Photo Courtesy Stuart Pllbrow

As we saw in a prior post, Budget problems abound.  Our Government budgets are in deficit, many personal budgets are in deficit, is it any surprise that our business budgets may need some attention too?

Budgets involve much more than a once-a-year commitment. For real value, you have to review it every month. Now that we have a couple of months of data to look at, let’s go over how you might do that!

First, let’s look at where  you hit (guessed right) and where  you missed (guessed wrong)? The difference between what you budgeted and your actual results are known as “variances”. Run your finger down your Income Statement and look at what categories had the highest “variances”. (Better yet create a budget report with budget in one column, and actual in the next column, then subtract Budget from Actual, the result is a variance column.) What happened here? Sometimes it’s just timing, an item that only occurs once or twice a year and it showed up all in one month, but you budgeted a little each month. Other times you will find places where your spending is just a lot higher (or lower) than you thought it would be. Why is that? What changed? You need to think about changes you want to make to get back in line with your budget.

Next let’s look at the important numbers. Are your sales over or under budget? Again, why? Did you get more leads than you predicted? Is that going to continue, or was it due to some kind of one-time event (trade show or promotion)? Are you closing them at about the rate you expected? Is your average sale higher or lower than you thought?

If your sales are under your budget, then you need to make sure that your expenses are under budget too in order to protect your profits. Do you need to reduce expenses to align them with your sales performance? This is always a judgment call. How do you decide that it’s time to make cuts, or more sales are right around the corner? Evaluating your budget and results monthly forces you to look at the data and decide. If month after month you are behind, it’s time to make some cuts.

Now that you’ve reviewed your major categories, let’s look at other assumptions. Are you thinking about hiring new people? Are the sales there to support new hires (or leads to support a new sales hire)? Thinking about more office space, or investing in new equipment? What are the key indicators that tell you that those investments are needed? Are you hitting those numbers consistently? Then invest with confidence.

If you are consistently looking at your numbers, and really looking at why they are better or worse than your projections, you create a frame for any decision in you business. It can even set your priorities. If sales are behind, you need to address that. If they are ahead, but profit’s not, then expenses are out of control… You get the idea.

Your budget provides you a measuring post by which you can compare your actual results and decide how you are doing. It also provides you with a tool to play “what if” and decide if you like the results.

What numbers do you look at that tell you how your business is doing?

Washington Post graph of Federal Deficit as a percentage of GDP

We are surrounded by budget crises these days. There’s the City of Chicago, the Chicago Transit Authority, the State of Illinois, and of course, the Federal Government. Hearing about these financial crises can be discouraging to business owners. Is this the new “normal,” where it’s ok for expenditures exceed revenues?

If it were “normal” for businesses to consistently spend more than they made, they wouldn’t be in business for very long. With that in mind, is there any advice you can offer our elected officials on how they can balance their budgets? Let us know what tactics you would take if you were in charge of balancing a governmental budget.

I’m often quick to criticize an ad campaign that makes no sense, or that treats it’s customers poorly; so when I heard the new DEXONE  commercials I had to take a minute to praise a well thought through campaign.

Dex is a well known publisher of yellow page directories, a business that has been getting hammered in the last few years as a larger and larger percentage of small business ad budgets have switched from yellow pages to online. How does Dex respond?

First, they repositioned themselves. Their new ads don’t present them as directory publishers, they are “marketing consultants” helping small business people to sort through the wide variety of options that they face in trying to reach their prospects. No one wants to talk to a yellow page salesperson, but everyone wants help with their marketing!

Second, instead of fighting against the Internet as a marketing channel they have adopted it as a product that they are selling. Now I’m not making any comment on the how good their product is, but their ads position them as experts that can help the small business owner “get found on the web” something that most small businesses need a lot of help with.

The thing that makes the ads most compelling to me are how they put the prospect, the small business owner, at the center of the ad. Dex really listened to what the small business owner is thinking and feeling and by expressing that in their ads, they gain instant relevance with their target demographic.

Is there some part of your offering that is becoming a commodity? How can you do a better job listening to your customer, speak in their language and attract more prospects?

Leaders are readers, or so the saying goes.  I frequently get asked what books I would recommend to improve the skills of founders of creative service firms. These are my typical recommendations.

E-Myth is the classic work on running a small business.  Michael Gerber has some crucial insights about how to structure and organize your small businesses to so that you can run your business instead of having it run you.  If you feel like the whole business depends on you, and you can’t get your employees to take responsibility this book has the answers.

Jim Collins is my #1 most favorite business author.  Built to Last & Good to Great are must read books for every leader in business.  I think that Built to Last is the best of his books, it’s clear and actionable, and holds terrific insights into how you can create an enduring great company. There’s also a great monograph, Good to Great for Non-Profits, highly recommended after you’ve read the books themselves.

David Maister is the unchallenged guru of professional service firm management.  As with Jim Collins it’s hard to pick favorites, but I find clients are most often impacted by the business development lessons in The Trusted Advisor.  True Professionalism can be a terrific book to take younger professionals through to help them to orient themselves to what the job of a “professional” is.  Managing the Professional Services Firm is a more advanced work, more applicable for larger firms, but with lots of meaty lessons. These books are must reads for my team members.

Vern Harnish’s The Rockefeller Habits, has a great structure for how to run a business well. He has the best system for reporting and a meeting rhythm to keep all the parts of your business connected and well fed with information.  It’s short, but packed with practical information.

Lastly, Crucial Conversations by Patterson et al is a terrific book about how to have conversations when the stakes are high. So many of our conversations with employees, partners, prospects and clients get emotionally charged.  Each person is bringing in their own story about what’s happening and what should happen.  This book can help you to keep a clear head and communicate effectively even when others can’t.

Lastly, there are a number of Harvard Business Review articles that have been as useful and powerful to me as any book, Who’s Got the Monkey for managing tasks with your subordinates, Manage Your Energy, Not Your Time is important work for keeping you fueled, and energized for the long haul.

This is quite a reading list, and of course it’s not exhaustive, just my favorites.  What books, articles or Web sites keep you up to date and growing?

Did you know that fear makes you stupid? Fear is perhaps the most powerful stupid drug that the human body has ever felt.  When we are afraid our reasoning and thinking is disabled by our body and instead we are thinking with our brainstem, basically reacting to reflexes instead of acting.

You know who lives with a lot of fear everyday? Business owners. I know, I’ve seen it in their eyes and heard it in their voices.  They are afraid of all that is out of their control.  Customers and clients, employees and partners, the government regulators and tax collectors, lenders, investors; there are so many forces that bear down on a business owner it’s easily overwhelming.

If these fears aren’t enough, there is one fear that almost every business owner I’ve ever talked to has that is bigger than all the rest.  We all feel like frauds, like we were lucky to get this far.  Yes, we worked hard, yes we are smart, but really… Someone’s going to find out that I don’t have a license for this, that I’m not trained for this, that I can’t do this and they are going to take it all away.

It’s true.  Almost every business owner I’ve ever talked too is secretly afraid that they are doing it all wrong, that they are screwing everything up.  That they are making big mistakes, that they will never recover from.

What makes it worse is that the people around the business owner most likely look up to them for their risk taking ability, for their courage and strength at taking on new challenges.  No one sees the fear that’s inside. So it stays there, inside.

But it is there and it’s making you stupid. What does that worry do for you? Does it motivate you, or hold you back?  Does it make you too cautious, or too reckless?

You have worked hard, you are smart enough, and experienced enough.  How do I know? No one is that lucky.  If you have gotten this far, you have what it takes.  I know that you could have made some better decisions along the way, and you could have done more at times.  But think about your employees, do you think that they make mistakes sometimes?  How much does that bother them?  Are they losing sleep over those mistakes? So they are making mistakes and sleeping well and you are making mistakes and not sleeping?

What’s the difference between their mistakes and yours?  When they don’t know something, or make a mistake, they can get help.  Their boss (or you) might bail them out, or show them a different way to do it.  But if you own your business, who do you ask?

Find someone who can help you out.  Don’t go it alone. We are pack animals, find a tribe who can point you in the right direction. Who is excited when you succeed, and disappointed when you fail?  Who knows all the risks you have taken?

Because there is one thing that fear will never get you, in fact that fear will keep you from ever achieving.

Peace.

Something is shifting and I think it’s just the current incarnation of the shift that’s been in progress for a long time, but it’s getting faster, and spreading wider.

9 years ago when I started Anchor Advisors, Ltd. I noticed how easy it has become to start a business.  You go to VistaPrint and choose a business card, find a template for a Web site that looks good with the card you choose and you are in business. Total cost, 10 hours of my time, $0.  The friction, or barriers to entry for creating credible collateral were very low.  Once the business got going, I eventually designed a card, and got a professional Web site, but why invest the money until you know it’s a going concern?  The production value of the templated solutions was “good enough” to get started with, and it took no time or money to execute.

Then came Blogs, and YouTube, then Facebook and now Twitter.  More and more of what we read and look at is created by amateurs.  The production value of most of the blogs that I read is low, they are produced by their owners with little or no help from “professionals”.  The production quality of the most popular videos on the Internet is basic.  We don’t have our blog posts edited by professional writers, we don’t have our tweets crafted by a copywriter.  More and more creative content is being made in some form of DIY manner.

And the tools to do that are expanding as well; the Flip camera makes video easy to shoot and even edit.  You can edit your photos using online tools without even buying expensive photo editing software.  OK, nothing makes writing easier, good writing is still hard, but at least Twitter has forced us to keep it short!

Phil Johnson posted an article on the AdAge Small Agency blog about this trend and how it’s forced him to create a whole new department in his agency that’s focused on lower budget, quicker turnaround, higher volume content to feed social media.

Is this the erosion of the creative class?  Have creatives lost their place as the crafters of communication and design?  No, there will always be a need for elegance, effective design and well written copy.  However, there is also a tolerance, even an appreciation for the unproduced, unvarnished, amateur production as well.  Lowering the bar has resulted in an explosion of content being created, and much of it is DIY.

The really excellent design is going to be reserved for only those projects with large impact and budget.  Company identities for successful going concerns, packaging for consumer products, annual reports, etc. will always deserve the value of a professional design.  It might even be valued more as it “stands out” from the crowd of amateur produced stuff we look at all day.

But there is also going to be more and more content created by amateurs, and the are going to want their stuff to look and sound good.  Teaching basic design and writing principals to the masses represents a huge opportunity.  Creating tools to enable easy, high quality DIY content is another.

It’s a brave new world and I don’t think the trend is going backwards any time soon.

How do you see this trend impacting your business?

Photo Courtesy of Leonardo Pallotta

RESOLVE.  Strong in the face of uncertainty, forceful in doing good work in turbulent times, unflinching in making the changes needed to thrive in the environment we find ourselves in. Bart Clevland chose it as his word for 2009 (see his post on the AdAge Small Agency Blog) but I’m thinking about it for 2010.

We need the type of resolve that Bart saw in 2009, but in 2010 I also think we need RE-Solve. If we look in the dictionary we find that resolve means “making an earnest decision”, but it also means “convert or transform”, “separate into constituent or elementary parts”, and ” deal with conclusively”.  It’s in these contexts that we need resolve in 2010.   We need to conclusively deal with issues in our business.  We need to convert and transform our business by breaking it down into component parts, parts that we thought were solid,  and rethinking and re-engineering them.

Most of us are running businesses with some success, we have survived the turbulent “first few years”, we have found processes and ways of working that achieved some success, but in 2010 we may need to re-solve some of the problems that we thought we have put behind us.

We knew how to attract and close business in 2008, but we may need to sharpen that message, improve our positioning and really target a specific issue/problem, or demographics/psychographic to stand out from the crowd.  We may even need to reconfigure our whole service offering to take us out of the mob of competition and into new markets or services.

We knew how to manage our people in 2008, but we have cut their salaries, given no bonuses (and for some no raises), their healthcare costs more and we need them to achieve results more than ever before.  Now is the time to increase transparency, give your team members access to information and processes that they have never seen.  Engage their best thinking not just in producing good work, but in producing a great environment within the constraints that we have.

We knew what our role was in 2008, but now we see CEO’s drastically shifting their roles (one example).  This is a time when leadership is at a premium, can you lead your team through this?  When you need to be the chief rain-maker and create an environment of engagement, transparency, and trust; it’s a lot to ask; but its got to be done.

2010 is bringing change, like every year before it, and it’s time for a clean slate.  Time to start fresh and RE-solve some of the basics.  It was fun the first time, I’m sure it will be fun again (and again)!

An employee receives a nice bonus for successfully completing a long and difficult assignment, but the next day decides to leave the company.  How could this happen?  Peter Bergman tells the story in his HBR blog, and in doing so he talks about a point that I’ve been speaking about all year.  Compensation is not about meeting the economic needs of your people, it’s about recognition.

When Janice makes more than Maurice you are saying that Janice is contributing more value to your organization than Maurice is.   You are saying that Janice has more status, more influence; you appreciate her more.  We all want to be valuable and recognized for the contributions that we make, everybody wants their work to mean something.  The most powerful tool that we have to communicate that value and meaning is through compensation.

But pay alone doesn’t make most people feel valuable.  Robust compensation is an indicator, or a result of having done valuable work.  We must give people regular feedback to  communicate the value that people bring to the organization.  This means everything from regular performance reviews to sending thank you notes.  It can be regular one-to-one meetings where you strategize and plan together, or inclusion in “management team meetings”.  It means being free with both praise and constructive feedback, letting your team members hear all the feedback that you get from clients and partners.

Most of us want our employees to bring more than just their head and hands to work, we are putting our heart and soul into our business and we want team members who are in that with us.  To get that kind of engagement we need to be proactive and think about how we can meet their needs for meaningful work, connection and recognition.

Too often, business owners who want to see an increase in sales think that saying “Get more sales!” to their sales team will make it happen. But, “Get more sales!” doesn’t provide team members with clear instructions on just how they are expected to get more sales. In fact, saying “Get more sales!” paralyzes many people. Sure, most salespeople will agree with you, many will work hard to do more of what they are doing, which yields some results, but few will be able to break that request down and really analyze what “Get more sales!” means.

Further, what things can the team do to get more sales?  Can we entertain more, or should we advertise more?  How much is more?  And what we really need to get more sales is some more sales people…

So “Get more sales!” can mean a lot of different things.  If, when you say, “Get more sales!” you mean you want more new customers; your sales team should be prospecting. If you mean you want to get more orders from the customers you already have, then your sales team will have to manage their accounts more closely. If you mean you want to get more dollars from each sale you make, then … well, you see the point. “Get more sales” doesn’t really articulate what you need specifically.

What does a budget have to do with this? Everything. Business owners who go through a solid, bottom-up budgeting process usually engage in discussions that can provide more specific direction to their team instead of “Get more sales!” So, if the answer is “Get more customers!” the next questions are, “How do we change our process so we can get more customers? Are we going to qualify harder and throw prospects out earlier in the sales process? Are we going to add bandwidth to the sales staff (by taking away non-sales activity, or by adding salespeople)? How much improvement can we expect, and will that add 5%, or 20% to the sales?

These detailed concrete discussions never happen if you don’t sit down and put real numbers into a budget.

Something else magical happens in this process. As the team members engage in these discussions and become part of the decision-making process, they start to become more committed to the outcome. Instead of strategies and goals set “from above,” these are goals and strategies that they choose! Now you can hold them accountable to these goals. The budget is no longer a goal to shoot for (with no consequences if it’s missed) but a baseline that, if missed, will disappoint everyone if it’s not reached. When this is the case, you can set up bonuses such that missing the budget means you don’t pay bonuses. Meeting the budget means your team is doing their job; you can only pay a bonus if the team exceeded what was laid out.

Once you do a budget, you will see that what was once drudgery and an exercise in lying and surprises can turn into a process where you can gain understanding of what drives your business. From there, you can create clear and concrete plans and targets that empower each member of your team to work together to improve performance. Isn’t that well worth your time?

What is going to happen in 2010?  After the topsy turvy ride we’ve all been on for the last 18 months everyone wants to know what’s going to happen next year, and the truth is, it’s anybody’s guess. This uncertainty and risk can be very unsettling for a business owner.  But there is something that we can do about it.  Create a budget.

OK, some of you just spit your coffee at the screen as you laughed out loud, but I’m not kidding.  A budget is a tool that you can use to hold meaningful discussions with your team about what the next year could look like.  I’m not talking about a budget where we take last year’s numbers and say, “We’re going to grow 20%” and scale everything up and move on, no I’m talking about a bottom up budget, starting with each line on the income statement, and identifying what we are going to do differently next year that is going to change this number.  Then creating a plan that reflects those changes and showing everyone how succeeding or failing at these initiatives affects the results.

That’s right I said “we”. It’s crucial that you have this discussion with your whole management team, your key leaders who can move the needle for the business.  As a team, you need to have shared assumptions, agreeing together what the most likely scenario is for next year, and what options do you have if that scenario doesn’t occur.  They need to know how their efforts can change the results for the company, how they can save a little on expenses and keep the company in the black, how 2 additional customers can drive substantial improvements to the bottom line.  That kind of stuff.

Yes, it may mean that you have to have a discussion about why the owner gets to keep the profits; but that’s a healthy conversation to have.  It might lead you to want to create a performance based compensation plan; good, that’s a step in the right direction.  It also may mean talking about what happens if we lose money next year; which is also a healthy discussion to have.

You are in the lifeboat with these people; you hired them because they are smart, and effective.  Use the budgeting process to engage the best ideas from the whole team to deal with the uncertainty and risk that you are facing.  It will make you feel a lot better, and you may gain some new insights and ideas that could make a big difference.