In mid-August, with the Red Sox
languishing 10½
games back of the Yankees, my
young friend Noah sent me an
email: "I bet you that the Sox finish no worse than
5½
games back."
"What would you like to bet?" I e-replied.
"Well, I only have $3.15 and Mom says I shouldn't
spend more
than $1.00 on this." So we settled on a dollar.
At the age of ten, Noah is learning about
budgeting.
His financial advisor (his mom, my oldest daughter)
has
influenced his spending. Mom knows about this stuff
because
for several years she tried to wing it without a
budget and
occasionally discovered that there were more days in
the
month than there was cash.
Many companies discover that the hard way, too.
The
accounting staff is so busy meticulously accounting
for history
that they neglect the future. The CEO on the
other hand,
is concerned about how many weeks of payroll
he/she has in
cash and whether or not the cash can be stretched
to cover the
rent, utilities, and the Amex bill when each is due this
month.
Who's doing the financial planning here?
Who's in
charge of making sure that the economic model is still
working?
Mom has figured it out. She knows
that
Grandma used to have a bunch of glass jars in the
kitchen
cabinet into which she'd apportion each paycheck
— so
much for the mortgage, so much for groceries, for dry
cleaning, for gas, etc. When the car's transmission
gave out,
she knew that she had to siphon funds from each of
the jars to
pay for it, and she knew which jars had discretionary
money to
make it possible. These days, Mom relies on Quicken,
but the
basics haven't changed.
The best companies operate the same way.
Their
revenue projections are based on their most recent
history, not
on an illusion of an imminent increase in income to
offset
increasing expenses. What they spend is
determined by a
solid understanding of their costs — not
only their
employees' salaries, but the related SUTA, FUTA,
workers'
comp., and benefits package for each individual. Not
only the
rent, but the utilities and the real estate tax bill. Not
only the
trade show registration fee, but the cost of shipping
and setting
up the booth.
Most of your expense levels for next year have
already
been established this year. You know what your
materials
costs per unit are. You know how much the product
brochures
cost. You know what the auditor's fee was for the
year-end
work. Each of those and 20–30–40
other
categories is a separate jar. Start out by
describing what's
in each jar (account), then determine what it cost
you this year
(see the general ledger detail), then modify it by
what you
know is going to happen next year.
Do the same thing for your income. List all of
your
customers by total annual revenue for the past three
years.
Consider each in turn — trending up,
down, or
sideways? Why? Do you want a different overall
result next
year? How will each of these revenue sources, and
others,
help you achieve it?
Budgeting isn't hard, but it takes discipline and
persistence.
It's a trial-and-error process that thrives on the
feedback
loop of monthly variance analysis: why did you have
money
left in that jar last month, even as you ran out of it
in this one?
What's the implication for next month, and for
the next
twelve months? How do you reposition your bets,
based on the
latest information?
Noah knew. Three weeks after our first exchange,
the Sox
were 2½ games back. Another email. "Let's
go double
or nothing on beating the Yankees." He's only in
fourth grade, I
thought. He must have gotten a new financial
advisor —
his older brother.
Andrew, who knows what it is to
be a Sox
fan, is sucking him in. Budget or not, another Howe
generation
is destined to learn the hard way about the Red Sox.
