Budgets are not plans

Budgets and Plans for a Perfect Storm

This time last year, I was working with UK based Great Taste Distributors, a fictitious name to protect the innocent. I was invited to sit in on their budget planning meeting for 2020. There were twenty people present, a mix of key account sales people (7), marketing executives (3), operations (7) and the top brass (3).

A list of customers went up on the screen. Each one had a cash number beside it that denoted their sales for 2019. Each account manager gave a projected 2020 target for each customer.

The operations and marketing people of course offered their view on the likelihood for each one, which caused great debate and conflict around the room. Not only that, but there were pre-set formulae in the spreadsheet that calculated on a running basis, the individual variances to last year and the impact on the total. That prompted the CFO to chip in now and then.

That bottom-up approach has been in place for years, and it seemed to work for them. However, when the total numbers for each product stream were added, one product stream accounted for a massive 70% of the total. I asked the CEO what his preference would be and his hope was for 45% for that stream. His desired new mix would have increased the overall margin.

The salespeople were accused of putting too much reliance on their favourite products. The salespeople of course argued and said they were giving the customers what they wanted. And perhaps they were. But if so, why has the company allocated significant budget to other product streams in order to improve overall margin?

While there are many readers that will see the flaws in all of this and the mismatch between strategy and target, for me there is one significant positive. They actually do an annual budget! And despite the process, this company gets there in the end.

We are in a perfect storm with the risk of further lockdowns, Brexit around the corner, an inevitable recession and the US presidential election. In these extraordinary times, planning ahead and putting best-case numbers beside your ambitions is essential. By the way, if you want to access any of the amazing government supports such as from Enterprise Ireland, LEOs, the Sustaining Enterprise Fund or the Future Growth Loan Scheme, you will need to do this anyway.

I chatted with Rory Finegan, the founder and chief executive officer of Dublin-based Beyond Accounting. The business specialises in cloud accounting solutions, business systems and technologies that make businesses run more effectively and efficiently. He has strong views on the importance of planning and budgeting and how to make it easy.

Tips for Planning in a Perfect Storm.

  1. To fail to plan is a plan to fail. There are too many businesses that do not plan and set budgets, probably because it can be seen to be a minefield. Consequently, they do not have visibility or benchmarks to work towards. They become accidental tourists that might arrive at a nice destination, or they might not.
  2. Benchmarking against yourself is essential. It is also very motivating for your own teams and gives them clarity for what to work towards. It also gives them confidence that you are in control by working on your business, not just in it.
  3. Even though you may be anticipating a drop in sales of somewhere between 25-50%, there are things you can do with your cost base to enable you to still make a profit. For example, an event company brought its costs down in proportion to a revised lower target for 2020. It since changed its business model to an online proposition and it will break even this year.
  4. Keep your records uptodate. There are great platforms and technologies to ensure your records are in real-time. Rory stresses the value of using cloud based systems that are efficient and reduce time lags due to executives being too busy. They also reduce the amount of manual input and therefore, less mistakes. He is seeing less and less reliance on Excel spreadsheets.
  5. Despite the uncertainty of Covid-19 and further lockdowns, plan for a future horizon of between one and three years. With effective online tools, these plans then slice and dice into quarters and months for greater control.
  6. For any new projects, such as acquisitions, new products, new territories or the reverse of any of these, they should all be inputted to your system and they will give you great information in addition to cash flow projections.

The Last Word

Budgets are not plans. Budgets are a set of numbers that show you the anticipated score of the game. As you will see from my notes above, they are essential. But it doesn’t stop there. You also have to consider ‘how’ you will play the game. And that’s where the devil is in the detail.

I do appreciate that for some, planning like this can appear complex. It’s not. But if you’re unsure, get help.

Alan O’Neill, author of “Premium is the New Black” is a Keynote Speaker and owner of Kara, specialists in strategy, culture and people development. Go to www.kara.ie to access a free on-line course Supercharge your Sales!

© Copyright. Alan O’Neill. All rights reserved. 2020