Friday, November 6, 2009

Budgeting is Worthless Because I Cannot Predict the Future

I have heard this statement more often than I care to admit: "I cannot predict the future so a budget would be worthless for my business."

An article entitled How to Create a Budget in BusinessWeek prompted me to recollect some of my experiences with helping people who have the above attitude towards budgeting gain a new appreciation for the process and, more importantly, the results the process can generate.

I have and will continue to make this guarantee to any business in any industry anywhere in the world: if you follow the "best practices" steps to creating a financial plan and operating budget for the next twelve months and you track your monthly progress against that plan, you will know more about your business than 80% of your competitors know about theirs.

Why can I make that promise?  Because the things learned in that twelve months are so revealing in terms of the most effective business model and other competitive advantages that the company cannot help but begin to develop and implement the right strategies for making the business more successful.

Why do most businesses fail to implement this process? I have found that the two main reasons are lack of discipline and lack of resources. This process requires a great deal of disciplined time, including the discipline to review your results against your budget EVERY month. The budget is worthless if we do not do this.  The focus of this monthly analysis should be on the variances in the budget. We need to know WHY we varied from our budget. What can we learn from that?  What can we change to improve our performance in that area?

Some companies lack the resources to be able to analyze their historical data and then easily track their progress. Perhaps they do not have an accounting system in place, or perhaps they do not have anyone that knows how to properly operate their system. The accuracy of the numbers is certainly a critical element to making the budgeting process a successful experience. So, having the right staff and a functioning accounting system are critical to this process. Even QuickBooks allows its users to enter in budget information and then run reports to track the monthly progress and variances.

If anyone reading this post doubts me, I challenge you to try it for 12 months. In my experience the value derived from the budgeting and variance analysis process has improved the bottom-line dramatically. I think you'll experience similar results.