Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.
Keeping Your Business On
Track: Power Of The Budget
Pictured at left is Judith Walker,
vice president for finance and administration at Cleary University.
Below is Nicola Rooney, owner of Nicola's Books in the Westgage Shopping Center, Ann Arbor.
By Kate Kellog
Good budget management is the cornerstone of business success, whether the enterprise is the family-owned shoe store or Google Inc. More than just a forecast of receipts and expenditures for the upcoming year, the annual budget gives a financial snapshot of the business. Ideally, it is closely tied to the original business plan and profit goals.
Even - or especially - during years when the budget doesn't look much like the actual numbers, it's an indispensable business tool. Without careful, long-range budget planning, a business can lose track of objectives or fail to adjust them to reality. Just how realistic are your revenue goals? How do they relate to your equipment purchases, hiring practices, production schedule, and marketing plans? How do seasonal business fluctuations affect the sales picture? The budget can help owner/managers answer these questions and manage overall cash flow.
"A budget allows you to perceive problems before they occur and alter your plans to prevent those problems," according to "Budgeting for the Small Business," a publication of the U.S. Small Business Administration.
Below, a couple of local financial wizards offer their views on how to use or not use the annual budget. We also talked to three local business people who share budget strategies they've tailored to their particular business concerns.
It's All about Implementation
Besides projecting income and expenditures, a budget should serve as a reality check and essential part of the business plan, says Judith Walker, vice president for finance and administration at Cleary University. "The budget should fit right into the business's strategic plan and overall long-term goals" she says. "That approach will keep you on track throughout the year and prevent financial surprises. Whether your business is a nonprofit or for-profit organization, the budget should reflect what you hope to achieve and help you measure results against those goals."
A well-constructed budget should enable the business to quickly and easily compare actual reporting to the business plan throughout the year and understand the differences. "That's the real power of a budget," says Scott Price, a director with Wright, Griffin, Davis & Co. PLLC, CPA's. "If you're not achieving the plan's goals, it should help you understand why and what you need to do differently."
Often as not, budgets deliver bad news. That dubious virtue may save your business. "Disparities get you thinking and evaluating," says Price. For instance, suppose your business has budgeted sales to increase by ten percent throughout the year. Five months into that year, not only are you not increasing, but sales are off by four percent from last year. An evaluation might reveal that you lost a major customer or production dipped more than you had anticipated. "There may be nothing you can do in the short run to affect the revenue plan, so you had better go to work on the cost side of the equation to remain profitable," he says.
Price suggests breaking down the budget into 12 monthly increments and timing it out. Allow for cyclical ups and downs as well as fixed costs, such as payroll, rent, and utilities. But even these items are not always constants, Price notes. For example, some companies need extra help during busy seasons. If the business regularly gives employees raises during the last half of the year, that expense should be figured in.
A multiple-year plan is not a bad idea either, says Walker. Rather than just looking at revenue and expenses for a 12-year period, it often helps to plan further out, and then refine the budget as needed for each year. "This type of long-range budgeting hooks up with the business's overall strategic plan," she says.
An accountant's tip: the budget should take the same form as the business's accounting system, says Price. "That facilitates budget-to-actual reporting throughout the year since you've already captured actual and historic data in that format. The data then provides a reference point for building the plan."
QuickBooks is his software accounting program of choice. That, and Peachtree - his distant second choice - have budget-to-actual-reporting features. These packages generate reports of real dollar and percent variances from projections, reflect business cycles, and monitor progress.
As a business grows, the budget tends to become more complicated. When the enterprise has added multiple cost centers and is focusing on generating new revenues, it may be time to seek budgeting advice from a professional, says Price. A business advisor can help the owner develop and understand internal accounting controls to ensure sound financial practices are followed.
A maturing business also may need to expand budgeting to capital areas. As the business grows, so do expenses related to equipment purchases and debt repayment. Or the business plan may call for a big increase in sales that requires more inventory.
"You really need access to working capital to pull such off such a plan," says Price. "History has proven over and over that small businesses overlook this area. They embark on a big plan only to find they have great sales results, but no cash. And payroll is due on Friday."
Businesses that have begun budgeting at this more advanced level should consider looking for working capital through lines of credit, investors, or personal funds. A financial manager can do a working capital analysis and help with cash flow projections. In the end, a budget is nothing more than a plan, emphasize both Walker and Price. Good budgeting demands flexibility. Walker cautions against blindly sticking to the budget regardless of changing circumstances. You may need to make adjustments in order to achieve the organization's goals, she says
And even the best annual budget will not guarantee success unless progress toward the plan is evaluated throughout the year. Says Price, "It's all about implementation and execution."
Accounting for Harry Potter...
One would think that planning a bookstore's budget would be a financial nightmare. Other than a few blockbuster best-sellers, how do you know what books will sell? How do you keep that inventory moving?
The book business is actually quite stable, says Nicola Rooney, owner of Nicola's Books, an independent bookstore on Jackson Road. In general, just three factors have a serious impact on her budget: rent, staff costs, and purchasing. Since the first is out of her control, "it's not worth worrying about," she says.
Using a budget model developed by the American Booksellers Association, Rooney focuses on efficiency of product purchasing and total man-hours per week. She monitors sales daily and produces monthly accounts, which she compares to last year-to date. Any variance is analyzed to determine why sales may be up or down.
Naturally her purchasing decisions are based on expected sales. In any given month, those are remarkably similar from year to year, she says. (If only the Big Three could say that!) She knows that holidays like Valentine's Day and Mother's Day mean more greeting card sales, while November and December are the biggest months for book sales. November usually equals a month-and-a-half of sales, and December is a double month. According to Rooney, "It's an almost completely predictable year,"
Harry Potter, of course, creates a huge glitch in the system. Sales for this July were not nearly as high as those of July, 2005 when the last book of the wildly popular Harry Potter series was released. "That's about the only single book that could make such a big difference in our budget," she says. "Fortunately, you can look back to last year's accounts to understand why this July was so different from last July. Otherwise, you're in for a lot of sleepless nights."
Over her eleven years of ownership, Rooney has learned that staffing is a key budget issue for the store. She schedules "viciously" so as not to have more employees than needed in the store at any one time. Through rigorous training, she has succeeded in trimming work hours. Her staff is now so efficient at shelving, unpacking books, and assisting customers that she can make do with fewer people.
Budgeting for inventory is not as tricky for bookstores as it is for other retail businesses, she says. Booksellers don't have to stock up heavily on their products, other than purchasing calendars a few months before the holiday season. Books cycle quickly through Rooney's store; they can be restocked within two days. And most wholesalers provide refunds for returned stock. In general, the book business is low-margin and low- waste compared with clothes and food.
"We just watch the stock and monitor sales history, rather than try to guess ahead of time what will sell." Rooney says. "Other than a few exceptions like Harry Potter books, I defy anyone to predict what new books will be popular."
An Appetizing Budget Process
The restaurant business, on the other hand, deals with perishable products, among other challenges. Mike Gibbons, co-owner and president of MainStreet Ventures, must be vigilant about budgeting and financial forecasting or risk losing money in a competitive market. MainStreet Ventures now owns six popular restaurants in Ann Arbor as well as several others in Ohio, Florida, and West Virginia.
The budgeting process starts early in October when general and district managers make up the annual business plan for each restaurant. The plans include outlines for marketing and financial goals for the upcoming year. The process generates about a ten-page report which Gibbons, his partner Dennis Serras, and the executive chef review and modify as needed.
In a town overflowing with restaurants, marketing and public relations are important expense items, says Gibbons. Funds must be allocated for his restaurants' wine dinners and other big fundraising events, which can generate $40,000 to $70,000 annually for charities. Such events typically bring in new customers and increase restaurants' exposure. "We've developed a track record to work from but we still have to tweak some of those programs," says Gibbons. "We document their performance and evaluate those efforts that weren't as successful."
Similarly, sales of menu items are documented on a daily basis to determine what sells and what doesn't. That history helps streamline product ordering and prevents waste. Computerized register systems at each restaurant pull sales reports through Oakwood Business Services, which provides accounting services for MainStreet Ventures. From there, the reports are forwarded online to Gibbons.
Along with great food, of course, information technology has been a key to MainStreet Venture's success. It has eased the challenge of financial forecasting within each restaurant's business model. The budgeting process now flows much more smoothly than back in the days when most of the accounting was done by hand.
"Not only has the cost of our accounting services dropped, but I have daily access to sales and profit and loss statements," says Gibbons. "I can sit at my computer and see how many New York strip steaks were ordered at the Chop House today and how many pounds of pasta were consumed at Gratzi."
Banks Need Budgets Too
As one would expect, a bank's budget serves as a critical and ongoing management tool. "It's not just a document we glance at once a month," says Mark Slade, first vice president and CFO for the Bank of Ann Arbor. The ten-year-old community bank will be opening its sixth branch off of Ellsworth Road this month.
Budgets often emit early warning signals that should not be ignored, says Slade. "They tell you when things are going well or badly-whether the ship is likely to stay afloat." But the budget is not an end in itself, he adds. "Remember that those are not real numbers you're looking at. The budget should be used as a yardstick to let you know when things are off track in time to take action."
Using a software program that show's the bank's current book of business, Bank of Ann Arbor starts work on the upcoming year's budget during the third quarter of the current year. The budget reflects managers' expectations for loan growth and deposit growth at each branch. The bank's board of directors approves the budget at their December meeting.
Typically, the bank's two main expenses are interest - the cost of funds - for depositors and staffing. Marketing also has increasingly become an expense item for banks. "You've got to get your name out there," says Sloan. Bank of Ann Arbor's marketing department works closely with the president on setting the annual advertising budget. That is a mini-budget in itself, as well as a line item in the overall budget. The advertising budget is broken down into spending categories that include money spent on billboards, hard copy, and radio advertising.
Lending activity is the bank's most significant source of income, followed by the Trust Department, says Slade. Deposits contribute a much smaller piece to the revenue picture.
As they plan their budgets, bankers must also look at the interest rate environment, says Slade, who keeps a close eye on economic forecasts. "We try to build the economic outlook into our financial planning. The interest rate environment has a significant impact on a bank's bottom line. The better the economy, the higher the demand for loans."