Purpose of Business
There are arguably many reasons why entrepreneurs start companies—provide jobs for others, accomplish a social good, leave their mark on the world—to name a few. No matter the altruistic or wealth-creating motive, all businesses should have as the first and fundamental goal to generate profits. Without profits, the organization cannot continue to function and accomplish the various purposes for which it destined. In previous blog posts in this series, we have explored various ways to increase a company’s competitive position to drive profits, but in this post I want to discuss an absolutely critical process to achieving profits: setting and achieving financial goals—aka budgeting.
Any business owner will confess that the budgeting process is not easy. The path to budgeting is long, grueling and tiring; unfortunately many see it as a necessary evil performed annually in order to satisfy business procedures or loan covenants. But those who have lived a budget either in their personal lives or in their business know that without a budget or “expectation” of how the business will perform, they don’t have anything to shoot for.
“To grow this company to be as big as we can by the end of the year,” is an example of all-to-common goal that is not only a waste of breath but misguided. “Misguided?” You ask? Yes. If the entire goal of the company is to grow, grow, grow, and everyone is focused on top-line revenues only, the company could be hurtling itself toward a brick wall of cashlesness. This is more common than you might think.
Proper financial goals should be prepared with the end in mind—to the keep the company’s profits growing. This may sound simple, but the application of proper cost accounting methods can be quite challenging depending on your company’s product or service. Be very careful in the way that you allocate overhead costs—misrepresented products may be sinking your company’s products, and by inappropriately judging, you may make the incorrect decision to discontinue a profitable product. Consult a financial expert (a cost accountant or outsourced CFO) to help you with a cost and profitability study.
You should round out your goal setting by preparing a detailed budget. With those expectations in mind, you’ll be alarmed (or pleasantly surprised) when your company starts deviating off course. Those are the flags that should trigger action on your part. Corrective actions or