Having good accounting discipline is critical for all business, well at least for those who wish to grow sustainably and deliver their aims and purpose over time. This applies to all sectors, whether your aim is to achieve great profits for shareholders, to deliver fantastic goods and services, you are in the private or public sectors. Controlling costs and investing in the right things at the right time in the right way will be key to success.
“I have no use for bodyguards, but I have very specific use for two highly trained certified public accountants.”
Whether you are a small business in the early stages of development, have a mature organisation which meets its current aspirations, you are looking to expand or react to changes in your operating environment, or maybe you are a manager in a large organisation responsible for a department budget. We can all always benefit from pausing, taking stock of the reality we are in, and considering whether we are doing the right things to give ourselves the best chance of achieving what we want.
Here are the 5 things I ask myself as I consider next year’s budget, and while managing this year’s. Maybe ask yourself (and your team) too?
Do you really understand your costs? This goes beyond just the numbers you show in monthly cost reports. Are costs described so you can more effectively think about sensitivities to changes in your operating environment? Which costs are directly proportional to your organisation goals?
“You know you’re getting old when the candles cost more than the cake.”
What is the relationship between fixed and variable costs? Which costs help your manage your risks? How will costs look over the next 60 months? What savings do you need to make, and what will you do with the saving?
Do you really understand your income? Does the definition of your types of income make sense? Which parts of contractual fixed? Is there any risk of this stream failing? Where are you expecting an increase, or where are their threats? Are you reacting to these with the right level of investment at the right time? Is it ok for some income to reduce or stop altogether? How much does each stream cost you?
Do you understand what factors you can’t control? Not everything can be controlled! There is always a chance that unexpected things will happen. You will increase the chance of the unexpected if you don’t think about the range of things that might reasonably be expected to happen. How do the extremes impact your budget? Consider what would happen if your material costs doubled, your key income stream stops, you loose your premises.
“There are known knowns. These are things we know that we know. There are known
unknowns. That is to say, there are things that we know we don’t know. But there are also unknown
unknowns. There are things we don’t know we don’t know.”
You may decide to do something to help manage or mitigate these scenarios – or not – that’s your judgement. Consider things that are so outlandish they will never happen – ‘cos when they do, or something like it, you will have at least thought about them.
How will you track what is actually happening to your costs & income? Will the changes in your costs you are planning deliver the expected results? Set targets and deadlines to review them now. If you’ve already got a regular review of your financial position, what is the variance from your plan which is acceptable, how long can a low variance be sustained before your plan is at risk. Will your income change over time? How will you react if you do not meet your targets? Will you have the time and money to react?
How will you tell the story? It’s great now that you understand what’s going on. But does everyone who supports you understand the same things in the same way?
“Tell me the facts and I’ll learn. Tell me the truth and I’ll believe. But tell me a
story and it will live in my heart forever.”
An old Native American proverb
Talk to your team and staff about what their targets and budgets mean to the aims of the organisation. Help everyone know the story, where they fit in and who they will contribute to the successful outcome – they all have a role in spending or generating income, and all their activities will be complimentary and support your overall goals and aims.
Business, as with the rest of life, is a journey. You will learning things all the time, even if you are not trying or do not notice. Give yourself the time to reflect – whether that’s a dedicated slot in your diary or just when you are in the shower!
“A wise man can learn more from a foolish question than a fool can learn from a wise answer.”
Mark Slocombe is a Director of BLMS Consulting