To budget or not to budget, that is the question

Budgeting is a “win-win” strategy that could be financially rewarding to all.

Why budget? What is the purpose of this exercise? Who really benefits from this document? Is it really worth all that time and effort to plan for the upcoming year? The 2022 planning season is already upon us. Let’s explore this important topic in detail.

Dealer groups are getting bigger and the number of key decision-makers in these organizations is increasing.

Gone are the days of a single dealer principal making all the strategic decisions. There is a hierarchy now. General managers, directors, vice presidents and presidents for almost any department you can imagine—fixed operations, marketing, accounting, business development. You need a whiteboard to keep track of organizational structure these days.

As you can imagine, it is very difficult to get all the key players in a room and agree on an action plan.

The single biggest benefit of the budget season is that it forces communication. Leaders need to talk to each other, meet, coordinate, and think about what they want to accomplish next year. They need to agree and walk away holding themselves accountable for what’s to come.

This accountability will drive results. It squeezes the creative juices from their brain and forces leaders to find ways to generate sales, improve the customer experience, and build employee morale. All this within the constraints of a profitable financial model. It’s tough—I know. But it’s important.

Having a budget in place improves decision-making. You can become more effective and efficient with the daily decisions you are forced to make. Even better is that it provides a baseline for making major capital decisions. The thought process is easy—if we’ve budgeted for it, do it. If not, justify why we need to do it. Simple, yet flexible.

The truth is that the budget is just a rough plan. The key is monitoring your actual results against it. The budgeting process facilitates the monitoring process. It provides a natural feedback loop: you define your goals, build detailed financial models to meet them, construct variance reports, and deep dive on missed opportunities.

Predicting cash receipts and disbursements is key to an organization’s success.

Overall, you want to understand what works and avoid costly mistakes. It really is a great way to manage your business.

An organization’s budget is also used to gauge managerial performance. It’s an objective way to judge who is performing well and who is not. Modern organizations have incorporated a “budget achievement” component into pay plans. If you hit the budget, you get paid. If not, you must rely on your modest salary. It’s a sort of “win-win” strategy.

Now-a-days the payout for achieving a target can be big too, sometimes up to 100 per cent of the salary amount so there is an inherent motivation to exceed the plan. This helps dealerships grow, groups to expand, and the industry to hit all-time sales levels.

Working capital management is a key success factor in our industry. Budgets are often required to obtain financing. Lenders need you to provide a payback plan before they provide you with capital. That makes sense, right? That means organizations not only need to build a sales, advertising and personal budget, they must also create a cash flow budget.

Predicting cash receipts and disbursements is key to an organization’s success. You need to know if you will have enough money to pay back vendors, pay employees, or acquire a new business. Successful dealer groups do this often, sometimes daily. Cash is king—so budget it!

To make the budgeting process effective you must plan for it. Set time lines and hold people accountable. It’s a collective process and everyone has a part to play. Avoid pitfalls by keeping paperwork to a minimum and try to make the process fun. Think about using new technologies—there seems to be a new tool every year and some of them are inexpensive and very easy to use.

The end result is more than just a document, it’s a game plan. A plan for success and growth. A “win-win” strategy that could be financially rewarding to all. Senior management must lead the way, but everyone must be involved.

Be committed to the success of the organization. Preparing a budget is important. Having one in place every year makes the probability of your success better. Isn’t that the point of business anyway?

Give yourself a better chance to win the game.

Happy budgeting!

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