career. I knew it was just days before my dream was to end.
Have you guessed it yet? I developed a software program designed to predict profit and cash flow, and I hadn't used it for my own business. Here I was a CPA telling people how important it is to predict profitability and cash flow and not following my own advice. Shame, shame on me for not practicing what I have preached for so many years.
I immediately jumped out of bed, threw on some jeans and headed for my laptop. I needed to get a handle on just how long the little cash I had would last. I entered my assumptions, crunched the numbers' and was shocked to discover that the disaster I was sure of was at least three months away. Suddenly, there was no more anxiety; I had some time left to fulfill my dream. Best of all, I had the time to do what was needed to get the resources and keep the company going.
So now, by my own experience, I discovered sleepless nights are not unusual. In fact, they are all-too-common. Whenever I ask entrepreneurs if they have ever had a cash flow nightmare as I described, I get a resounding yes.
LEARNING COMPASSION
The lesson I learned was not only to abide by my own financial philosophy, but to also be more compassionate as it regards the struggle entrepreneurs face while pursuing their dreams.
Every business operating in today's complex world must have a dynamic financial plan. A plan that changes as circumstances change. A plan that will forecast the financial future of the business. A plan that will tell management on a regular basis just how much cash they will need and when they will need it. A plan that will tell you what your company's cash balances will be at the end of every month for the next twelve months. A plan that will forecast the economic implications of management's decisions. A plan that tells management what lies ahead.
Do you want to sleep at night?
THE MOST POWERFUL TOOL IN THE WORLD is the ability to see and manage the future.
Not too long ago, I was a guest speaker at a business event. I asked the audience my standard question: There is only one thing in life that you can manage. What is it?
Silence, as the audience thought for a moment. The answers began:
Time, one man shouted.
Money, from another.
Myself, was the final answer I heard before the room fell silent again.
Ladies and gentlemen, I began, The only thing you can manage is the future. Every decision you will ever make will only impact the future. We spend so much time and so many resources looking at the past, yet we live for the future. The more we know about the future the more effective we can be at managing it.
Knowing what the future holds is powerful. And it is yours for the asking.