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Do You Want To Make Your Annual Budget More Effective

Oct 04, 2010

Do You Want to Make Your Annual Budget More Effective? 

Think SWOT and 10 Level

It’s that time of year again!  It’s time to start thinking about 2011.  Are you one of those people who cringe at the thought of the annual business planning process?  Love it or hate it, this process is a key ingredient for success.  I’d like to suggest two tools that might make your annual planning process more effective:

1.    Start with a S.W.O.T. Analysis

2.    End with a 10 Level Analysis

S.W.O.T. Analysis

All good annual plans start with some derivation of a S.W.O.T. Analysis.  What is a S.W.O.T. analysis?  It is simply a brainstorming and prioritizing of your company’s Strengths, Weaknesses, Opportunities, and Threats.  Let’s take a look at these more closely:

Strengths consist of all of the things your company does best.  Some people call these your core competencies.  These might be the things that give you a competitive advantage in your market or industry.  For a consumer products company it might be how you manage your brands.  For a manufacturer it might be your outstanding quality.  For a service organization it might be your long established relationships.  I once worked for a company whose strength was its management philosophy and corporate culture that fostered and nurtured autonomy and decisiveness in its operations.  The resulting strength was great responsiveness to the customer.  Whatever it is that your company does best, write it down.  The goal of listing out your strengths is to identify your core competencies so that your plan for next year will include strategies on how to leverage your strengths to grow sales and market share.

Weaknesses include all of the things you don’t do well.  We all know what they are.  It may be an antiquated ERP system.  It may be a manager in over his/her head.  It may be persistent quality issues.  It may be lack of robust processes.  It may be untimely and inaccurate financial statements.  Other common weaknesses include poor customer service, out of control spending, poor vendor quality, poor internal communication, etc.  The goal of listing out your weaknesses is to identify the behaviors and events that inhibit your firm’s success so that your plan for next year will include strategies to eliminate or reduce these weaknesses in order to improve the effectiveness and results of your business.

Opportunities include all of the changes that you foresee taking place in your market or industry that will result in potential new business for your company.  These could be internally generated opportunities (like new products, or new technologies) or externally generated opportunities (like new markets for existing products, or new customers).  The point of identifying opportunities is to hone in on where your firm has growth potential and thereby identify areas of the business to dedicate resources in order to capitalize on that potential growth.  This could mean hiring more people, or investing in capital equipment, or investing in research and development.

Threats relate to all of those things, internal and external, that can hinder your success or disrupt your business model.  Examples of threats could include things like a potential work stoppage if your union contract expires next year, new competitors entering your market, new disruptive technology introduced by a competitor (like the iPad or iPhone), changes in governmental regulations that could increase operating costs (like environmental or tax law impacts), or expected price increases for raw materials (like oil or steel).  The goal of identifying threats is to make sure your plan for next year is aware of these potential threats and you’ve included measures to minimize the negative impact these things could have on your business and strategic direction.

So, before you “crunch the numbers”, make sure you go through your S.W.O.T. Analysis.  Going through this thought process will make your numbers more meaningful and will dramatically increase your chances of success next year.

Let’s assume now that you’ve done your SWOT Analysis and crunched your numbers and have in front of you a monthly P&L, Balance Sheet, and Cash Flow projection for 2011.  Congratulations!  You are now 2/3 of the way completed.  You may be asking yourself, “Why am I not done?  I’ve done the strategic planning and crunched the numbers.  What else is there?”  If you’ve missed something in your S.W.O.T. or other changes occur in the marketplace that you could not have possibly seen at the time of your annual budget, I’d like to suggest that you also do an analysis that gives you a roadmap to change your plan on the fly.  That analysis is called a 10 Level.

10 Level Analysis is a tool that can be used with the annual budget to identify adjustments that need to take place if your sales volumes differ significantly from plan.  This analysis looks like your budgeted annual income statement with 11 columns.  The sixth column contains your budgeted numbers for the year.  The five columns to the left of the budget column reflect your annual P&L at volume levels below budget in 10% decrements (-10%, -20%, -30%, -40% and -50%).  In similar fashion, the five columns to the right of the budget column are your annual P&L at volumes higher than budget in 10% increments (+10%, +20%, +30%, +40%, +50%).  It is extremely important to point out that this is not merely a mathematical exercise.  The key to this tool is to identify your required adjustments (both up and down) to variable expenses for each 10% increment or decrement to sales.  That means quantifying changes to staffing and spending, if applicable, for each 10% change in volume.  In addition, if you are so fortunate to be in a situation next year where volumes are trending significantly higher than budget (in the +40% to +50% range), then you may also need to identify at what increments you will need to invest in capital equipment as those volumes may exceed your current open capacity.  The end result of this 10 Level Analysis is that you have an action plan and road map for revisions to your annual plan when you have significant changes in your volume assumptions.  You know what to do with staffing, you know what to do with variable spending, and you know what to do with equipment and capacity for each 10% change to your budgeted annual volumes.

To summarize:

1.    To make your annual budget more meaningful, start with a well-thought out S.W.O.T. Analysis.

2.    Include the top priorities from your S.W.O.T. in the building of your annual budget.

3.    Once you have your annual budget completed, build a 10 Level Analysis to identify spending and staffing cuts required for each 10% decrement to budgeted volumes as well as spending and hiring increases for each 10% increment in annual volumes.

4.    The S.W.O.T. ensures your annual budget is in alignment with your strategic priorities and the 10 Level gives you the road map of when to make corrections to your plan and how much to adjust at each 10% change in volume.

 So, if you want to make your annual budget more meaningful, I’ve got two thoughts – S.W.O.T. and 10 Level.  Good Luck!

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