Well, folks, it’s that time of year when visions of sugarplums (a.k.a. next year’s sales forecasts) are dancing in business owners’ heads while chestnuts roast on an open fire (fueled by the paper that this year’s objectives and budgets were written on). Yes, it’s that time of year when businesses go through an annual ritual whereby they compile numbers (lots of numbers with the advent of new budgeting software) and then refer to this compilation as the new year’s budget or profit plan. We affectionately refer to this ritual as the "Annual Rain Dance.”

After compiling numbers and thinking almost euphorically about the coming year, the end result is a large document housed in a three-ring binder --- that promptly occupies that special place on a shelf until the same time next year when the Annual Rain Dance is repeated all over again.

Budgeting, when done right, is a plan that describes future desirable results. However, part of the frustration associated with budgeting is that a variety of terms are used interchangeably to describe future these desirable results, such as "goals", "targets", "aims", "strategies", and "objectives". Some say objectives are the overall results while goals are steps along the way; others say the reverse. To eliminate this confusion, get your management team to agree that since all these terms refer to desirable future results, they will be called objectives (anyway, that’s what I will call them in this article).

To put additional stakes in the ground between you and your management team, I also suggest you agree on the following premises:

1. Both short- and long-term objectives are connected in that they compete for allocation of resources (beware of the tendency to sacrifice long-term results for short-term gains);
2. Functional objectives (financial, marketing, personnel, etc.) also compete for resources and there is a tendency to give higher priority to financial vs. personnel management, to recruiting vs. training, to quantity vs. quality, and to tangible vs. intangible matters;
3. Longer-term objectives will not be achieved unless the short-term or subordinate objectives are coordinated and accomplished;
4. It is impossible to predict the future with precise accuracy, and history is not necessarily the best predictor of the future; and
5. Future objectives can only be achieved if adequate resources (people, money, material, time, and know-how) are provided in the right quality, quantity, time and place --- objectives without essential resources are not objectives, but delusions.

Creating Useful Objectives

Although budgeting is often viewed as a perfunctory accounting exercise intended to fulfill paperwork requirements, it should provide an opportunity for periodic selfexamination and evaluation of market dynamics, competitiveness, and new innovations.

This evaluation is the basis for writing three to five corporate performance-based objectives. These should be statements of a desired result that can be measured and that are to be achieved by a specific time. For each corporate objective, there should be functional objectives for the next relevant time period and an indicator to measure achievement. And, for each functional objective, there should be tactics explaining how the objective will be achieved. (See table on the following page.)

It is not easy to make all objectives measurable. For instance, how can you accurately measure employee morale? Simply saying that you hope to have high employee morale will not motivate your managers to do anything about it. Even if it is not perfect, tie some type of performance indicator (like turnover) to every objective or else no one will pay attention to it. Remember, what is measured is what gets done.

Now that you’ve written some really cool objectives, it’s time to stack them up against the following common-sense test:

1. Are the objectives suitable? Are they relevant, and do they support the purpose and mission of the business? Are they compatible with other objectives?
2. Does achieving the objectives rely on divine intervention and super-human feats, or is it reasonable to expect you can achieve them?
3. Is the business or management able and willing to provide resources in the right quality and quantity, at the necessary time and place?
4. Are the objectives worth the resources required? Have you prepared a cost / benefit analysis for each major objective?
5. How will each objective be achieved?
6. Can progress and end results be measured in terms of quality, quantity, time, and/or cost?
7. Is it possible to modify the objectives to respond to unforeseen factors
8. Is there a firm buy-in and commitment on all sides to provide the energy and resources needed to accomplish the results?

Avoiding Budgeting Pitfalls

Budgeting is not just a technical activity, but should be viewed as representing the"essence of management". Your business’ ability to achieve its objectives is largely dependent upon the availability of resources and your ability to operate within the constraints of a budget. The budget is the primary instrument of planning and control.
It reflects all management decisions that have financial consequences, and serves as a benchmark to measure the business’ progress in achieving its objectives.

Given the importance of budgeting to management businesses, there are gazillions of resources available on how to create budgets from bookstores, libraries, the SBA, banks, and on the Internet, so I will not go into them here. Rather, I will review common budgeting pitfalls that we have observed while working with troubled
companies:

1. Relying upon unrealistic sales forecasts: The best way to begin sales forecasting is from the "ground up" with your sales reps, but the best way to finish it is to have upper management carefully review it for accuracy. A common cause of business failure is management’s reliance on overly optimistic sales forecasts, which cause a trickle-down effect to cause errors in procurement schedules, manufacturing capacity planning, and resource allocations.
2. Not anticipating external events: Too many businesses create annual budgets by relying on past results to predict the future and not providing for flexibility and adaptability to factors outside their control. For example, what impact would a 3-4 percent movement in interest rates have on your profits? Or, how would you respond to pricing changes by your competitors?
3. Neglecting to forecast cash flow: I’ve seen many companies create beautiful profit and loss statements and balance sheets, but then neglect to forecast the financial impact of their objectives on their cash balances. Are you just sneaking over the bar each month? If sales are off in one month, how does that impact your cash levels? Make sure that cash flow statements are included in your annual budget.

Communicate, Execute, and Measure

An annual budget that incorporates corporate objectives, functional objectives, tactics, and a budget can become an effective management tool useful for tracking monthly progress toward the achievement of your goals. But to ensure its success don’t let your work stop here. Use your budget as a communication and tracking tool --- now is the time to communicate, communicate, communicate … and then execute, execute, execute… and then measure, measure, measure!

Use the annual budgeting process as an opportunity to push your business to achieve its growth potential. Otherwise, your plan will become a dust-gatherer on your shelf, and then someday you won’t be around for the Annual Rain Dance!