Budgeting is planning. Planning requires our businesses to review the prior year’s activities and to think about what our goals are for the coming year. It’s budgeting season at our companies. We take this time to set our expectations for the coming year: revenue, earnings, leverage, capital expenditures, and the conversation evolves from there.
As a banker, we are fond of budgets. They give us foresight into the business’s plans, cash flow, leverage, and a barometer for management’s ability to predict sales and expenses over the upcoming year. Although not all our customers build or share their budgeting system or process, it is the process we find effective.
Here are three quick budgeting tips:
- Consider Zero-Based Budgeting.
In a Zero-Based Budgeting Process, the managers plan each year’s budget as if starting the year from “zero.” Most famously adopted by 3G Capital Partners LP (architects of AB InBev and Heinz/Kraft Foods) and founded in the 1970s by Pete Pyhrr (WSJ Article), it has become more popular in recent years. We use this at our financial institution to find better ways to stretch our dollars, eliminate wasteful spending, and to manage our capital. The rub is that it forces the manager to think deeper than just adjusting prior year spending. The manager needs to see what is driving the spending and consider and defend why it is needed in the coming year. In our banks, we build expense worksheets indicating the costs that went into each expense line item and work forward into the new year on each item. It can be a cultural shift and cumbersome to initiate but extremely rewarding to the business once it is accepted and understood.
- Lean on Vendors and Suppliers
When was the last time you reviewed your contracts with your existing vendors and suppliers? Perhaps you have used the same supplies for several years and have not competitively reviewed their services in the marketplace. Budgeting season is a good time to layout which relationships require a review and depending on the depth of the relationship, a meeting to discuss how costs can be reduced and/or value created in the coming year. Does the business need better planning and sourcing on inventory orders? Are you paying more for a particular supply than what is really required? Has it been over 12 months since you reviewed the relationship pricing? Has there been a change in the marketplace? All are good reasons to revisit and have an open line of communication with the business’s vendors and suppliers.
- Keep in Mind the Long-Term Strategic Direction
Many times businesses are only looking at the next 12 months when preparing their budgets. I would challenge to not ignore the long-term trajectory of your business. Does your business need a new piece of equipment to scale up operations to meet demand? Is there a technological change to the business coming that requires a significant capital investment? Delaying investments in equipment and workforce might be attractive in a current budget, but you may be starving the operation down the line. For example in banking, there is significant technical change occurring in the industry. In 2013-2014, we spent significant time reviewing, planning, and converting to a new online banking platform to complete an omni-channel experience (improved mobile banking, person-to-person payments, mobile deposit, improved commercial ACH services, etc…). It required planning as part of our budgeting process to ensure the business case was made and our capital expenditures were laid out for when we implemented the new system in 2015. Short-term sacrifices to generate long-term gains are worth it.
We have invested in expert people, systems, and industry knowledge that make us a market leader in a field often dominated by very large banks. If your Minneapolis/St. Paul Metro Area closely-held business, nonprofit organization, or real estate company could benefit from a bank that delivers specifically for you, please give us the opportunity to review your banking needs. We are committed to making our clients successful. Your success is our business!
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