Is it worth it?  Create a Budget to Find out.

Budgeting is the one thing that most owners hate.  Many owners hate it so much, they never do it.  “I’ll wait till my taxes are done to see how much money I made.”  “Sales are going up, must be doing something right.”  “Money in the bank, it’s all good.”

If things are going along well, why bother?  Why bother going through the mental gymnastics of planning your finances with a budget?  For me, that’s the perfect time to plan your finances.  Because we have all been in the position of working harder and longer and questioning is it worth it.  And often we forget that dollars in the bank is not the only measure of success.

Building a solid budget allows us anticipate issues before they happen and think about ways to avoid them.  It helps us answer the question “Is it worth it?”.  A budget is a tool to help you focus on your priorities and avoid distraction.  It provides a focus for your business.

One of the reasons managers don’t create a budget is because it is hard to look into the future, let alone pull all of the numbers together.  Here is a thought process to help you develop a strong budget.

Start with your historical profit and loss statements, hopefully at least 3 years.  Break your cost down to a cost per unit value.  For a detailed post on how to calculate your per unit cost of production, click here:  Average the cost per unit for the time period you have and look at the trends per year and what your plans for the next year on before deciding on a good value to use.

The next step is to break the accounts into fixed and variable costs and recreate a yearly budget based upon how much you think you can sell the next year, multiplying the variable costs per unit by your projections and keeping the fixed costs level.  With a bit of Excel magic, you can tie all of the variable costs back to one cell that you can change and quickly see what happens to your bottom line when you change your sales projections.  I always like to do a good, bad, and ugly scenario because as optimistic humans, we tend to think sales will always go up, a bad assumption all too often.

This process is particularly useful when your business is changing.  It gives us a projection tool that helps us answer the question “Is it worth it?”  as you take on more responsibilities and work.  Take your time, run the numbers and make a good decision based upon numbers.

Are your profits growing at the same pace as sales?

Sales growth is wonderful, and what most of us like to see happening.  But the real indicator to keep your eye on is profit.  During growth periods, there are people coming and going on your payroll, new product lines, tools and computers bought, bigger offices, more phone lines, the list goes on and on.  But the question remains – are you better off with or without the sales growth?

You don’t need to wait for your taxes to get done to answer this questions.  By merging sales data with your profit and loss, you can look at income and expenses on a standardized per unit basis, allowing you to compare how things were to how things are.  QuickBooks has a nifty export to Excel feature that make life much easier to make the calculations.

Need help with the process?  That’s what we are here for.  In person or by Skype, we give you the numbers to make better decisions.

More with Less

We need to do more with less!  I can think of no better way to demoralize a team than by saying this to employees.  It is a mentality that is pervasive in today’s business world, from finance to manufacturing.  When I hear this phrase, it means we are going to squeeze our employees and vendors for every last drop of blood.  It means we have become so lean that opportunities are lost because we can’t take time to investigate them, let alone take advantage of them.  It means that something important gets dropped and lost forever.  It means high turnover, lost knowledge, and brutal treatment of people for one more penny.

We focus so much on cutting costs and increasing production that we lose sight of the big picture.  We don’t factor in the hidden costs of our actions or the opportunity costs of alternatives.  As a manager, it is our job to develop a long term sustainable system that makes money.  You can do that for a while by beating up your employees and vendors, but after a while, no one will work with you.

Do I know what the answer is?  Not entirely.  But I am working on it.  I do know that balance and moderation are a big part of the answer.  Balancing the human side along with the numbers side of a business takes skill and time, but it makes a big difference.

It pays to take care of your people.

Nobody wants to work anymore

I hear on a weekly basis nobody wants to work anymore. Millennials are lazy. People these days are afraid of work. I hired somebody and they left after a week. The list goes on and on.

Maybe it’s not the workers that’s the problem. Maybe it’s your business model. When Millennials have opportunities to do online work at $50 per hour, your minimum wage job doesn’t sound all that great anymore. Don’t get me wrong, I have seen more than one business pay employees more than the owners trying to be fair to employees. But all that does is make the owners resentful of the employees.

There are also great employees out there that are able to do two, three, or four times the work of a new hire because they are motivated, understand the work processes and think about efficiency all the time. I know of a landscaper that went from a 3 person crew to a motivated 2 person crew and did not see any change in productivity. But do these motivated employees make double? Usually not even close.

In just about any job market, there are highly qualified people looking for work. But do you have a business environment that they are willing to come to? It’s a hard pill to swallow, but maybe it’s time to look in the mirror and ask what can you do to make the job better.

So what can you do? Beef up your people management skills. From hiring to training programs to management, work on your skills first. Second, improve the profitability so you can hire and keep better people. It may mean walking away from low margin customers, or changing your product mix to attract a different demographic with more disposable income. Third, share in the successes. Give people a say in their future and reward them for a job well done. It is your job to create win-win situations. Look in the mirror, take responsibility and make changes that work.

It’s all about the numbers

I have been working with a maple syrup producer recently.  It is a very seasonal business with large fluctuations in production driven by the weather.  They have been selling wholesale and looking at increasing their profit margins by moving into the retail markets by developing an online store.  Everything was on track until Mother Nature decided to throw a curve ball.  The crazy spring weather reduced production by 35% from last year.  There was barely enough production to cover the wholesale orders.

The retail expansion plans were shelved until next year.  At least until we started looking at the numbers a bit more.  We had been looking at equipment purchases to package for the retail market and had some solid cost numbers on the equipment and the cost of production for each stage of the operation.

The aha moment came when we asked the question “What if we bought high quality syrup on the wholesale market instead of producing it ourselves?”  When we compared our costs to wholesale prices, we found that not only could we make money by buying wholesale and packaging for retail, but we could make as much money as producing it ourselves.

By shifting our focus and looking at different ways of reaching our goals, we came up with a way to continue the growth rate.  The original focus was always produce as much as possible and sell what you make.  Shifting the focus to finding a way to sell maple syrup instead of produce as much as possible seems like a small change, but it will mean the difference between an average year and a very good year.

The question is, what small changes in your thinking can have big impacts to your business?

Your taxes are done, now what?

You spent all this time gathering information for your CPA to do taxes.  Income, Expenses, Capital Purchases, Depreciation, and every other detail your CPA wanted you to dig up.  And then you paid Uncle Sam a nice chunk of money.  Most people don’t want to look at financials any more for another year, but this is exactly when you should be delving into the nuts and bolts of your business to assess your strengths and weaknesses.  What do all these numbers mean and where do you start?

When I am asked to look at the health of a business, I start with this list.

  1. EBITA  – Earnings before Interest, Taxes, and Amortization.  A look at how your efficient your business is without taxes or debt
  2. D/A – Debt to asset Ratio – how dependent upon debt is your business.
  3. ROA – Return on Assets – What percentage did you make on the total assets of your business
  4. ROI – Return on Investment – How much did you make on YOUR investment
  5. Owners hourly rate – often owners pay themselves a salary, but breaking it down to an hourly rate can give you a different perspective
  6. Cost of production per unit, compare to previous years.  Are you making improvements in cost control of critical areas.
  7. Budget vs Actual – look for how accurate your plans were.
  8. Profit and Loss, compare previous years.
  9. Inventory Adjustments  – make sure inventory purchases and use are not artificially inflating or deflating profit.
  10. Accrual vs Cash Profit and Loss comparisons- in particular, I am looking for big changes in AR and AP, Inventory values
  11. Profit and Loss, with percent of income and expenses.  Look at the big expenses and see if small changes can make a big impact on the bottom line.
  12. Develop or tweak budgets – now is the time the numbers are fresh.  Look at your plans for growth or cutting unprofitable areas of your business.  Incorporate marketing plans with financial plans.  Plan your profit levels.
  13. Balance Sheet – Look at changes in Net Worth

Ideally, you would be looking at these indicators on a quarterly or monthly basis.  Minor adjustments to spending or income timing can have big impacts on your total tax bill.  The trick is to know you need to make adjustments in the same tax year, not 3 months after.

It is a long list, and it takes time and thought to go through.  But the payoffs are there.  Don’t be intimidated by numbers!

Turn things around

So you have finally come to grips with the fact that you are in over your head financially. What is your first step? STOP DIGGING. Stop. Spending. Money. Now.

Then start answering these questions.

First of all, where do you stand financially? Who do you owe money to, who owes you money. What assets do you have, what liabilities do you have? What contracts do you have with clients?

The next question is where did you spend the money – cash, credit, barter, checks, debit cards – all of it. Don’t hide anything, you are only lying to yourself. It is important to know how you got to your current situation.

Third, find out where can you make the most money the fastest. If you don’t know your margins, you don’t know where to focus your efforts. Focus on high margin products until you are stabilized. Look at both the income and expense side of the equation, sometimes it is easier to increase income than cut costs.  Keep in mind that 10 hours of work at $40 per hour is much better than 40 hours of work at $10 per hour.  You may not have the $40 per hour work available when you need cash, but work towards that type of work.  You will be much better off in the long run.

Third, develop a realistic budget. A budget not only shows cash inflows and outflows, but what your priorities are. By making a conscious decision on what to fund and what to ignore, you have set your priorities. Any time you deviate from your budget, you should question if the purchase fits your priorities. If your priority is to stop bleeding cash, then you should probably cancel the spring break trip to Florida.

Financial turn arounds happen every day. But it takes a concerted effort to change the habits that got you there in the first place. Make a commitment, enlist help, and develop a plan to make it happen. It is your choice!

Thick Skin and Open Mind

It takes a thick skin to be in business. We don’t get better by ignoring the bad news, we get better by fixing the bad news. The problem is, we are hardwired to get defensive when someone points out flaws. In today’s culture, the attitude of you are either with us 100% or you are against us 100% promotes knee jerk reactions that leads to hiding issues that would normally wither under the light of day.

The balancing act of seeking out solutions to problems while remaining positive is difficult. I have never had a problem finding someone willing to complain and find fault. And it is usually not difficult to find someone who doesn’t believe there is a problem either. Finding a balanced solution can be difficult.

In my career, I am often in the position of pointing out problems to business owners. Things like your target demographic is not big enough to support a business. Your financial controls are inadequate to grow your business. Your sales force is cutting your margins to unprofitable levels. There are hundreds of other examples, but what really stands out is how a person responds to the problems. Someone who gets defensive, denies the problem and attacks the messenger is not going to perform as well as someone whose response to negative feedback is to ask questions and seek understanding.

So what does it take?

First of all, a curious and questioning mind. One that is open to the possibility of being wrong. One that is looking for a better way. Embrace the scientific method of testing hypothesis and coming to well thought out conclusions. A mind that is more interested in progress than always being right.

Second, there must be trust. Trust that the person bringing the problem to light will not be punished, but heard. Trust that a problem is not a personal attack, but a means of improving the current situation. Trust that a solution developed by all stakeholders will be make life better.

It takes a thick skin and an open mind to admit there is a problem and create a solution. Develop those skills and you will go far.

Making Lasting Changes

It is often relatively easy to identify broad areas that you need to change – lose weight, exercise more, spend less, save more.  The real trick is to implement those changes, and not just for a week or two.

A good friend of mine who has been sober for 8 years often tells me – People are only motivated by two things – avoiding pain and finding pleasure.  Understanding this helps him find ways to stay sober and help others do the same.  I have a variation that I have used in training for years – “People will only change when the pain of staying the same exceeds that of changing.”

I often struggle with getting clients to make lasting changes.  For instance, one week after telling a client that they needed to go on a fiscal diet and stop spending money that was not generating income, I got the “I know you are going to yell at me, but, I just spent $2500 on my daughter” phone call.

The question is how do you make lasting changes?

#1  Accept that the responsibility rests solely with you.

Your business is not failing because of the economy, you made a series of mistakes that did not account for changes in the economy.  No one is making you take another bite of ice cream.  Salespeople can talk and even be ruthless, but at the end of the day, it is you that takes your credit card out of your wallet and gives them the number.  So until you are ready objectively listen to yourself and look at what needs changed with a clear head, NOTHING will change.  Listen to others for advice, because let’s face it, we are not special, hundreds of others have made the same mistakes we are just about to make.  Having said that, it is very important to understand why you make the decisions you do, what influences are at play and your biases.  But at the end of the day, the responsibility rests with you.  Make up your mind, set a path, and start walking.  Set some realistic goals and lay out a plan to achieve them.

#2 Change your processes

Automate the change whenever you can.  Set up a separate bank account and move 10% of your income into it every time you make a deposit.  Make it more difficult to spend money – leave your debit card at home.  Carry a set amount of cash so you cannot spend more than what you have.  Cut up credit cards.  Put cash into envelopes to cover a budget category.  Become a bad cook so you eat less.  All are tricks to change your habits.

#3 Change your focus

This is the most powerful Jedi mind trick in your arsenal.  Shift your focus to a pain point to avoid a habit or a pleasure point to create a new habit.

If you are on a diet, it is easy to be tempted by your favorite food – a big Mac, cake, bagels with cream cheese – there is always a temptation.  But if you shift your focus from “its only a few hundred calories” to “that is 70 minutes on the treadmill at 5 miles per hour”  you can reframe the narrative happening in your brain.  Same thing goes for changing financial habits.  Change the focus from the instant gratification of buying an expensive meal to the long term goal of retiring at 55 and you can make lasting changes.

Even subtle changes in focus can be extraordinary.  Years ago, a child I know was diagnosed with leukemia.  He is doing wonderful now, thanks to a bone marrow transplant from his brother.  At the time, the brother did not want to be the bone marrow donor, making it a very tough sell to a head strong 8 year old.  In his words, “I hate my brother”.  It took a while and a very talented therapist who uncovered that underlying issue was he did not want to be responsible if the bone marrow transplant failed.  In his mind, if the transplant didn’t work, it would be his fault, a very heavy burden for any child.  The therapist managed to shift his focus from hating his brother to hating cancer, and the best way to beat cancer was with him being the bone marrow donor.  By defining cancer as an entity separate from his brother, the therapist shifted the rage target 6 inches, just enough to turn the tide.  It worked beautifully and is a lesson that I will never forget.

Here is the bottom line:  making changes to your habits IS difficult.  Pay attention to the narrative in your head so you can shift the focus by adding a pain point to discourage a behavior or add a reward for reinforcing a behavior.  But stick to it.  It is worth it.

Focus. On the Important Stuff.

I grew up on a commercial dairy farm and we had to grow hay to feed 300 cows. As you can guess, that’s a lot of hay. One of the things that was common knowledge was if you harvested hay at the beginning of July, it had grown as much as it would and started to dry down, making it easier to harvest and giving you the most tons of hay per acre. With this time frame, you could then harvest again in September and maximize the tons of hay per acre for the year.

Then came the new ideas. Harvest the hay as soon as it starts to bloom, and then every 30-40 days afterwards depending on the weather. In Northeast Ohio, you could usually get 4 cuttings per year this way. The total tons per acre was about the same as 2 cuttings, and often less. And you did double the work.

So why in the world would anyone consider doubling their work? Because we discovered that tons of hay per acre was not the important thing. It was the protein content of the hay that made cows give more milk. By cutting the hay as it was just starting to bloom, the protein levels were peaking at 18-20%. The plants were storing up energy for blooming and reproduction, protein levels were at their highest. If you wait until the plant hits full growth, the protein has been used up and is only 3-5% of the total weight. This hay is bulky filler with little nutritional value outside of fiber. From the standpoint of producing hay to feed to dairy cows, the important thing to maximize is not tons of hay per acre, it is tons of protein per acre.

All of this is a very nice lesson in agronomy and feeding cows, but most of you don’t milk cows for a living. What lesson is there for you? As entrepreneurs, we do many things, but what we all have in common is we spend time producing or selling a product. And most of us measure our efforts in hours per day or week. We take pride in knowing that we can outwork just about anyone else. We know what it takes to make our business go, and we’re not afraid of the hard work to get there. But what if we are measuring the wrong thing? The tons of hay per acre, not the protein per acre. Would it be better to measure productivity in a way that did not involve hours per day? Something that relates to the value of what you produce? And even more shocking, what if working fewer hours actually produced more value to your business?

I can tell you with absolute certainty that time is even more important for you to budget than money. And on top of that, not every hour is equal in terms of productivity. But as long as we measure productivity as working hours per week, we will never find out what is truly important.