It’s the time of year when we think of what we could have done better last year and how we are going to fix it in 2015. One of the items that we often overlook as a smaller business is the budgeting and planning process. Generally, I have run into two objections to the process. One being that the idea that “I don’t have time to deal with writing down a budget since I know what I do and it would not be something I would find useful,” and the other that the business never performs as expected and it would be a waste of time putting a plan together.
I guess Yogi Berra’s comment is an appropriate response; “If you don’t know where you are going, you might end up someplace else.” More important than that however, is the fact that without clear goals, in writing and reviewed routinely, it is tough to achieve what you want. The process also allows you an initial reality check of your assumptions for the year.
Most important of all, the budget process and review of results against that budget, establishes a blue print of the business for potential investors and lenders that the business may desire at some point. Investors wish to know that the business is performing as expected, or that variations are identified and managed in order to assess all the factors that make this business one of which they would wish to own a piece.
Lenders are in another situation. When assessing a loan, they have two choices; either depend on the expected cash flow of the business entirely for repayment or have security that protects the lender from unanticipated events. That security can take the form of company assets or personal guarantees. If the company has business plans and budgets put together and consistently performs against those plans, the lender has some assurance that the company will continue to perform as planned in the future and is more apt to lend money with business assets as collateral, or even unsecured after a relationship period. If there is no such plan, the lender would be much more likely to require personal guarantees secured by personal assets.
Something to think about as your company grows and when putting exit strategies together.
Have a great 2015!!