I feel true Budgets can be a quite a contradiction. On the one hand, they are the well-written and very detailed road map that takes you into and through the next year. On the other hand, as good as we prepare them, they'll begin to change ten minutes after the ink is dry. A given for those of us in the building material/construction industry, almost nothing "is for sure"...We often face a chaotic and uncertain future. Keeping this in mind, how can we make good use of our Budgets so they’re realistic and useful tools?
The first thing to remember is that we all experienced a "Tectonic Shift" when "The Great Recession" hit. At one point it kind of became "All Bets Are Off." So, in our industry, I feel there are some "Guidelines" that we must always be cognizant of: (A) Once a Budget is finalized and you feel confident in it, remember, "Ten minutes after you put it to bed, it's already changing." (B) You're off and running, things look good, so you get the comfortable feeling, "Hey, I've got a plan for the next twelve months, and we'll produce a new one, a year down the road.” At Kimal, we review and evaluate performance of each of our five Profit Centers, every single month--and sometimes in between! Remember, our "Landscape" is changing constantly. Some times in such small ways, if we didn't look at it monthly we'd miss something. And, you can take that another step…Do a kind of in-depth review every quarter. An anomaly in a given month may not mean much, but after three months of a "Change," you may spot a trend. (C) Never, ever, "Fall in Love with Your Press Releases"...A super month or quarter (when you're hitting on all eight) should never “lull you into complacency”...Nor when you have a "bad" month, should you panic, throw the good plan out the window, and do something dramatic. Learn to "Peel the Onion" all the way down to evaluate what's really happening. Learn from it, and maybe have a revised plan. I think the greatest danger is to have a great, final plan (Budget) in front of you, and decide that no matter what, it will stand the "test of time" so you don't deviate nor adjust...No matter what!!
All of the above is more or less a re-cap of things I've written about, Budget related. So, where is Kimal now? We ended our Fiscal year, October 31st 2016. So we're now into the "New Year"...2017… and yes, with our new Budget. Have to say, we had a good year--better than we expected or budgeted for--so the thought could be to just create a Budget based on the "unusual" performance. But to me, this wouldn't be smart. Instead we probably took more time preparing Fiscal 2017 Budget. We looked at the potential "Capital Expense" needs even closer...In other words, if you feel sales are going to continue to increase, and you believe you'll need, say, a truck and forklift to support those sales, then build the expense of that Capital need into the Budget. Obviously, if you don't need the truck, you don't spend the money.
On the Expense end, fuel was "Cheap" last year, and we spent quite a bit less then we budgeted for...But, fuel will probably go up during the year, so don't plug in a low and maybe unrealistic number. We arbitrarily budget a 5% increase, overall, for salaries...Doesn't mean we'll spend it, but it's "in the budget.” We always do our homework ahead of time regarding all insurances. If we see increases, they must be included. Chances are, you're not going to go out and find that magically cheap insurance. For things like taxes (bless those government agencies), we always seem to need more money! So we make sure we're on top of our various tax liabilities. And it almost always happens: We get these "real" expense numbers together, and it almost always winds up we have "more expenses" than the year we just finished. One school of thought, and I went through it in my past life with the big Corporation, "Al, you have to find savings on the expense side"...which translated to...“I can't afford the folks I have, but I have to cut somewhere!!” That plan was always disaster for various reasons. So, we generally look at, "We need to support that expense base with more sales, higher margins, some cost savings," etc...And this is where you have to constantly review your "Business Model" from the standpoint of, pure and simple, "Growth." This is never simple nor easy. If gaining a lot of new customers isn't realistic, then can we seek a broader mix of products to sell to existing ones? Are there new products and services we need to look at now and build into our "Growth" plan? Without belaboring this, sometimes when the reality of a higher Expense base hits home, there is a tendency to try to find ways to pair that down...and it becomes an exercise that rarely works. However, still don't overlook cost saving "realistic" possibilities.
To wrap this up...Try to look at all figures "realistically." Don't do things like arbitrarily raise sales 10% and Maintained Margin 1% to cover the shortfall. If you do that, better be real sure you can "make it happen." So, you had a good year...Really good! Celebrate it maybe ten minutes...It's now History!! The Canvas in front of you is fresh and new...Have to "Focus and plan Forward'...
The last thing I'll say or add is, always remember: What you went through to create a Budget becomes nothing more than very good “Guidelines.” Because that Budget, no matter how great a job you did preparing it, is now "Fluid and Ever-changing."...A very real "living" document. Treat it as such and it won't fail you. If any one wishes to contact me regarding how we do some of the above, I'd be more than happy and willing to share ideas/knowledge with you. Understanding what a budget "Is" and also, what it "Isn't" may be the most important activity you do during the year. Good luck and good profitable selling.