The Three R’s for Budget Season

It’s almost November–budget season.  It’s time to get your budget process started.  It’s time to formalize your plan for 2016.

It’s also good time reflect, review and re-focus before you actually start crunching numbers.

So to start, I do a quick exercise with my business owner clients.

  • Reflect: We take a look back to where they were five years ago (2010).
  • Review: We look at the transformation (or not) from 2010 to now and review where things stand right NOW.
  • Refocus:  We look at where they want to be five years from now, and tighten our focus on those goals.

The look back is important to appreciate where we are.  The lessons are, yes, painful at times, but are good for us developing as individuals and successful business owners. The look forward primes us to seize what is ahead and make it count.

This exercise helps us develop goals to move toward the five year vision.  We look at sales and marketing, operations, profitability, working capital, EBITDA, and lifestyle.  This helps clarify the vision.  It’s a simple, but very effective exercise.  This helps us activate our brain’s reticulate activating system to do the right things to move toward that five year vision.

Now, comes the nuts-and-bolts part–doing the budget.

As you start forming your 2016 budget, use the following as a guide with the idea of having the budget finalized by the end of November.

  • Sales Budget:  The overall company budget starts with the Sales budget. Look at customers sales and gross profit history.  Work with your sales team in a synergistic way to develop what is possible for your business.  Look at your current customers.  Set targets for new customers. Look at your current segments–are there any new segments for 2016?  Put your customer data into a size/profitability matrix.  If possible consider fully absorbed gross margin (i.e. some customers use more operating expenses than others).  Consider allocating variable operating expenses to your cost of goods sold by customers.  Understand your average transaction size, and number of transactions per customer.  Fact: Super-successful companies focus on sales growth more so than expense reduction.  Make that your focus too.  What are your planned sales by segment by month for 2016?  What are your gross margins by month?
  • Production Budget:  This depends on what type of business you’re running.  The production plan must be able to support the sales plan. For example: do you need to adjust shipping schedules?  Is production driving revenue or is revenue driving production?  Focus on lean, smooth, and efficient processes.
  • Personnel Plan:  Plan your your organization chart with salary dollars.  Here’s a Personnel Plan you can use.
  • Operating Expenses:  Look at your trailing 12 months-by-month to see any seasonality or sales relationships.  Forecast each line item by month and document the assumptions in a summary of significant assumptions document.
  • Interest Expense:  Calculate planned debt usage.  Ensure all debt on your balance sheet ties out to an amortization schedule.  Plan to meet with your bankers to improve your borrowing capacity.
  • Depreciation:  Plan your capital expenditure budget.  What fixed assets are you buying, when, and how (lease/buy, cash/finance).  Use your fixed asset register to forecast your current depreciation for 2016 and use 20% of planned fixed asset additions.
  • Cash Flow: Can you make improvements in your DSO or Inventory Turnover to improve cash flow?  Your forecasted balance sheet will be driven from your cash flow drivers.
  • Calendar Your Quarterly Accountability:  I use a Year-at-a-Glance Calendar and schedule everything: holidays, important dates, vacations, quarterly meetings, etc.  It’s a good idea to get this drafted now.

A step-by-step budgeting process preceded by a “Reflect, Review, Refocus” exercise can help you tackle this sometimes intimidating but very necessary project in preparation for the new year. If you need help, contact me!

The Power of Quick Pay Discounts

I was talking to a retailer last week with ten retail stores, and we were going through his larger vendor’s terms.  Many offered long net terms with quick pay discounts to provide incentive for companies to pay faster.  This retailer was meticulous at paying vendors at the very last minute, but was not taking advantage of any quick pay discounts.

This lead to a discussion of the huge advantage of quick pay discounts.

The textbook formula to calculate the cost of not taking a discount is:

Cost of failing to take discount = (Discount %/(100%-Discount %)) x (360 / (final due date less discount period))

So, the basic vendor terms of 2%10, net 30 terms calculates as (.02 ÷.98) x (360 ÷ 20) or 36.73% as the cost of not taking the discount.

We discussed the math and simplified as determining how many 20 day periods there are in a year (360/20=18) and multiply that by 2% = .36 or 36%.  Therefore you can make 2% 18 times per year – assuming you pay the vendors exactly at 30 days, in this example.

That’s a lot of extra margin. By paying vendors 10 days instead of 30, you make 36%.  If I borrow the money at 8%, I still make a net 28%.

Think about it.  What’s your gross margin on your sales?  By using purchase discounts effectively, you can double your gross margin! How’s that for adding profit!?

Also, keep this simple formula in mind when you offer quick pay discounts to your customers.  2% is a lot to give up to get paid in 10 days vs. 30.

Take a look at your top five vendor payment terms.  Do they offer quick pay discounts? If so, calculate the cost of not taking the quick pay discounts; if they don’t offer a quick pay discount, ask.  It may be time to pay your vendors quicker.

Need help finding ways to save money? Contact me!

A 6 Step Guide for Effective 2016 Planning

As we push for a strong Q4, it’s also time to start thinking about next year.  
Plan the work and work the plan.  People don’t plan to fail, they fail to plan.  A solid operating plan for 2016 will help you see the future, align your team and your business processes, and really help your business succeed.
As you get your Q3 results finalized, it’s a great time to assemble other data points for your 2016 planning.  The message today is: start the planning process NOW. Gather your facts, contemplate the future, and get the planning meetings for you and your team on the calendar. Here are steps to take to prepare for the best year yet.
1. Assemble the following data points:
  • Historical Income statements by division. I like monthly for the last two years summarized by quarter and by year.  Chunk down and group your expense line items to minimize the number of expense categories.  Know where you stand with all.  Some P&L’s are three or more pages long which may be fine for your monthly review, but is too long for planning. 
  • Sales (dollars and units), gross margin and number of invoices by customer sorted by sales dollars.
  • Cash to Cash turn over: inventory days, accounts receivable (days sales outstanding), accounts payable days, and revolver debt turnover.
2. Ensure your current personnel plan is up to date and current : name, department, salary, benefits.  Start thinking about performance and salary reviews.  Set up one-on-one meetings with your key team members for November.
3. Know where you are with respect to your 2015 goals.  Did you hit the ball out of the park, or are you falling short some?  Were they realistic or too aggressive? List the important things the company/department needs to get done in 2016.  What will you need to do to get there?

4. Revisit your mission, values, and vision.  Are these just window dressing or does everyone understand what you are trying to do?  

5.  Think about your performance measures.  The measures must be aligned with your strategy and your goals.  Every organization is different, and I have learned a tremendous amount on what works and what doesn’t work over the years.  More on aligning measures later this month, but my advice is be careful what you measure, because people will focus on what you choose to measure.   

6. Start thinking about what is possible for your revenue streams and for your team.  Let the ideas brew as your Q4 progresses and start to get clear on what you really want to achieve in 2016 and determine what actions you must take to accomplish your goals. 

Need help? Contact me!

Q3 is in the Books: A Checklist for Closing

The 3rd quarter ended this week.  Us finance guys are hustling to get the month and the quarter financial statements closed, and get the financial reports issued.  Business owners are chomping at the bit to see their results.  Bankers want to see the numbers to see how things are going and hoping for no surprises.  The sales guys are already into the 4th Quarter, digging to make their annual targets.

How is your business doing so far?  I see a lot of companies that don’t know the answer to that questions.  I hope you do.

We need to focus on getting the Q3 results in the books ASAP, and we need to start thinking about 2016 budgets and operating plans.

We need to start with a solid benchmark and a quarter is a great time to do that. Q3 especially.

So here’s your list:

  • Ensure all balance sheet accounts are reconciled and clean.
  • Know where your collectability issues are.
  • Know that all A/P invoices are entered, the fixed asset register is up to date and reconciled to the GL, the debt schedules all tie out to the amortization schedules and bank statements, and the accrued liabilities are adequate.
  • Scrub the income statement to make sure it’s as clean as possible.  It’s paramount to have solid quarterly numbers.
  • Update your historical graphs for all cash flow and key result drivers – receivable days, inventory turnover, accounts payable turns, average invoice value, number of new customers, etc.
  • Document where you are with respect to your vital few objectives and your goals through 9/30.

A quick and solid Q3 close is essential for many reasons:

  • You need to know exactly where you are vs. where you thought you’d be.
  • Strategic planning and budgeting season is coming soon.
  • There is still plenty of time to make some big goals with a Q4 push.
  • Bankers, investors and supporters: all want to know.

Two things can really make a difference making the close process better:

  • Solid numbers all the time
  • A closing process and checklist

Sounds simple, but I see it all the time.  The numbers are not updated daily and/or there is no closing checklist or documented close process.  These are simple steps, but they make  a huge difference for accurate financial reporting.

Push your Q3 close process now to get accurate numbers fast.  Use a closing checklist and focus on getting each item done accurately and quickly.  This will help you immensely with the overall results for your business.

Contact me!