Remember the old gag about the bloke who for years had been keen to enrol in a personal efficiency program – but for whatever reason, could never find the time?
I had a similar conversation with a new client the other day, who told me he was far too busy and couldn’t afford the time to sit down and prepare an operational budget for the new financial year. He had more pressing things to do.
“Haven’t got time?” I asked. “I tell you what. I’m going to put you under even more time pressure. Next week, I’m buying you a steak at the Brekkie Creek, and over lunch, I’m going to explain, exactly why a budget is not a ‘nice to do’, but a ‘need to do’.”
He’d been in business a few years, and remarkably, had never gone to the trouble of sketching out a financial road map.
He was just very good at what he did (like most clients), he worked hard and followed his gut instinct.
And yes he’d survived – but what were the opportunity costs of not fully understanding and monitoring the incomings and outgoing of his business? How could he really qualify his performance?
1. Realistic Target
As I explained over lunch, the starting point for any financial year is setting a financial goal – what you believed was achievable. This was a “realistic appraisal”, based on a range of assumptions – past results, the current business climate, and of course your strategic, sales and marketing plans for the year.
2. Big Hairy Audacious Goal
Astute business operators at this point, also set themselves a significant stretch target – a “BHAG” (Big Hairy Audacious Goal) which was calculated on “best case scenario” – what the business would achieve if everything went perfectly according to plan. Go anywhere close to achieving that BHAG – and of course you’d be ecstatic. Even getting halfway there would be an excellent result.
3. Break Even Point
The other very fundamental element of any budget, I explained, was the “business break even point” – that is, add up all your costs and work out what amount of money do you have to drag in the door to keep the doors open?
This might sound defeatist, but this knowledge is vitally important.
At what point are you simply “surviving”? What do I have to “turn over” to stay in business?
There are plenty of traps, and hidden snags in the calculation of that figure but we’ll talk more about that next month.
So for starters, remember the big three –
- RT – Realistic Target
- BHAG – Big Hairy Audacious Goal
- BEP – Break Even Point.
Three powerful signposts on any roadmap to financial success.
Until next time.