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Budgeting for 2012: What I would like to say vs. what I have to say…
We have limped into the 4th quarter of the year, the traditional time for starting the planning and budgeting process for the next year. I wish I didn’t feel the need to write this piece, not because I am against planning and budgeting…to the contrary, I think they are critical to the continued success of any organization.
Rather I had hoped at this point I would be able to say that the evidence was clear that the worst was behind us and small and medium size businesses should start their 2012 planning with an eye toward growth and continued economic improvement. I would like to say that now is the time to dust of those deferred expansion plans, take off the hiring freeze, plan for meaningful salary increase for your loyal employees, and so on.
But I can’t, in good conscience, do that. At this point, I think the evidence is clear that 2012 will likely resemble 2011, and it has the potential to be worse. Over the last year we have all heard that “flat is the new growth” and I think that philosophy will apply next year as well. Sure, there will be pockets of growth, and some industries will do better than others, but on a macro scale, I don’t think we should count on aggregate demand growing in any material way.
OK, the bad news out of the way. My purpose here is not to depress you, but rather to discuss the appropriate mindset for approaching 2012 planning and budgeting:
First, do not plan on revenue being any higher than in 2011. The easiest way to fool yourself into thinking that you can afford certain increases in expenses is to assume that growth in sales and margin will absorb them. Start the process assuming that flat revenue is your best case. If your specific industry has experienced declining revenue over the last few years, it is best to assume that the same trend will continue into 2012.
Pricing and payment terms. If your cash flow model assumes that customers pay according to terms, and they don’t, you have several options. If you have relatively weak bargaining power, and have no choice but to accept the late payments, at least reflect that in your planning. It may help you justify the need for a greater line of credit from your bank. If you have any bargaining power at all, discuss the payment terms with the worst offenders. Let them know that your pricing is based on them paying according to terms. If that can’t happen, tell them the options are a higher price or interest due on delinquent balances. Which would they prefer?
Staffing. Just say no to requests for additional full time staff unless they can pay for themselves in the first year. And that that means paying their salary, employment taxes, benefits, new PC loaded with new software, dues and subscriptions, travel, etc. I KNOW that this sounds un-American, especially as the President is looking to small and mid-sized businesses to provide the new jobs that will help the economy grow. I would love to be able to recommend that all companies should plan on major employment expansion in 2012, but I can’t see how that would not result in a lot more companies going out of business. For a thought provoking and sobering discussion of this phenomenon, click here to see or hear the recent NPR interview with venture capitalist Bill Frezza.
Rather than focusing on a single budget, also spend a meaningful amount of time thinking about what you will do if things are better, or worse than planned. I like to see my clients look at 3 scenarios: Expected, best case, worst case. In the event you get some positive surprises, think about how you can quickly obtain additional resources: people, materials, equipment, capital – to meet increased demand. Think about where you can get temporaries, freelancers, fractional resources, and other less than full time commitments to fill those needs. On the down side, think about what expenses you will need to reduce if things turn out worse than expected. It makes it easier to react appropriately if you have thought through this possibility before it actually happens.
- Years ago, there was a lot of talk about “zero-based budgeting.” This is where you start every new year with a blank page assuming that there is no such thing as a fixed expense. Just because you spent $100,000 on travel last year, that was no justification for budgeting $105,000 the following year. This is a time consuming process, and I know that most small and mid-sized organizations do not have the staff to do justice to an exercise like this. I do, however, believe that approaching the budgeting and planning process with this kind of mindset, especially with regard to large expense categories, can pay big dividends.
Doug Jones provides CFO services to small and mid-sized companies, on either an ongoing or project basis. He can be reached at firstname.lastname@example.org