Last week I considered the question “Did I get sufficient reward from my business last year in return for the investment of time, energy and emotion that I put in?”
This week I consider the first of the factors that I believe is significant in why we can’t always answer yes to that question.
Optimism in forecasting
Business owners seem to fall into 2 camps in forecasting sales. Either they are overly optimistic or they are prudent. In my experience, over my years in practice, businesses are quite consistent in either falling short of targets or delivering over. Which are you?
The difficulty with overly optimistic forecasts is that a cost budget is agreed or spending commitments are made based on sales that will never materialise or if they do they will be at a reduced margin. It is important here not to confuse sales targets and sales budgets.
Sales targets are something to aim for and should be optimistic, after all, it is far better to have a target too high and miss it than to have one too low and hit it. However, sales budgets should be more prudent to ensure that in a worst case scenario the business still works and the overhead commitments and income needs of the owner can be met.
Furthermore, very few cost budgets build in a contingency for when stuff happens. Often we assume, no staff turnover, no wage cost pressures, we don’t allow money for building reserves or for asset replacement and repair. What that means is that we have a budget that looks like we have a business case that works but repeatedly costs will be higher and sales lower –a recipe for failure and frustration.
In my own business this year I did hit my sales budget (as I tend to be quite prudent) and happily my sales targets also; however, I certainly didn’t allow enough in my cost budgets to cater for the growth in sales for example:
- Recruitment fees
- Staff training
- Office stationery – more staff means more stationery! An extraordinary amount it seems!
In your own business ask yourself the following:
Were my budgets prudent or overly optimistic?
Did you have both optimistic sales targets and more prudent sales budgets in your business?
Were you cost budgets realistic, when did you underestimate cost and why?
Next week we consider the business’s ability to react to circumstances during the year and to control costs in light of actual results to ensure overall financial objectives can be met.
Again I’d love to hear any comments you may have on this blog series so please do get in touch!