October was the month when our CFO, Doug, would be making his rounds with all of the leaders in our business to begin to forecast their income and expenses for the upcoming year.
The best run, long-term sustainable family businesses know that having an annual budget “process” is an important step on the road to “professionalizing the firm.”
Some family members wonder, “Why do we need to go through a process like that? That is one of the advantages of being privately held – that we don’t have to answer to a Board or Investors…”
Here are my top 6 reasons your family business needs a budget.
1. Makes financial discipline a core part of the culture
Creating and maintaining a budget is a foundational piece of financial discipline. Sure, most family founders were frugal and financially focused, but as future generations come into the business it’s easy for them to fall into the mindset of “we’re very successful and no longer need to “pinch pennies.”
2. A budget sets up a culture of accountability
Setting a budget is one thing, but perhaps even more important is learning to “hit your numbers” and deliver results based upon what you forecasted. When there is strong financial accountability it naturally leads to accountability in so many other ways in the business.
3. Helps you learn the details of your business
As your business grows it’s easier to become a bit blind to all of the expenses that go into the business. Every year when we did our budget it made me realize and investigate why some of those expense areas had grown. It made me reevaluate or renegotiate some of our vendor relationships. It helped me question some of my manager’s activities.
4. Create a road map for growth and reinvestment
When we would sit down and forecast our revenue, it would force us to think about the other resources we would need (manpower, trucks, warehousing) to deliver the results. The budget process would help us plan for capital improvements and added headcount. Seeing the numbers helped us think about where we were going to get the money for those important purchases.
5. Creates a process for incentive compensation
My grandfather, Richard Walsh, instituted both departmental and company-wide profit sharing plans in the 1940’s. He wanted everyone to better understand the finances of the company and give them a good reason to watch the numbers and share in the success. The staff could earn up to 15% of their base pay on a monthly basis if everyone helped get the deliveries done on time and without damage (cost of employee damage came right out of the bonus pool).
6. Builds structure for consistency and long-term excellence
The budget process can be a bit awkward and even annoying the first time or two you do it, but over time can become a great process to build consistency in your financial results. Sometimes a budget shows you might be heading toward a downturn. The budget process helps you prepare for some of the hard decisions sooner rather than later.
Having a sound budgeting process is a sound business best practice! Start this year!
Pete Walsh is a demanding, courageous and playful Master Coach in Phoenix, Arizona. He is the founder of Peak Workout Business Coaching and the Family Business Performance Center. He can be reached at firstname.lastname@example.org.