I’ve not met a business manager with a crystal ball. With the exception of public company managers who provide so-called “earnings guidance,” most of us are humble enough to recognize the difficulty — if not the futility — of predicting our financial results. However, in spite of the difficulty, there’s inherent value in using management tools like budgets, forecasts, and projections. These tools let us know how we’re doing and where we’re going.
Benefits of Using These Tools
How we’re doing. Comparing our actual results to our budget gives us a benchmark to measure our performance. If we’re doing well, we can pat ourselves on the back. If not, we can make adjustments to get better.
Where we’re going. A forecast tells us where we’ll end up if things stay the same. A projection tells us where we’ll end up if we make changes to our current situation.
If we use these tools monthly, we can make timely adjustments to maximize performance. But the value of these tools is more dramatically demonstrated by what happens when we don’t use them properly.
Pitfalls of Not Using These Tools
Insufficient attention. It’s apparent that many business managers don’t see the value of these tools, and they will operate without budgets or forecasts. Management will do its best to gauge whether things are going well or poorly based on periodic financial statements. But unless they’re measuring against a benchmark, how will they know?
Untimely measurement. In many organizations, it may be so difficult to know whether things are going well or poorly that management may simply defer judgment until the end of the year. But if your trend line is negative, wouldn’t you rather make adjustments now rather than later?
Uncertainty. It will permeate an organization and destroy both morale and productivity. Fear rules the day, and everyone feels unstable in their job. Often, the best and brightest will leave for greener, less stressful pastures.
I’ve been dieting for the past several months, and I’ve learned that consistent measurement of my progress is most effective. If I weigh myself once a week, I am often disappointed. As an example, after a week of consistent exercise and eating well, I’ll be up two pounds when I thought I should be down two. With only weekly weigh-ins, it may take me several weeks to get a sense of my trend line. But if I weigh myself daily, I can see my trend line over the course of a week. In the words of author Ken Blanchard, “Feedback is the breakfast of champions.”
Business requires adjustments. And it requires consistent feedback and early warning systems like budgets, forecasts, and projections to know which adjustments to make. You don’t even need a crystal ball!
Dan Weiss, founder and President of Counterpart CFO, leads a team of flexible, part-time CFOs specializing in nonprofits. To read more from Dan, follow him on LinkedIn or subscribe to his blog at www.counterpartCFO.com.