Why Budgeting Fails, Part 2

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Presentation-quality budgets.

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An Advanced Budgeting System:

  1. Align budgeting to strategy. An advanced budgeting system will integrate the planning and review processes. The Balanced Scorecard is a helpful alignment mechanism for this purpose.
  2. Link relevant nonfinancial performance measures to budgeting. Financial data is a lagging performance indicator. Focus needs to be on important performance drivers – both financial and nonfinancial.
  3. Reduce detail through the use of aggregated budgets. Many companies have taken the first step toward reducing detail by focusing budgeting on major product groups, organizational units, processes, and cost types. Aggregating involves giving leaders discretion in allocating resources to departments and activities under their jurisdiction instead of documenting every single departmental cost.
  4. Use rolling budgets instead of fixed budgets. In competitive and dynamic marketplaces, companies need more frequently updated budgets so they can adapt to changing conditions. Therefore, the best budgeting systems use such approaches as the five-quarter rolling forecast. Constantly focusing management on the next five quarters helps to balance short- and mid-term thinking.
  5. Use relative targets instead of a fixed budget to reward people. Instead of encouraging managers to meet their fixed budget, I suggest measuring success by comparing manager performance against relative, self-adjusting performance measures whenever possible. Relative targets can motivate the right behavior, guiding people to act in the company’s best interest. It is better to assess performance based on benchmarks. Managers today should be rewarded for achieving a set of nonfinancial as well as financial objectives. Today’s companies incentivizes such performance by basing bonus compensation on multiple factors, not just on whether the manager makes their numbers.
  6. Increase the focus on processes instead of on departmental and organizational unit performance. This reflects the idea of managing processes to drive success in the marketplace. It also focuses management on major cost drivers. Managers are more attentive to organizational strategy and goals.

Business planning is essential for business prosperity. Businesses, like people, don’t plan to fail – they fail to plan.  If you would like to learn more about how you can transform you business using the Bible as your guide, email me at info@commonsensecfo.com.

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Why Budgeting Fails, Part 1

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2005 US cent, obverse side]

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The Problems with Budgeting:

  1. It’s inefficient. The traditional budgeting process takes too long and consumes too many management resources.
  2. It rapidly becomes obsolete. With their annual focus, most budgets are outdated soon after they’ve been set.
  3. It doesn’t motivate the right behaviors. Traditional budgeting fails to move people to act in their company’s best interest. It encourages bureaucracy and dysfunctional behavior instead of entrepreneurship. Managers can deliberately lowball their financial targets to make their performance appear better.
  4. It’s out of sync with the strategic plan. Perhaps most important, traditional budgeting emphasizes financial performance over and above the pursuit of strategy.

 

The Traditional Role of Budgeting – Designed to Serve Three Main Purposes:

  1. Coordinate the organization’s financial activities and picture. The point of the budget isn’t merely profit planning; it’s designed to align the individual units to the organization’s strategic and operational objectives.
  2. Communicate financial expectations. A budget is designed to give managers a clear understanding of the company’s financial goals, from expected cost savings to targeted revenues.
  3. Motivate managers to act in the company’s interest. Rewarding managers for achieving challenging objectives is probably the most important – yet most debated – function of budgeting. Budgets more often than not encourage dysfunctional behavior such as “padding” or “slacking”.

 

The real problem is that the traditional approach to budgeting is no longer suited to the realities of today’s dynamic business environment. Companies that continue to rely on the budgeting system as their only management system are following a prescription for failure.

 

Business planning is essential for business prosperity. Businesses, like people, don’t plan to fail – they fail to plan.  If you would like to learn more about how you can transform you business using the Bible as your guide, email me at info@commonsensecfo.com.

 

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True Wealth

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The Parable of the Rich Fool, Rembrandt, 1627.

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Money is a powerful force. We work for it, save it, spend it, use it to satisfy our earthly longings and then wish we had more. I believe Jesus was aware of its distracting danger as He taught more about money than any other topic. As far as I know, He never took an offering for Himself. I think it’s clear that He didn’t teach about giving to fill His own pockets. Instead, Jesus warned us that trusting in wealth and using it to gain power clogs our spiritual arteries more readily than most other impediments to spiritual development. In telling the story of the “rich fool” (Luke 12:13-21), He shamed His listeners for not being rich toward God, indicating that God has a far different definition of wealth than most of us.

 

So what does it mean to be rich towards God? Paul tells us that those who are rich should not be conceited about their wealth, “nor to trust in uncertain riches” (1 Tim. 6:17). Rather, we are to “be rich in good works, ready to give, willing to share” (v. 18).

 

I think that’s interesting! God measures wealth by the quality of our lives and our generous disbursement of wealth to bless others. That’s not exactly Wall Street insider talk, but great advice for those of us who think that our security and reputation are tied up in the size of our bank account.

 

Are you using your business to build “true wealth”? Is your business “rich in good works, ready to give and willing to share”? Focusing your business on building true wealth is an essential part of business prosperity. If you would like to learn more about how you can transform you business using the Bible as your guide, email me at info@commonsensecfo.com.

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Recipe for Success

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Joshua commanding the sun to stand still

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Following a recipe in the kitchen usually leads to success. Using the right combination of ingredients, the correct measurements, the exact temperature and cooking time results in a delicious meal that everyone will enjoy. But consider for a moment what that meal would be like if you didn’t follow those instructions. I don’t know about you but the best way for me to make a delicious, successful meal is to follow the recipe that I’ve obtained from someone else. Someone who has tried it and succeeded. Someone who is more of an authority than I am. Those times when I’ve tried to do things on my own, I’ve created a mess.

 

Joshua 1:8 says. “Study this Book of Instruction continually. Meditate on it day and night so you will be sure to obey everything written in it. Only then will you prosper and succeed in all you do.” (NLT) Without God’s instructions, Joshua would have failed at leading the Israelites into the Promised Land. The first step was to “be strong and courageous” (Joshua 1:6). Next, he was to continually study God’s Word. Finally, he was to do everything that it said. As long as Joshua followed the directions, God promised him “prosperity and success”.

 

God’s recipe for success can work for us in business too. His idea of success has little to do with money or popularity. In the original Hebrew, “then will you prosper and succeed in all you do” means “then you will act wisely.” Just as God called Joshua to walk in wisdom, He wants us to “be careful how we live, not like fools, but like those who are wise.” (Eph. 5:15)

 

Acting wisely, making wise business decisions, will produce peace and comfort for you, your family, and your team members and is essential for business prosperity. If you would like to learn more about how you can transform your business using the Bible as your guide, email me at info@commonsensecfo.com.

 

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10 Reasons to Avoid Debt, Part 2

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Credit cards

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Austin Pryor, in his book Sound Mind Investing, lists ten reasons to avoid debt. Though the list is directed towards individuals, I believe it is also very appropriate for businesses. Here are the last five:

  1. Debt evades the necessity of distinguishing wants and desires from real “needs”. Try making an “I Want” list. The “I Want” list has two rules. First, not more than five items are allowed on the list at one time. Second, you have to wait thirty days after the item is entered on the list before it can be purchased. You will be amazed how many “wants” and “desires” fade over the thirty days and the amount of impulse buying that is eliminated. This simple idea may help to transform you (your business) from a chronic impulse buyer into a much better steward of His assets.
  2. Debt encourages impulse buying and overspending. The Chief Financial Officer of a national credit card company said that consumers will spend 27% more on plastic than they would with cash or check. Any merchant who accepts plastic will verify that consumers will spend 25% to 30% more with plastic. That is why businesses pay a fee of 1% to 7% of every purchase you make on plastic for the privilege of accepting your credit cards. For your business, consider the potential effects of entertainment and travel costs.
  3. Debt and credit cards stifle creativity and resourcefulness. If we want something today, we charge it rather than “make do” with what we have. We feel entitled to what we want, when we want it, so we automatically head to the mall, never considering a simpler, less expensive choice: “doing without”. It is not fashionable today to resole our shoes, repair our cars, or mend whatever wears out; we simply replace them. For your business, consider the potential impact of maintaining the equipment you already have (without sacrificing safety) or using what you currently have in a new way to accomplish the task instead of buying something new.
  4. Debt and credit cards eliminate margin in our lives (our businesses). Plastic becomes our margin. Rather than planning what we need and allowing a margin for errors or overruns, we “charge” ahead and spend, thinking that if we must write a check that we don’t have sufficient funds to cover, we have overdraft protection with our credit line. Your credit card (or line of credit) is not an asset but a potential future liability which becomes a liability when you use it.
  5. Debt teaches your children bad habits. Your children will have a casual regard for using credit cards, obtaining car loans, and applying for student loans.

Review the first five items from yesterday as you consider these. Consider the negative (or potential negative) effects debt may or does have on your business. I encourage you to develop a solid business plan to eliminate your current debt and to prepare to operate without borrowing in the future.

Avoiding debt is essential for business prosperity. If you would like to discuss more about avoiding business debt or how you can transform your business using the Bible as your guide, email me at info@commonsensecfo.com.

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10 Reasons to Avoid Debt, Part 1

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Loan payment schedule of a 1-year, fixed-size ...

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Austin Pryor, in his book Sound Mind Investing, lists ten reasons to avoid debt. Though the list is directed towards individuals, I believe it is also very appropriate for businesses. Here are the first five:

  1. Debt presumes on the future. Scripture clearly says, “Do not boast about tomorrow, for you do not know what a day may bring forth” (Proverbs 27:1 NASB). When you commit yourself to payments over time, you are presuming: no pay reductions (i.e. no loss of customers/clients), no loss of job (i.e. you’ll be able to keep your doors open), and no unexpected expenses. That is a dangerous and improbable assumption.
  2. Debt lowers your standard of living in the future. Money that you borrow today must be repaid over time along with the cost of renting the money (interest). From a business perspective, think of it as an increase in opportunity cost – what opportunities does your business lose out on because of the repayment and interest?
  3. Debt avoids life-style decisions. It allows you to make the decision of whether you can afford to buy an item by focusing on the low payment rather than on the cost of the item. The question of whether you can afford it should include all the cost: purchase price, operational expenses, and finance charges. Credit is dangerous because it is too easy to say yes to low payments over time and ignore the real decision – can I (my business) afford it, and do I (does my business) need it?
  4. Debt places the awesome power of compound interest at work against you. Here is an example for credit card debt. If you borrow $100 on your credit card and make only minimum payments, it will take up to 30 years to repay the loan. Items charged on your MasterCard (or items purchased for your business via term debt) can cost you double, triple (or more) the purchase price!
  5. Debt may delay God’s plan for your life (for your business). Or it might cause you to forfeit a blessing God had planned to give. Before you obligate yourself (or your business) to payments, give God a chance to provide your needs.

I’ll post the next five tomorrow.

Avoiding debt is essential for business prosperity. If you would like to discuss more about avoiding business debt or how you can transform your business using the Bible as your guide, email me at info@commonsensecfo.com.

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Be a Servant Leader

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Rehoboam, a fragment of the Council Chamber murals
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The key to the success of any organization is found in two key elements: the leadership and the people. Leaders must show the way, provide the resources to reach the the goal, and provide accountability. Your attitudes and outlook as a leader and toward your people will frame every policy decision you make.

I Kings 12:1-19 marks the beginning of the reign of Rehoboam as king of the united twelve tribes of Israel. However, the kingdom was divided and a long-term rebellion against the house of David was instigated, even before the confetti was cleaned up from his inaugural ball. Rehoboam had the benefit of the counsel of elders who had served the wisest man to ever have lived – King Solomon, his father. They had watched for forty years as God had rendered wise judgments to His chosen people through this great king. But when the people came before the new young king with a pledge to serve him, Rehoboam forsakes the counsel of the elders for the fast friendships of his peers.

Rehoboam clearly lacked wisdom which Proverbs 1:7 says comes from the fear of the Lord. Ironically, this Proverb was written by Rehoboam’s father during his lifetime. Rehoboam had not learned the lesson that King Solomon knew so well: the key to effective leadership is humility. Solomon was willing to be known for who he was: a flawed man called to fill a role by God. Solomon knew that he had no power within his person great enough to accomplish the awesome responsibility of governing Israel. He humbled himself before the God he feared and the people he served. The result was Israel’s golden age.

The consequences of the actions by the proud and foolish Rehoboam stand in stark contrast: the kingdom was permanently divided and idolatry, prostitution and warfare were the distinguishing characteristics of his reign. But the most damming result of the young king’s failure to adopt a servant’s heart is found in verse 19, “So Israel has been in rebellion against the house of David to this day.

Business owner/manager, if you want to lead your company, then humble yourself before your God and be willing to be known for who you are among your fellow men. It is God’s formula to make servants out of leaders.

Being a servant leader is essential for business prosperity. If you would like to discuss more about becoming a servant leader, or how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Managing Cash Flow Problems

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A diagram of the company cash cycle from first...

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Are you having problems managing your business’s cash flow? Short of borrowing money, which I do not recommend, what can you do to improve your company’s cash position? Here’s some suggestions.

You can regain control of your financial situation by examining several areas of your business. The first area to look at is purchasing. You can conserve cash by buying smaller quantities of supplies more frequently instead of buying them all at once. The best time to buy in bulk is if a significant discount is offered. And when it comes to payment, negotiate with your vendors to get the best possible terms. You should pay early if offered a price break for prompt payment; otherwise, bills should be paid on time.

You can put the same concept to work with your customers by offering a discount for paying invoices early. If a payment is late, though, consider charging an extra percentage on the invoice. Billing customers immediately after your company ships merchandise may help speed up cash receipts. Also, any customers who regularly make late payments should be switched to COD.

Another area to look at is inventory. You should attempt to return slow-moving inventory or mark it down so that it will sell. You can avoid overstocking new purchases by carefully planning the quantities that need to be kept on hand.

A review of operating expenses can help you find ways to cut costs on overhead items, such as insurance and telephone and Internet service. To reduce taxes, consider making any equipment purchases before year-end if your business will be able to write off the cost on the current year’s tax return.

Good cash management is essential to business prosperity. If you would like to learn more about developing or improving your financial management system or discussing how the CommonSense System of financial management can improve your cash management, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Operations Manual

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Sample mission statement

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Business trips, vacations, illness or injury, family issues. There are many reasons you might be absent from your business. Whatever the reason, having an operations manual will provide vital information and step-by-step guidance so business can continue without interruption. If you don’t have one, you should.

Begin your operations manual with your mission statement or a brief description of your goals and values. List the products and services you offer. Depending on how large your company is, you may want to create an organizational chart with titles, job descriptions, and employee names. Include complete contact information for key employees, vendors, clients, insurance companies, security, and IT support staff.

To be effective, your operations manual should have step-by-step documentation (best practices) for all business procedures, from unlocking the doors in the morning, to running reports, processing checks, recording sales, and turning the lights off at night. Spell out important policies, especially those applying to such matters as discounts, returns, refunds, and the like.

Once your manual is written, all the details pertinent to running your business will be in one place. Make cross-training your employees a priority. Plan to review and update your manual regularly. Not only will you be able to be absent from your business, it will also help your business run more smoothly and improve profitability.

Maintaining a complete and current operations manual is essential for business prosperity. If you would like to learn more about preparing and maintaining an operations manual, or if want to learn how a part-time, virtual CFO can help transform your business using the Bible as our guide, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

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Financial Management System

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Financial Management System

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Does your business have a financial management system? Your accounting software by itself is not a financial management system. An accounting software package is necessary for producing accurate, timely financial statements – but is just a piece of the total financial management system, albeit an important piece.

A financial management system is a set of components; one component by itself is not a financial management system. A system is effective because it is a repeatable set of processes that consistently deliver an expected result. Small and medium sized businesses often avoid using any kind of a system because of the time necessary to set up and learn. The time invested initially, however, is more than offset by the time saved by more effective decision making in the future. Your system’s ability to produce quality, timely and valid information depends on its design and structure. (1)

Accurate, timely financial statements do not make up a financial management system. By themselves, financial statements do not provide much understanding. Financial statements typically have the following limitations:

  • An analysis of many elements is required to convert the data to useful knowledge
  • They provide lagging data (they’re always prepared after period end)
  • They are too infrequent

A good financial management system will incorporate the financial statements generated by your accounting software package along with appropriate cash flow forecasting, important performance metrics (trends, ratios, comparisons, break-even, etc.), and updated financial projections to provide you and your executive team timely information so that the decision-makers may react quickly to the current reality.

Having a solid, effective financial management system is essential for business prosperity. If you would like to learn more about developing a financial management system or discussing how the CommonSense System of financial management can improve your decision making and prosperity, email me at info@commonsensecfo.com or call Kirk at 402-658-7340.

(1) “Be diligent to know the state of your flocks, And attend to your herds; For riches are not forever.” Proverbs 27:23-24a (NKJV)

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