Thinking about budgets

"Truly, thoughts are things, and powerful things at that, when they are mixed with definiteness of purpose, persistence, and a burning desire for their translation into riches, or other material objects."

Napoleon Hill

Napoleon Hill wrote his timeless classic, "Think and Grow Rich," in 1937. Hundreds of revised editions, summaries, workbooks and interpretations have been written since but the work in which he postulates that "Thoughts are things" has stayed just as relevant in all of the years since its original publication on the tail end of the Great Depression.

By stating that thoughts are things, he makes the point that everything that exists first had to be thought up before it could exist. He states that all achievements have their beginning in an idea.

Isn't this true about your business, too? If you go back to not only before you were in business, but even before you started in your chosen field, you had an idea that you wanted to do a specific thing. Once you had that idea, you thought about what it would take to get there. Your thoughts would surround the schooling, training and mentors it would take. You then went and completed the steps that your thoughts foretold. You went to school or training, maybe medical school, law school, trade school. Whatever it took to get your foot in the door.

Next your thoughts told you that you were ready to go to work. So, they were centered on getting you the job you needed to start in your field. You worked on getting the training, maybe the certifications or licenses too, that you needed to become a master at what you do.

Then your thoughts turned to going out on your own. So, you developed a plan, found a location, rounded up some financing and so on ... all of the pieces to open those doors and be your own boss.

Why would the process stop there? Does it make sense to have those doors open and then wait to see what happens? Of course not. So you think about what you need to do to meet your goals and what you want to see in your company's future.

A budget is the tool to realize those thoughts. Now, don't take this to mean that a budget is a limiting factor. If "Thoughts are things," then truly it is also a fact that "If you can think it, you can do it." But you need a plan of attack to take those goals and turn them into a reality. Mr. Hill agrees as Chapter 7 of "Think and Grow Rich" is dedicated to Organized Planning The Crystallization of Desire into Action.

By creating a well-thought-out budget you have the nuts and bolts to carry out that plan. Here are some steps to follow in creating a budget you can use as a real tool for your company to attain its goals.

1. Budgets should be done no less than annually so that they do not become obsolete or get forgotten.

They should then be reviewed and referred to constantly so you make sure you are staying on track. Budgets can be updated and changed as new information becomes available. Don't feel that if you start to deviate from your proposed budget that you can't update it to work for where the company is headed. But, don't forget to stay focused on what you wanted that budget to do for you in the first place. After all, that budget is the best way to manifest what you see for your company's success.

2. Start with a projection of gross income.

This is the item that will drive all of the other factors of your plan. This number dictates whether your company grows or stays the same. It will also help you put together the steps you need to complete to make it happen for example, additional marketing or hiring.

3. Make sure the pieces of the puzzle fit together and that revenue and expenses are related to each other.

What is your current capacity and what is your product's sales price? If what you can produce times your sales price is dramatically different than your budgeted gross revenue, you either need to change it to meet what you can produce or increase expenses in order to increase your capacity. For example, if you sell widgets for $10 each and your plant can only produce one million widgets per year, then if you stay at the same level your budgeted gross revenue would be $10 million at full capacity.

But let's suppose you want to have gross sales of $20 million or $50 million or $100 million or higher and to sell widgets in every country in the world, then that's great. Fantastic even! Just think through what you need to make it happen. You would need to budget for additional equipment, labor, facility expense, etc in order to increase your capacity. You also need to plan for more marketing, technology, accounting, and all of the overhead to get there as well.

4. Plan for all expenses by not only looking back but also looking forward and at the budget for revenue.

When you budget for expenses, look at historical numbers but also look at the year ahead. This will ensure you don't leave anything out. Often when a company grows, there are expenses that rise to the surface that you didn't anticipate. Be conservative and try to include all expenses so there are no unpleasant surprises. Don't forget about increases in taxes, insurance and other expenses that tend to grow as a company does.

Payroll and the related burden are often one of the largest expenses for companies. Do you pay payroll bi-weekly? If so, you will have two months in the upcoming year that have three payrolls in them. Are you giving raises or changing benefits? These can have material effects on your budgeted expenses.

5. Prepare a cash-flow forecast and a capital budget to supplement your operating budget.

If you need to make equipment purchases or have a substantial amount of debt you are paying on, you need to make sure you plan on those in your budgets. Net cash income needs to be enough to cover debt service and you need to plan on payments for any new equipment coming on line.

It is often easy to think that net income is going to equal the cash in your pocket at the end of the year. By using a cash-flow forecast as a tool to plan for future expenditures, you will be able to see what you can keep versus what needs to stay in the company to fund its growth.

Remember "Your achievement can be no greater than your plans are sound." By following these steps and creating a reliable, organized budget based on your thoughts of where you can see your company going, you truly will turn thoughts into things through your company's financial success!

Tanya McCaffery, a certified public accountant, is president of The CFO Group Inc. in Reno. Contact her at 359-7600 or through www.thecfogroup.com.