As a business evolves, it will encounter the need to build credibility with outside parties, such as investors and lenders, and to make well-informed strategic decisions. In short, financial...Read more »
Budgeting: Part II
Budgeting: Part II
Doug Jones, Director Fahrenheit Finance
This seems to be the season for articles that throw budgeting and financial planning under the bus in favor of better strategic planning with an emphasis on words rather than numbers. The authors usually begrudgingly admit that the numbers have their place, but conclude that success is really all about having a clear strategic vision.
I will argue that it is not an either/or proposition, but rather that both words and numbers are important in planning. An oversimplified fictional example will make my point:
Let’s say that I have identified jazz fans as an underserved market segment, and I believe that there is an opportunity for a web site to be the definitive source of information on jazz recordings, jazz concerts, jazz books, jazz history, etc. I want to position myself as the one stop shop for people who are interested in jazz. In my strategic and business plans, I have defined all sorts of methods on how to attract jazz fans, how to get recording companies and concert promoters to advertise on the site, and even to earn commissions on sales made through the site. My strategic and business plans are clear, well thought out, well written and could win awards for their quality. So off I go to change the world!
But let’s suppose that I spent some time on the numbers. Costs are usually the easier part of a plan to quantify: personnel, computer equipment and services, advertising and marketing, etc. And let’s say I come up with projected annual costs of X.
On the revenue and margin side, there is as much art as science, but one can use statistics from similar industries, input from marketing consultants, gut feel and other sources to come up with a range of possibilities from various types of advertising, media and other promotional efforts. It won’t be perfect, but it will start to give a range of reasonable possibilities for sales and margins.
In this case, let’s assume that even with the best case, the everything generates way more than we expected case, revenue and margin assumptions, we still come out to X minus of margin, for as far out as we can project. That means a loss into perpetuity. Time, as they say, for Plan B.
So let’s not play favorites: For a start up or an established business we need both the words and the numbers to do effective planning.
Please feel free to email or call (804-955-4440) Doug Jones, Director at Fahrenheit Finance on any accounting or finance issues related to your small or middle market business.