Management Memos

Making Measurably More For You Since 1985

July 2019
 

July 2019 Good Management Means
Good Budgeting

Faced with the day to day tribulations of making the place work, confronting employment issues and trying to drive sales traffic, all the while dealing with difficult suppliers, it can be hard to actually 'manage'.

With a new financial year getting underway, having a good budget for the year is one of the keys to good and effective management.


Budgets Are NOT An Option

In a current case before the corporate investigators, a franchisor has been roundly castigated for not carrying out realistic and professional budgeting for the business, and providing proper guidance for its franchisees. That's bad management, and the franchisees have lost out - hugely.

Budget paperwork

Not optional. Necessary!

Of course, budgets are only half the story. Managing against those budgets is where skill and understanding make you a really good manager.

In a private conversation, an airline pilot flying as a passenger from Kuala Lumpur to Melbourne, joked the flight plan is really simple. "Just head to Perth, then turn left," he said. Simple though it may be, it's scary to think what would happen without any kind of flight plan.

You budget is the flight plan to navigate through the financial year.

No Place for Fairy Tales

There is a large number of very practical people who have quite mixed feelings about budgets and budgeting.

One such view is that budgets are 'aspirational' - it's what you'd like to do, but "it probably won't happen, and there will still be food on the table if it doesn't." Well, it's good to have something to fall back on, but that's not 'managing'.

Another misleading view is: "you can budget all the sales you like, but that won't make it happen". That's a misleading view because, while it is true, it completely misses the point.

Sales don't happen unless you manage the steps that will make those sales happen. The budget for sales tells you how much you have to do to achieve the level of sales you'd like to see.

We could go on and on talking about ways people try to avoid setting business goals. It's more useful examining how to make budgets work for you.

Think of Just Four Things

What is really important here is to remember that the profit you make is the very small difference between two very large numbers. You mightn't have thought of business that way. You make a lot of sales and book a lot of gross profit - and you incur a lot of expense. What you get is that difference - between gross profit and expense. So that's two of those four things. Let's look at all four!

  • Sales

    You're going nowhere without sales success. So you need to plan and manage to make those sales. Do you have enough staff? Are they rostered on when they're needed? Are you putting your offer in front of enough people? Is it easy to buy from you? Is your on-line presence attractive, and can buyers actually buy online?

    These are all things you can manage to get you closer to your sales objective. Hold on to the principle that it's your 'objective'. It isn't just a 'target'!

  • Gross Profit

    Can you keep a secret? 'Gross Margin' can send you broke! Well it can, if you focus on margin alone. Over thirty five years of consulting, we've seen dozens and dozens of businesses get into trouble while keeping very good margins.

    As the saying goes, "You can't bank percents,", which is another way of saying that you need to achieve gross profit measured in dollars, and 'gross margin' is a shorthand way of looking at that. But don't see only the shorthand way. What matters is what gross profit dollars end up in your books at the end of the month - not what the percentage was.

  • Expense

    Deny, delay, defer. Three good words when it comes to controlling expenses.

    Stock has to turn over

    Products sitting on shelves is money tied-up. Old stock is costly. Don’t get left with old merchandise.

    When it comes to expense control, here's the message: "Don't, unless you can't not." Think about that, and how it will affect your expense approval process.

  • Stock Turn

    One of your high volume lines needs restocking every couple of months. It's generating a gross margin of 40%. That means you're getting a return of eight times on your investment in that stock. That's 800%! If your stock needed to be replaced just once a year, your investment is that stock is six times higher, and your return on that investment in stock is just 1.3 times.

    Would you rather a return of 800%, or 130%? Of course! That's why stock turn is important!

Doing it Needs Skill and Training

Many SME operators know all this, but just don't how to make it all work out in practice. It's easier to avoid the issue, than tackle it and learn.

It is also much more dangerous! It's easy to run out of cash, and find creditors hounding you. It's easy to find you've worked 'your fingers to the bone' - yet there's not much left in the tank for you at the end of the financial year.

If you're starting out this financial year without a budget, you're starting out without a plan. Failing to plan is planning to fail - so don't make that mistake!

 

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Any advice, information or comment contained in this document is general in nature, and should not be relied on as the basis for any specific commercial, business, employment, or financial decision. Specific advice should always be obtained for each individual circumstance. Accordingly any advice, information or comment contained herein is for general guidance only.