In Control - You or Your Business?

by Duane Geyer, VOLLMER CFO

Do you control your business or does it control you?

Wall Street is down since the election. Unemployment is the highest it has been in ten years and rising. Japan has declared it is in a recession as has the United States. The Consumer Price Index and home values are dropping. Credit markets are tight. Everybody is asking the government for a bailout. Given all these conditions, how do a business owners/managers best control their operations? Prepare and work against a budget.

Begin with revenues – what you expect to come in. Be careful not to be too optimistic (you’ll see why in a minute). Start with what you know - existing clients who will continue with you in 2009. From there add potential new business (but again, don’t be too optimistic). Finally, add in a small portion of business which will come from “who knows where.” Add it all up and compare it to previous years for reasonableness. If it is more or less, how do you justify the change?

Next, plan the cost of running your operation. Spend a lot of time on employee costs (salaries, taxes and benefits); this is usually the urgent expense item. For other expense items, consider what you have done in the past and add in any changes you would like to make, such as new marketing initiatives.

Profit is revenue minus expenses. Calculate a Profit percentage (profit divided by revenue) and compare it to previous years and metrics published for your industry. This will tell you if revenues and/or expenses are out of line. Go back and adjust accordingly. Be careful not to spend all your expected revenue. If you plan revenues too optimistically, you may be tempted to pump up your expenses since you can still show a good profit. This could get you into trouble if you start spending too aggressively in the new year and the revenues you projected do not materialize.

Budget cash flow! Why? Because cash is king – no matter what the economy is doing, positive cash flow will keep your head above water. How? The simple answer is profits plus depreciation minus capital expenditure (computers or other equipment) minus loan payments. Too many small businesses only budget their profit and loss, only to wind up with not enough cash to pay their bills.

Budgets can be a lot of work, but they can also be an invaluable tool – especially in uncertain economic times. They are not an end all and be all; they are a guide. Comparing your actual results against your budget will keep you on track by revealing if your plans are realistic, or need to be modified. After all, it’s better to find out sooner than later what is happening to your business – it keeps you in control!