Every business faces the challenge of stretching a budget to fit their plans. Political shenanigans in Washington demonstrate just how tough it can be when you factor in differing priorities. But, there is one simple action step you can take to steer clear of the problem. Big businesses call it a “strategic offsite”. You can call it taking one business day dedicated to thinking about the future of your business. It begins with how you establish a budget.
Some companies believe in “zero-based” budgeting: build an ideal plan to match your revenue goals and create a budget to achieve that plan. Leave no great idea on the cutting floor. I’ve never been a fan of this approach for two reasons: one, a zero-based budget can be wildly different from your resources; and two, how do you trim things when you’ve fallen in love with the perfect plan?
An equally popular direction is to start with a budget and build your goals around it. This approach, though, can fail from lack of vision. You get to the point of profitability sooner, but in doing so, you may leave some lucrative opportunities behind.
The other end of the spectrum is to do no planning at all, winging it as each opportunity or expense arises. Surprisingly, there are far more companies that do this than you might imagine. But not surprisingly, it’s why many specialty food start-ups a lot of go out of business as soon as the seed money runs out.
A better approach is to start with a forecast of where you want to be in five years (like sport athletes who “vision” winning by planning the whole race). Then, begin the “what if” stage. First, build your budget on realistic expectations, and then add 10%. Or give yourself a real cushion of 20% (which will quickly evaporate) if this is a first-time experience. There are always unforeseen costs that didn’t get included in the first round of the budget planning process.
When developing a business plan, which is more important: a 'what if' stage or a spreadsheet?I maintain that the “what if” stage is more important than a spreadsheet. It’s a bit like creating your own crystal ball. It sets up worst case/best case scenarios well before they happen. If you’re faced with a real world “worst case”, wouldn’t you rather have thought about your options before they become emergencies?
It’s simple to do: gather your best advisors – whether they are family, friends, employees or consultants – and host your own single-day “strategic offsite”. No cell phones, no iPads, no interruptions, and most importantly, no preconceptions. Just a big white board with two columns and enough information to get into the details.
Start reviewing the basics: both fixed and floating expenses. Discuss your budget line-by-line. If the details of the business are too many, just tackle one area at a time. If you don’t have enough information at your fingertips to answer, make notes and table it for later.
You don’t have to come up with all the answers in one meeting, but just get started. It will become a lot easier as you go through the process. And in the end, you’ll have a budget and a plan that will meet somewhere in the middle – right on top of that balanced ball.