The power of numbers

Its impossible to plan properly without using numbers. But make sure you get them right!

Managing for profit by Peter Hughes

Words are often not worth the paper they are written on. Ideas expressed in words alone can be poorly expressed, vague or just plain confusing. And even if carefully crafted, they can be twisted, misunderstood or interpreted in several ways. Numbers – budgeting, accounting and so on – are different. They do not lie. They are exact and unmistakable. Of course, they can be incorrect, as we’ll see shortly, but at least they have the benefit of unambiguous precision.

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This brings me to my main point. At motivational and business seminars, early in the programme, participants are inevitably told that without clear goals, they are on a hiding to nothing. Clichés such as “If you don’t know where you’re going, any road will get you there” will be bandied about to emphasise the point. Towards the end of the session, you are normally asked to write down your goals. You do this making use of words alone. Very few, if any, numbers are required.

And that’s the problem.

Without numbers, goals are merely indicators of intent. Put a number into them, such as a date by which they will be achieved, and they suddenly come alive and mean something. This is why it is so important to do a well-prepared budget for any business.
Unfortunately, the word ‘budget’ itself is so often misinterpreted. As a consultant, I always ask the business owner or management team for the budget. Often I’m shown a single page setting out a schedule of income, a few lines of major expenses expected, and a cash flow line.

When I ask to see the sheet setting out the assumptions and calculations on which these figures are based, I get a blank look. There isn’t one. “How did you derive these numbers?” I ask, only to be told that they took last year’s figures and added a percentage. “But what if last year’s figures were wrong – incorrectly allocated by the bookkeeper, for example?” Another blank look.

“By the way, who’s responsible for your pest control operation? Did you discuss these pest control figures with him?” “No. We just used last year’s, plus a cost increase.” “But then how do you expect him to carry responsibility for this operation if you haven’t discussed it with him?” And so the conversation continues.

Highly productive
Let’s be quite clear. A budget is not a single page on which the boss has jotted a few numbers based on last year’s figures. It’s an itemised summary of likely income and expenses for a given period. It is zero-based – that is, built up on a clean piece of paper from scratch, item by item. Before each number is finalised, the assumptions on which it is based are discussed and agreed upon with the manager or supervisor responsible for the operation concerned.

A budget provides a concrete, organised, easily understood breakdown of how much money you have coming in and going out.
Creating a budget decreases stress levels all round. Everyone will now know what’s expected. With a well-prepared and regularly monitored budget, there are no surprises.

The budgeting process can be turned into a highly productive and creative voyage of discovery, where every single material activity in the organisation is examined critically to try and find a better way of doing it. Planning and monitoring a credible budget in which all concerned have an input helps to identify wasteful expenditures quickly. It also assists everyone to adapt quickly to changes in the financial situation of the business and to achieve financial goals. A budget brings a sense of financial clarity that, sadly, is lacking in so many businesses.

Methods of budgeting
There are three main types of budget: capital, operating and cash flow. Capital budgeting is the process of planning the purchase, expansion and replacement of fixed assets that the company needs to do its job. This is the time to explore new ways of keeping present operations going economically and of exploiting entirely new opportunities.

Care should be taken: decisions made during the capital budget process have long-term impact. Mistakes can come back to haunt the business owner for years.

The operating budget is a forecast of the company’s sales revenue, overheads, operating expenses and profit. Combining the capital and operating budgets leads to the cash flow budget, the most important of all. As its name indicates, it shows expected cash inflows and outflows. Crucially, it shows whether or not enough cash is available to meet monthly expenses. If not, it’s to the bank you go for a loan. And, if you present a well-prepared, credible budget to the bank manager, he will be delighted to advance you the funds needed!

This article was originally published in the 7 March 2014 issue of Farmers Weekly.