Planning & Budgeting As A Growth Tool

In today's session, I want to discuss planning. The first thing I want to touch on is, why is planning important?

My take as a CFO is that if you look at the statistics, more than 6 in 10 businesses fail in their first 5 years of trading and after that there's still a reasonably high failure rate in businesses.

So, I look on planning as a tool and a process to really enhance your chances of success. And the old adage, if you don't plan, you can expect some poor performance in the future. I think planning is an underrated tool to help small business and indeed large businesses to have a better chance of success.

As a CFO, I know planning is an important task in any business. If you look at the statistics, 6 in 10 businesses fail within the first 5 years of their trading. That gives you an idea of how difficult it is to run and grow a business. To maximise the chances of its success, a plan, however short or long that plan is, is a vital ingredient to making sure that you get to where you want to go, and you have success along the way.

A plan will give an early indication of some of the critical success factors your business needs in order to get to where it wants to go and to meet its goals. It also gives you an idea of some of the barriers to success and some of the potholes you need to avoid along the way. It helps a business owner as well as the business owner's team create a roadmap and framework to manage the growth of the business. These are all useful things on a day to day and week to week basis within the business.

If you can create a roadmap that ends up in a financially healthy business, then I believe, you've got a happy business all around.

The purpose of a plan is to get the team together. Planning is not an individual activity, I think it's a team activity. As a result of that, it's a good opportunity to get the team around the table talking about the plans for the business and what it's going to do across any given period of time. As a CFO, I try to interpret those plans into a financial narrative for the business and a financial story and paint a picture of what those plans look like in financial terms.

So, what I look for achieving around the table is for the team to articulate what they're going to do, how they're going to do it, and what they need in order to be successful.

My role as a CFO is to translate that into a financial story and narrative that I can play back to the team to ensure that their story is going to have a happy ending. The purpose of that story is really to help the team understand whether the business journey that they're on is going to be on track at or whether they're veering off track.

As planning is important and the purpose is to get everybody together to talk about the business plans and to translate that into a financial story, what sort of planning might you be doing in a business?

As a CFO and an experienced finance professional, often I sort planning into two main buckets:

1. A short-term plan – based on the next 12 months

2. An annual plan – based on the next 3-5 years

The amount of activity depends on the size of the business. If you’re a bigger business, you’re going to have slightly more room for change and unforeseen circumstances than a smaller business. In some smaller businesses where I've been a CFO, I’ve seen how things fluctuate on almost a daily basis. Worrying about getting your budget forecast completely accurate for the next 12 months is still an important exercise to do, but you need to be flexible.

Larger businesses have got more history and trends to look back on and therefore more confidence. As a larger business, you can afford to be a little bit more detailed, a little bit more serious in how you build that expectation and budget with your team and you can adapt it accordingly throughout the year.

The other type of plan is a slightly longer-term view of what the business is doing and where it's going. Typically, this would be over a three to five-year time horizon. Unlike the short term, in the 12-month budget, you’re looking at understanding where the business is going, and the big strategic brush strokes that the business is making.

You’re also trying to understand the story of the business, its model and development and trying to slate that again into a financial narrative and story. A narrative where you’re not prescribing the absolute detail on a month to month basis.

You’re looking at the general progress you’re making over a five-year time horizon and putting in more milestones as opposed to detailed month by month expectations.

This allows you to have a story in a narrative whereby you have both the short term (more granular information about where you're going, what you’re doing, and assessing expectations on that basis), but also a slightly more detailed near-term plan.

This longer-term picture where both of those financial narratives and story end up, demonstrate how your business is going to be financially healthy and successful over both the short and medium term. If we achieve this visibility in a business, I don't have to sit here and explain to you what’s going to be valuable for a business and increase the chance of success- and that's what we want.

So, we've already talked about the importance of planning, the purpose of planning, and the types of planning that you might undertake in a business. In this session, I want to talk a little bit more about how we start to go about creating a plan.

I like to think about the audience for your plan first.

When you think about the audience, the most common groups of people that are interested in your plan are people such as:

• The team in your business

• The management or leadership team (if you've got one)

• Investors

• Bank or financial institution (if you're looking to update or potentially borrow funds)

• The owners of the business if they're different to the above.

With this audience, you're looking to think about what the needs are for each type of them, what their expectations are in the budget process and to design your budget creation or your plan creation to talk to the needs of those individual stakeholders. You may have just one, which could be the team, or you may have multiple audiences. So, think about all the audiences that you've got and what they are looking to get out of the process.

As an example, a bank will be looking to understand whether the business is going to be in a healthy financial position or not. That's really indicative… an acid test a bank is going to look for.

A team member may be looking for more specific guidance around how they are going to be doing their roles and the sorts of expectations and outputs they're going to be delivering, whether they're in sales or operations. They may be looking for more granular information.

Once you've worked out your audience, it's a good opportunity then to work out who's going to be involved in the budget creation or plan creation process. And by that, I mean who's actually going to be in the room because the start of any good budget or plan, it really starts with a conversation about the business and the plans for the business and what that's going to do.

The role of a CFO is really to help facilitate that conversation and steer it to a point where the CFO and possibly the finance team have got enough information about the plans of the business. As I said, to translate the plans into a financial narrative and story for the business.

My top tip for getting people involved is not just looking internally, but thinking about (given that it's a conversation about the business) who outside the business might you want to invite to that conversation about your plans and activities for the next year?

Don't just look inside the business.

Also, think about who outside the business might bring valuable perspective or input into your plans. When you start that conversation, it's really important to have a relaxed environment where you're talking about the plans and the process for the year. What sort of goals do you want to achieve or the specific things that you want to achieve in the year, specific progress you want to make or a specific kind of output you want the business to get? Start with that in mind.

For example, if you're looking to double your sales in the year as a goal for the business, then you're going to think about things like:

• What do I need to do from a marketing perspective to do that?

• What investments do I need to make in marketing?

• What's that likely to cost?

To support that, I'm probably going to need people. I'm probably going to need some extra operational grunt to be able to do that. I'm going to be making some investment. I'm probably going to need to be buying more things and possibly need more space for the business. I need to think about logistics, tech equipment and any other investments I need in order to be able to do those things.

So, start with a conversation and allow your CFO to facilitate that and turn that into a financial narrative.

The CFO will no doubt be asking for things like assumptions. If that all goes to plan, what assumption could we assume that we're going to achieve in sales, business output or price expectations? Your CFO will be able to go into that narrative to have the conversation and start to set some expectations for the business activity for the year.

During that conversation, you really want to make sure you talk about the heart or essential success ingredients you need in order to get to your goals and your plan for the year and what those look like. The sort of things that you can't do without, the things that are going to enable you to achieve your plans for the year.

Start with the knowns. Start with the things you know about. It's very difficult to predict the future but start with things you know about. Create a list of the unknowns and all the questions that you've got.

If you get stuck in the conversation and you can't answer some of the questions, just stop, park, move on and try to build as much detail in the picture as possible. Don't worry about every little detail. Move on and finish the story.

The CFO's role is to ask questions to clarify, to help and ultimately, as I said before, to translate that conversation about what the business is going to do to reach a financial narrative and plan.

Once that conversation has finished and taken place and the translation has been done, it's a really good opportunity to then come back together as a group and to plan how you're going to communicate that to the business. This might be formal communication or informal communication to the different stakeholders, or it may just be sitting the team down and talking through the goals and the financial outcomes of the year and what you're looking to achieve.

The aim of the communication is to make sure that everybody understands the direction of travel, where things are going, what the expectations are.

Don't stop there. Don't just communicate once at the start of the year for a budget. I see that mistake as a CFO a lot and I think communicate, by all means, let's start with the budget, but make sure you communicate as you go through the journey of the year if you're creating a 12-month budget or over multiple years and how you're sticking to the plan.

Regular communication, short, sharp and punchy is better than communicating once and forgetting about it. That will then allow you to create a meaningful budget based on a meaningful conversation of what the business' plans are for the year. Translate that into a financial story and expectations and ensure everybody understands where the business is going and what the results are to be expected.

So here are my top tips for creating an effective budget.

First of all, with any budget, you need to know where to start. My top tip is to start with a conversation with your team about your plans and your activities you're going to do as a business.

Don't start with the financial numbers, start about the activities that you're going to do and build from there.

The second top tip is don't overcomplicate it, especially if you're a smaller business.

Make sure you're having a conversation about the key activities, your key goals for the year and you're not getting bogged down in too much detail. It's better to have a budget than to have something that takes too much time, and everybody resents doing because it's tedious and laborious and in too much detail for anybody to realistically take care.

My third tip is really budget for the entire year and in the amount of detail you need for your budget to be effective even in your business.

And that really means understanding your budget that's appropriate for your business size, appropriate for your business complexity, and appropriate for the resources and risk that you're in in your business. Your CFO will help to, I guess, give some input on…thoughts on that before they start the budget process, but make sure you get the right time period and the right level of detail for your business.

After that, my next tip is probably around communication.

Just like with any business activity, communicating is absolutely vital. At the start, when you create your budget, make sure you communicate what the budget looks like, the big numbers, the big expectations, and make sure you communicate it to the right people in your business, all the stakeholders, anybody who's going to find value from understanding your financial story for the year. And make sure that you don't just communicate at the start. You communicate throughout your financial year, how you're doing against budget, what things are going right, what things are going off plan, any adjustments that are going to be made.

Constant communication means everybody's got the same information, the same context in the business and that they're able to pull together in the same direction to achieve your goals. Even if inevitably things always don't go to plan, it's much easier to make the team adjust their activities if everybody's on the same page.

My final tip is really that effective budgeting isn't a solo activity.

It isn't something a CFO or a finance team would do on their own. It's really a team event and should be viewed as such. And by that, I mean get the team involved in the conversation around the business activities, get the team involved in the process of creating the budget, get the team involved in reviewing the budget and make sure that the team are together and singing from the same song sheet throughout the year in terms of plans, meeting plans, expectations, changes that need to be made.

If you do all of that, you'll not only have an effective budget, but you'll increase your chances of having business success because success isn't manufactured by luck. Success is built and if you build a good budget, you'll be able to build a good business.

So here are my five top tips for getting the most out of your budget.

You've gone to all the pain of creating a budget. You've had the conversation as well with the team. You've translated the business plans into a financial narrative. So how do you get the most out of that exercise that you've just done?

Well, the first top tip is really to make sure that you regularly review it.

So, you go back, and you look at how did we perform, what did we do against what we thought we were going to do?

I think personally that if you go back and do reviews little and often, it's better than having one or two big reviews throughout the year.

Personally, I like checking in formally every quarter, monthly, having a bit of narrative, how did we do? That could be quite light touch, that could be, you know, leadership cascades, that could be a town hall meeting, that could be a nice email, but certainly, little and often communication throughout the year on how we're doing against the budget or against the plans, what's working well, what's not working so well, what are we changing.

That's all important to keep people interested and to keep people engaged in the budget that you've produced.

My second top tip is be realistic. Be realistic about the expectations of the budget.

Be realistic about the assumptions that have gone in. If you create an unrealistic budget, it creates disengagement with the plans, the numbers, and a sense of we're just now, you know, hoping for the best or it's going to be some random outcome.

So, keep the budget realistic, but also set an expectation that you can't forecast everything. Things are going to change. You're going to have to adapt and change to your environment. So, keep it realistic but also be conscious that things change.

My third tip is around making sure you distribute the detail.

So, when you put a budget together, you're going to have detail in that budget that's going to be relevant to different people in the business. So, if somebody buying raw materials needs to know the target price, the amount of raw materials they need to buy…as an example, somebody in marketing needs to know what activities they're going to undertake, and what channels and what budgets they've got to do those sorts of things.

And make sure everybody who could benefit from knowing the detail that's in the budget has that detail and is clear on it. That may mean that as a CFO, I have to sit down with some of the stakeholders and talk them through what that detail means and also checking on that throughout the year as well.

My fourth tip is to make sure that the budget that you've put together relates back to the business objectives, where you really want to take the business.

A 12-month budget is really just a hop in a five-year longer-term plan and short-term setbacks don't necessarily mean that you can't achieve longer term objectives within your five-year plan. So, make sure you relate back the importance of this 12-month budget perhaps into where we're going overall as a business.

And you might find in that that certain aspects of what you're looking to deliver in the year are more or less important when viewed in the context of where you're going over the next five years and what you want to achieve.

My fifth and final tip is really to make sure that you evaluate and you reevaluate that budget throughout the year.

Look at it in context of seeing how you've achieved against your goals, against your KPIs, against your plan, and ultimately how the story is panning out and make sure that as you go throughout the year, you do that evaluation and you celebrate success as and when you have it.

I'm a big believer that you should celebrate success, and any deviation, you look to address that and look to try to, you know, adjust your plans accordingly.

If you do that, you'll have an absolutely successful year, and everybody wants to have a successful year in business.

Below are a few common misconceptions about creating budgets or plans.

As a CFO, I've heard before that budgets are inefficient, lengthy and tedious to put together. They take too long. They take too much effort. These are common misconceptions in a business.

If a budget or a plan is done well, none of those misconceptions apply.

Ultimately, if a plan or a budget is done well, it can enhance the culture of business by creating a healthy financial awareness, bringing people together under a common goal or umbrella and also provide assistance for people to carry out their roles and tasks. It's perfectly easy to bust that myth if you create a great budget.

Another misconception is that budgets are inflexible and cannot be adapted to fluctuations or changes.

I'd actually flip that on its head and say that a budget or a plan is your best estimate of the likely outcomes of business activity when you set them out.

If things change, it's a perfect opportunity to get around the table with the leadership team and talk about what's changed since you last had a conversation, why it's changed and what, if anything, you're going to do differently.

Don't view it as being inflexible. Perhaps view it as an opportunity to discuss why things are not going the way that you thought they were going to go, what's changed and whether you're going to do anything or pivot as a result.

The third misconception that I hear a lot is that the data is unreliable, or you can't predict the future or it's slightly unrealistic in terms of the budget.

A good budget has a healthy degree of realism in it. It works on the known information and data at the time, but it pulls that information from all the stakeholders and the team in the business. It doesn't just rely on one person to input into that. It's about the collective knowledge of everybody in the team.

There's lots of things you can predict, including:

• What the rent is going to be

• What you're going to get paid next month

• The cost of your goods or services

• The goods and services you are going to be buying

There's a lot of knows in there if you really start to think about it. It doesn't have to be unreliable, unrealistic or hard to put together. There's a lot of known things. You just need to bring those to the fore when you have the conversations about your plans for the budget in the year.

That's a few misconceptions. Hopefully, I've given you something to think about and some impetus to think about creating a budget or a plan for your business.

Let's talk about a few common mistakes when preparing budgets and plans in business.

As a CFO, I see questions like ‘I don't know where to start’ all the time. Where do you start creating a plan? Do we start with sales? Do we start with our costs? Where do we stop? Do we start with our targets, with goals?

I always say start with a conversation about what it is you're trying to do as a business, where is your game, and start from there. Don't get bogged down in which number has to go on the page first.

The second common mistake I see is a lack of collaboration when thinking about the budget or plan.

Collaboration is absolutely key across the business. Make sure that all your business areas are represented to some degree in the budget or planning process. This means you'll take into account more opinions and information and these will be more accurate. Consequentially, when you actually deliver your plan or budget, you'll get more buy-in from the business as a total.

The third common mistake I see a lot is forgetting certain items in the budget, whether it's expenses or certain revenue streams.

It's okay to forget small things. We always do. The approach to minimizing the impact of that is to make sure you have a little pot of items or a little finance pot for unexpected expenditure.

Try to cover the small things with a little bit of an unknown pot and have some flexibility for things you need to spend that you didn't think about throughout the year. Make sure that pot's not too big, otherwise you're defeating the point of having a budget or a plan.

The fourth mistake that I often see when putting together a budget or a plan is that sales expectations, whilst they are coming from the right place, are often unrealistic. I've seen it unrealistically too high and also unrealistically too low.

The impact of having unrealistic sales forecasts means that the rest of the business is to some extent driven. If we think about sales, sales often mean customers and customers mean work. This signals work for everybody from the operations teams, to the people dealing with customers, to the logistics people. Customers mean work.

If we think we're going to have too much work to do and we forecast sales too high or unrealistically high, you’re probably going to gear up your business to have too much resource to service those customers and to do that work, not necessarily something you want to do because you can't change that on a sixpence.

Likewise, if you're too low with your sales forecast, you get the counter problem in that you've sandbagged or gone too low on your sales forecast. You’ve tapped to take work out of the business and therefore you've taken the money out of the budget to enable that work to happen. You may not have the resources available to actually fulfil those orders when they come in.

A healthy dose of realism in the budget is absolutely essential when it comes to sales in order to set the right tone and tempo for the business.

The fifth and final common mistake I see is not using the budget to benchmark against. To have an ‘update’ conversation throughout the year and to reflect on how things have changed.

In business, things change on a daily basis. We all know that. And especially in small businesses, things can change very quickly indeed. It's really important when you put together a budget not to fall into the mistake of putting it in the top drawer or not referencing it throughout the year.

The valuable piece is having the dialogue with yourself and with your team about the things that are changing, why they've changed, what you're going to do about it and how you're going to adjust to it. If you can have an open and honest dialogue with the team, you'll get much better engagement from them around the budget, the plans and what needs to change throughout.

Make sure you do these things when you put together a budget or a plan, avoid the mistakes and you'll be much more successful in your business journey.