When I was being force-fed human resource management on my MBA (some 30 years ago — and thank you Professor Coghill) one study stuck in my memory.
It was to show the benefits of goal setting.
The study took place in a light-bulb factory.
Three sample groups of workers were selected. They all made the identical product – light bulbs.
Sample Group 1 was not given any specific production targets – “Just to go ahead and make light bulbs.”
Sample Group 2 was given prescribed production targets – “You will produce X light bulbs per day.”
Sample Group 3 went through a process of negotiating targets – “Given all factors, how many do you think you could produce per day?”
Which group produced the most light bulbs? Why, Group 3 of course. They had been part of the decision making process and had bought into the game by the use of participatory goal setting.
The poorest producers? Group 1 – with no production goals at all.
Which goes a long way to showing that goals, however conceived, are better than no goals, and negotiated goals are best of all.
Which is why budgeting is so important. It may sound like a “big business” term, but it is simply the process of setting income, expense and profit targets or goals for a business.
Allied to the above concept of goal setting is that of measurement and also from that long-ago class, I remember a piece of wisdom that went something like: “You can’t control something unless you measure it”
Measurement in the financial world is provided by good accounting. In order to set and measure performance in business, it therefore stands to reason that good accounting systems would be a prerequisite to any performance tracking, including budgeting.
Budgeting — it’s what is for every business
So what exactly is a budget?
It’s a one-year business plan that every business — not just startups — should produce and use every year.
It spells out planned/expected monthly costs and revenue numbers for the next 12 months. It can and should be used by all entities, both profit and non-profit, large and small.
In my many years of dealing with small and emerging businesses, I have found the following to be true:
• Around 95 percent of businesses have not gone through a proper budgeting process and have a poorly conceived budget or no budget at all.
• Of the ones that do, more than half do not prepare them properly.
• Of the ones that prepare budgets, almost all of them do not use them to gain the full benefit of the process.
• The businesses that have and use them rarely adjust them to meet new criteria over the year.
Why this aversion to budgeting? This is not so easy to answer. Some of it could be:
• “The fog of war?” Once in the “trenches” and being “shot” at, you are in no mental state to take a step back and consider any form of planning.
• No competent bookkeeper or accountant on staff to ensure a clean, readable and correct set of financials by which to measure? Need the one for the other.
• Simply do not understand accounting or budgeting and do not care to learn about it. — “Been doing just fine on my own without any of this fancy newfangled outside help, thank you.”
If we are to accept the following:
• The purpose of a business is to earn profits.
• Profits are a result of income less expenses.
• It has been shown that income — and therefore profits — will tend to grow if a business has growth goals and tries to reach them.
Then we must accept that budgeting makes up part of that process.
In fact, not only does budgeting force business management to identify income goals and try to meet them, the budgeting process if properly carried out will also force management to identify associated cost targets and try to meet those, thereby assuring management of meeting its most important target — profit.
We can all accept that the success of a business depends on multiple factors. I have seen businessmen succeed in spite of their complete lack of good accounting, let alone budgeting. Conversely, other businessmen fail despite trying hard to “do the right thing.”
This allows the successful guy to be scornful of professional business practices and the businessman who failed to be scornful of exactly the same practices.
However, there is little doubt that in an ever demanding business environment, professional business management does prevail. And in the unlikely event of two identical business models being pitted against each other, using the law of probabilities, the professionally managed business will win the day.
Case made for budgeting? Good.
In our next article we will discuss how to do it.
Neville Stein is a partner at Hancock Askew & Co. LLP. He can be reached at 912-234-8243 or nstein@hancockaskew.com.