Monday, December 6, 2010

Budget 2011, but be ready with Plan B

2010 is coming to a close, and its time to get serious about having your 2011 plan in place. And I'm not just talking about a revenue target or a net income budget. You can do so much better than that, and you'll be surprised how much it will make a difference in your business!

If you are looking for some tips on how to create a budget for 2011, then I recommend you read my recent article on American Express OPEN Forum: 10 Tips for Creating Your 2011 Budget. I'm going to expound on Tip #10 and the Bonus Tip, both of which have to do with creating alternate plans in case your Plan A doesn't work out, then making mid-year adjustments based on your best and worst-case scenario plans.

In these uncertain times, chances are better you'll either under or over-perform against your plan than you actually hitting your target right on. Of the entrepreneurial companies for whom CFOwise® serves as the CFO, their 2010 results prove this point. Even with careful, thoughtful planning, only about 15% of them varied from their revenue and income projections less than 5%. 55%beat their projections, and the remaining 30% came in below their plan for the year. So why bother to budget if it is so hard to get it right? Have I ever mentioned I love that question?

My initial answer is that if your year is any different than you planned, you have already thought about what changes and adjustments you would need to make. Just the exercise of planning for it gets you one step ahead of your competition, and it helps you understand your business model, which elements are flexible and which are not and what parts you can and need to change if your business is beating or falling short of its plan. That's why I always recommend three budgets for the year. Your realistic plan, and then your best and worst-case scenario as derivatives of that realistic plan.

So, let's imagine your company is under-performing on its budget. You initially planned to hire one new employee each quarter of the year, but sales are falling short of your plan. By referring to your worst-case scenario and your realistic budget, you will quickly determine how many employees you can hire and the best possible time to hire them.

Conversely, let's imagine you are beating your revenue projection by 20% after just the first few months of 2011. When you consider your best-case scenario would require you to purchase additional equipment to handle the increased demand, you can quickly react to your better-than-expected performance and be ready to handle the volume and take advantage of the opportunity. One entrepreneur I know calls that "making hay when their is hay to be made."

So, by having three budgets you are forced to think about a myriad of what/if scenarios and plan to accommodate them. Then, by analyzing your variances from your realistic budget each month, you are ready to make quick adjustments to maximize your results, regardless of if your year is going better or worse than you planned.