Category Archives: Budgets

Achievement, Alignment, Budgets, Sales

Budgets and Quotas

It seems to me that too many times I have heard the words “budget” and “quota” used interchangeably. I don’t know why, but this really concerns me. Perhaps I am over reacting. It doesn’t seem to bother others. At least if it does, they aren’t showing it. Perhaps it is just my recent dealing with budget-oriented groups that are acting like quota-oriented groups that is making me more sensitive to this phenomenon. In any event, I’ll do a little comparing and contrasting of budgets and quotas and see what the rest of you think.

First, let’s put a couple of definitions out there. It is always good for everyone to start from the same baseline. First off, do not Google “budget”. You will get far more than you ever wanted to know about some care rental company. But, as you might guess, let’s start with:

Budget

Budgeting for a business is a process of expressing a detailed quantification of resource requirements (capital, material or people) that are expected for given time period in future. Budgeting can be done for any person, business, government or anything that makes and spends money. Restricting in this definition to financial results for business firms we can explain budgeting as process of preparing a detailed statement of financial results that are expected in the future period of time.

https://www.mbaskool.com/business-concepts/finance-accounting-economics-terms/8632-budgeting.html

As you can see it primarily deals with the amount of money (or resources) needed or available for a purpose in a future period of time. This means it is a definition of how much you can spend on, or the expense for something. Let’s keep this “spending” idea in mind when we talk further about budgets.

Now we will move on to quotas. Hopefully this one will be a little more straight forward.

Quota

Sales Quota is the sales goal or figure set for a product line, company division or sales representative. It helps the managers to define and stimulate sales effort. Sales quota is the minimum sales goal for a set time span. Sales Quota can be individual, or group based e.g. for a business unit or a team.

https://www.mbaskool.com/business-concepts/marketing-and-strategy-terms/1919-sales-quota.html

Again, we have a financial goal for a future or set amount of time. Only this time it is focused on sales (orders and revenue) as income to the business, not the expenses of the business.

Now admittedly there are other definitions for both budget and quota, but these are also for utilizations of the terms for applications far outside the normal business usage. When you start discussing immigration, college acceptance and items such as those the line can become somewhat murkier. However, we will not go there, or anywhere near there today.

So here we have what I consider the crux of the issue. Budgets are associated with expenses for a set period of time and quotas are associated with sales for a period of time. This seems like a pretty simple set of definitions and differences. So why are people using them interchangeably?

I think some of my confusion may stem from the observation regarding “which side of the fence” people are speaking from. The example I will use here involves the government and everybody’s favorite topic, taxes.

For the longest time taxes were just that, taxes. Taxes were the amount that citizens paid the government. Taxes went up. Taxes went down. Periodically there was an attempt at tax reform when things go too complicated and it appeared that special interest groups were getting away with too much. By and large we all paid taxes.

But somewhere along the line this changed. From the government’s point of view (their side of the fence) taxes started to be referred to as “revenue”. Since taxes were, in the truest definition, the income that the government received, it did not seem like such a stretch or leap to go there. Soon the statement was no longer that the government was going to raise taxes (which was sure to irritate all citizens), they were going to raise revenue.

This is a much more palatable statement. Raising revenue. Everybody wants to raise revenue. Why should the government be any different? They should want to raise revenue too. The only slight difference might be that there is not another government around competing for our tax dollars. They can just vote themselves more revenue.

What doesn’t change is that from the citizen’s point of view, taxes are always an expense. Something that is paid. So, while it sounds more acceptable to raise government revenues, we need to remember that it is always raising the citizen’s expense.

This same governmental evolution occurred (in the US) when the Department of War thought it best to change its name to the Department of Defense, but that might be a discussion for a later date.

In business it appears that a similar evolution is occurring. In the past those organizations that had to live and work within budgets were called “cost centers”. They were associated with costs and expenditures. As such they were occasionally subject to reductions as most companies seemed to think that reducing costs was always a good idea.

It only goes to assume that these cost centers started to realize that the business’s expense budget was their revenue. This quantity was how much money was going to come into their piece of the business.

This was a master stroke.

No one ever wants to cut a revenue. They will cut, hack, chop and slash budgets all day long, but they will steadfastly refuse to cut a revenue.

I also think that some of the issue stems from business’s drive to remove as much overhead, or indirect cost from the business as is possible. There are essentially two way to do this. One is to actually reduce the number of resources associated with these indirect functions. The other is to try and translate these indirect cost functions into direct cost functions.

Below is a refresher on the difference between direct and indirect costs:

“The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects.

A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities (which are considered period costs).

Examples of direct costs are direct labor, direct materials, commissions, piece rate wages, and manufacturing supplies. Examples of indirect costs are production supervision salaries, quality control costs, insurance, and depreciation.

Direct costs tend to be variable costs, while indirect costs are more likely to be either fixed costs or period costs.”

https://www.accountingtools.com/articles/the-difference-between-direct-costs-and-indirect-costs.html

The idea here is that when everything is associated with direct costs, everything is now directly associated with the sale and the generation of revenue. When that happens, almost all of those cost justifications for those groups now get aligned with sales and more importantly sales quotas. Now all budgets for those groups are supposedly aligned with sales, which in turn are aligned with, you guessed it, quotas.

And everybody likes to achieve their quotas.

In this way what were once cost centers have now aligned themselves with the sales function. Likewise, budgets which were once limits that were not to be exceeded became quotas that were to be achieved. This is a subtle but important difference.

Beating a budget meant that you came in with an expense that was lower than the budget. Success was reducing expenses below the targeted level. Efficiency and cost reduction were key targets. In short, the costs associated with the process were separated from the sales and prices associated with the process.

By now aligning everything with the sales and revenue process, costs now in effect do become quotas.

If sales do not achieve its quota, well then obviously costs will not be affected as they have a set cost quota. As long as they are on target for their quota of costs, they are achieving their goal, regardless of what the overall profitability of the process appears to be. This engenders a strange situation.

These cost groups are now of the opinion that as long as there is cost “quota” left to spend, they have the right to continue to spend it, regardless of sales performance. It in effect becomes the sales function’s responsibility to bring sales back into alignment with the sales quotas, instead of the cost function’s responsibility to bring cost “quotas” back into alignment with the sales function’s performance.

Costs “quotas” are really nothing more than verbal sophistry.

As business continues to look for ways to improve, some of the age-old axioms still do apply. Its always a good thing to achieve or exceed sales quotas. Cost budgets are an upper limit. It is always a good thing to “come in under budget” and return unused budgets back to the business in the form of bottom line profits. And, if you hear someone claiming that they are on target to achieve their cost quota, either they are not trying hard enough, or their cost “quota” needs to be reduced.

Analysis, Budgets, Business, Conflict Management, Finances, Management, Metrics, Performance, Process Management, Time

Time Cards

Time cards have been a symbol of manufacturing productive efficiency for years. I think we have all seen images of production and manufacturing associates dutifully standing in line to “punch in” at their appointed shift on the time clock. It seemed to be a marvelous mechanism to maintain, measure and direct those resources associated with production, in the most efficient manner. It is where the phrase “on the clock” originated. You came in and they started paying you when you “clocked in” and they stopped paying you when you “clocked out”. It was efficient.

By the way, the “Time Clock” that has become so universal when talking about clocking in and clocking out, first made its appearance on the business scene in the late nineteenth century.

” An early and influential time clock, sometimes described as the first, was invented on November 20, 1888, by Willard Le Grand Bundy, a jeweler in Auburn, New York. His patent of 1890 speaks of mechanical time recorders for workers in terms that suggest that earlier recorders already existed, but Bundy’s had various improvements; for example, each worker had his own key. A year later his brother, Harlow Bundy, organized the Bundy Manufacturing Company, and began mass-producing time clocks.” https://en.wikipedia.org/wiki/Time_clock

There then arose the dichotomy in business where there were those that were “paid by the hour” (those on the clock), or waged employees, and those that were paid a set amount per period of time, or salaried employees. Waged employees were referred to as Non-Exempt and Salaried employees were referred to as Exempt. These definitions were laid down in 1938 by the Fair Labor Standards Act.  https://www.investopedia.com/terms/e/exempt-employee.asp

Below is a brief comparison of the differences between the two:

So, why am I talking about one hundred and thirty year old inventions (Time Clocks) and eighty year old employee definitions (Fair Labor Standards Act)?

The reason is pretty simple. As the production and standardization processes that have been used in manufacturing have found their ways into the other disciplines and aspects of business, so has the cost tracking and charging of those resources responsible for doing the manufacturing.

We are now asking our exempt employees to fill out time cards associated with the work they are doing. This in and of itself is probably not a bad thing, however it engenders a new and different behavior in the exempt employee. It is this new “Time Card” behavior in exempt employees that can a detrimental effect on the business.

For lack of a better definition, exempt employees are paid by the “job” as opposed to by the “hour”. If an exempt employee must work late hours and weekends to complete their assignment, they do not get paid any more. They do however get the satisfaction of knowing the completed their task, regardless of how long it took them.

The idea of having exempt / salaried employees track their time, was to better associate costs directly with specific projects or activities. This association gave rise to the exempt employees who could directly associate their activities with specific items or revenue producing functions, and those that could not associate their work with specific items. Those that could be directly associated with specific products, projects and functions were called “Direct” labor, and those that could not be directly associated were called “Indirect” labor.

“The essential difference between direct costs and indirect costs is that only direct costs can be traced to specific cost objects. A cost object is something for which a cost is compiled, such as a product, service, customer, project, or activity. These costs are usually only classified as direct or indirect costs if they are for production activities, not for administrative activities (which are considered period costs).

The concept is critical when determining the cost of a specific product or activity, since direct costs are always used to compile the cost of something, while indirect costs may not be assigned to such a cost analysis. It can be too difficult to derive a cost-effective methodology for the assignment of indirect costs; the result is that many of these costs are considered part of corporate overhead or production overhead, which will exist even if a specific product is not created or an activity does not occur.” https://www.accountingtools.com/articles/the-difference-between-direct-costs-and-indirect-costs.html

The following as a good way to think about this. I promise I will get to my point about Time Cards and why this is important soon.

So, all of this work associated with slicing and dicing the time that salaried employees spend on their various activities is being done to understand what portion of their work can be directly associated with a cost object (Direct) and what portion cannot (Indirect). Why is this important anyway? It’s pretty simple.

All businesses want to reduce, minimize and otherwise exit overhead or indirect costs from the business equation.

Every business has the objective of reducing indirect costs, otherwise known as “Overhead”. As noted, these are the costs that cannot be directly associated with revenue production.

So, when Exempt, salaried employees are asked to fill out time cards, and they have multiple options, both “Direct” and “Indirect” to associate their time with, which are they going to choose? Knowing the corporate desire to minimize, reduce and exit Indirect and overhead costs from the business, they will naturally migrate their time charging to “Direct” functions and charges.

On the surface this might seem like a wonderful way for companies to reduce overhead, and in some instances, it will work. However, if you have the financial responsibility for one of these cost objects, you will want to be able to closely monitor the number of people and the amount they can charge to your cost object. This monitoring, or policing activity and capability again creates an incremental overhead.

It is essentially a transference of the overhead responsibility from the labor pool owner (of salaried, exempt employees), to the Cost Object owner.

Labor pool owners are always going to try and minimize the amount of their labor that is not directly associated with a revenue producing cost object. They will want to show the preponderance of their time, as reported by time cards, as being directly associated with a revenue producing function. Engineering groups, development groups, support groups and just about every other group will begin to display this behavior once time cards are utilized in this fashion.

The fear for them is that if they show too much time spent on overhead functions, they will be subject to a cost reduction activity in an effort to reduce overhead.

The results of this “Time Card” behavior are manifold:

  • With the pressure to be associated with, and charge to only Direct costs, the direct costs associated with specific cost objects can become inflated by excessive charging. Since direct costs are “above the line” in accounting and margin terms, this could result in inflated and non-competitive prices.
  • There will now be a somewhat adversarial relationship in place between those groups wanting to charge directly to cost objects, and those groups that are responsible for maintaining those cost object budgets, and the corporate inefficiencies and friction that this creates. There is also the non-productive time that will be spent challenging, changing and rectifying those charges as they come in.
  • There is non-productive time, effort and cost for increasingly capable corporate tools to maintain, monitor and control this type of charging effort. How do you control who should and should not charge to a cost object?

Time cards, like process can be a good thing. But like process, they should not be viewed as a replacement for judgement. When you move costs associated with time cards from indirect labor to direct labor, it may solve a corporate desire to reduce perceived overhead and indirect labor expenses, but it also creates several new issues and expenses associated with monitoring and controlling those charges. Due to how costs are accounted for in direct versus overhead items, it can also change both the cost profiles, margins and ultimately pricing profiles in the market.

Time cards in the salaried or exempt employee environment can and will change behaviors. Labor resource groups will increase their focus on having cost objects to charge to as opposed to understanding that there is to be expected a certain amount of slack time that they will have. Instead of the labor resource pool manager managing this slack level, time cards in essence transfer this issue to the cost object owners to try and control and manage.

Time cards for salaried and exempt employees can provide a better level of visibility into how time is spent and what employees are working on. It does however carry with it what is known as “The Observer Effect”.

I always try to sneak a little physics into any discussion.

“Observer effect (physics) In physics, the observer effect is the theory that simply observing a situation or phenomenon necessarily changes that phenomenon. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner.”    https://en.wikipedia.org/wiki/Observer_effect_(physics)

As long as business is aware of how behaviors are changed, and what may need to be done to compensate for these changes, there can be value in them. However, without those considerations they can create an entire new set of issues for a business to deal with, and may result in little to no efficiency gains.

Alternatives, Budgets, Competition, Finances, Sales, Solutions

For the Money

“One for the money, two for the show, three to get ready, and four—-to—-go—-!”

In case you are wondering, the earliest attribution for this phrase that I could find is in the children’s book, “Striking for the Right” By Julia Arabella Eastman, in 1872.

Some of you however may be more familiar with the 1955 variation that Carl Perkins included in his song “Blue Suede Shoes’:

“Well, it’s one for the money,
Two for the show,
Three to get ready,
Now go, cat, go.”

I think Elvis did it better than Carl, but that really isn’t relevant to today’s discussion.

In either case, as you might guess, my focus here is going to be on “for the money” as I think we may have lost track of this part of the phrase, particularly as it relates to sales.

A phrase that is generally thought of as a countdown to the start of a children’s race or contest, is becoming more and more germane to the increasingly high-pressure contest of business to business sales. However, in many instances it appears that organizations are skipping the first line of the phrase and focusing on the second, third and fourth lines. Now usually to some form of hardship.

As we go through what might be described as tectonic shifts in the business, capital and sales markets and processes, brought on by the evolution of the cloud, the Internet of Things (IoT), and the multiplicity of other technological discontinuities they have engendered, “for the money” is probably going to take on an increasingly important role, particularly in the sales process. It is probably time to start steering away from the age old, tired sales phrases associated with focusing on quality, or value, or any other direction from a past time.

We have all been aware of “Moore’s Law”, which in its simplest iteration generally states that new products arrive with essentially double the previous product’s capacities every eighteen to twenty-four months. What this postulate also infers is that products can be expected to become obsolete every two years as well. This is now an important concept since previous views of product life expectancies were once much longer.

The difference now is that as new capabilities and applications are developed, they are more and more dependent on the latest generation of technology for their functionalities.

As an example: What would you pay for a car today, if you expected that in two years it would not be able to efficiently run on, or possibly even be able to access the new highways that are being built? What would you pay for that car if in two years it would not be capable of allowing you to drive to all the new destinations that would be available then?

Would it change your car buying patterns? Probably.
Would it change how much you would be willing to spend on a car, knowing that your time horizon for needing to purchase the next new car – which would then allow to run on the new highways and go to the new destinations – was going to be so short? I think so as well.

Such is the situation for just about every company and organization when it comes to their information technology needs.

Eureka. This sounds like every vendor’s paradise. Knowing that your customer is going to have to buy a new product every two years. What could be better?

I guess the first thing would be to make sure that all capabilities and applications that are developed are equally applicable across all customers.

Uh oh. That doesn’t seem to be the case since different companies need and demand different capabilities. And since vendors do not have infinite resources to develop all possible applications and capabilities in parallel, we cannot expect a continued alignment of applications, capabilities and the platforms required to run them.

And since customers do not have infinite capital to be able to afford each and every application, capability and platform as they come out, we return the new catch phrase, “for the money”.

Customers do not want the best solution.

I know this sounds like heresy but this has been proven time and time again. They want the best solution – for the money. They do not want the best service. They want the best service – for the money. Value and quality are good, but they are table stakes, not differentiators. And make no mistake about it, since the product life cycles and associated obsolescence are now so short, there is corresponding less money for each customer to spend on each purchase iteration. With the reduction in customer capital available to purchase each new product iteration the question is no longer how much functionality can a customer afford, but what is good enough to serve their purposes for now.

Whether it is said or not, it should be implied that every sentence used in communications between the vendor and customer, should end with the phrase “for the money”.

With this concept in mind it becomes a little easier to understand the changing landscapes for sales in the business to business world. Buying new higher capacity platforms in anticipation of being prepared for future applications or capabilities probably will no longer occur. The fear of platform obsolescence before the capabilities are available, along with new constrictions on purchase funds will probably preclude that.

Future capabilities will be purchased in the future, when they have been developed and can demonstrate immediate (not future) value to the customer.

Because of the direct relationship between purchase capital and product capability, reliability, capacity, speed, etc., all those factors have become negotiable as “for the money” comes into play. Communications networks that had essentially one hundred percent reliability and twenty-year life expectancies are being superseded by far less reliable but faster terrestrial and more convenient but equally less reliable wireless networks. They are good enough, at a far lower cost.

Personal computers and laptops that used to cost thousands of dollars are now costing a couple hundred dollars and are expected to be outdated, and disposable within two years. They are not repaired, they are replaced, at a far lower cost.

I have said that if customers are not buying it is probably because the sales team has not generated the appropriate business case for that customer’s business to justify the purchase. Immediate expenditures will require immediate value generation to offset them.

For the money is emerging as the prime parameter associated with this same customer business case sales process. Customers are recognizing that the lowest common denominator functionalities are what are required for their business. By way of example, Sprint seems to have fully embraced this approach to wireless services in that they are openly touting that they are “within one percent of the coverage / reliability” of their competitors, but only half the cost.

Their catch phrase is: “Why would you pay twice as much for only one percent more?”

We had all better take note of this approach to the market. In case you are wondering, Sprint grew more than any of its competitors in the last quarter. (https://www.cnet.com/news/even-sprint-topped-at-t-verizon-in-customer-growth/). And this is after several previous poor quarter performances.

In the article, it is noted:
“…Sprint with a campaign that essentially boils down to this: We’re good enough for your business. The company’s commercials play up its half-off plans versus the competition (the rates go up after two years) and a mere 1 percent difference between the quality of its network and that of Verizon.”

The key comment for me is “…good enough for your business.” I think this approach is becoming the new norm. Being the best is great, but being good enough, for half the price, is probably going to be better. It seems to be resonating with the market as they continue to attract new customers.

There will always be exceptions to every norm. There will be those customers that truly want the elevated capabilities, and will be willing to pay for them. There are those that want luxury cars as their form of transportation, when there are almost any number of less expensive models that will deliver the same functionality at a far lower cost. Most companies, like most of us, do not have the luxury of preferring luxury.

They are moving more and more toward the Sprint model that good enough, at half the price, is better than the best at double the cost. As budgets continue to constrict, for both consumers and companies, the comparison of what is wanted versus what is good enough for the money, will continue to change the landscape for sales. It is probably time for many businesses to change their sales model to focus on what is good enough for the money.

Alignment, Analysis, Budgets, Finances, Information, Simplification

What is a “Plug”?

For some reason, I have been reading and thinking about forecasting for the last little while. One of the words that seems to be popping up more and more frequently in the business literature with respect to forecasting is the word “plug”. I have actually heard this word in past forecasting meetings that I have attended. I thought I might delve in a level deeper than just understanding forecasting, and look into one of the more favored words in the forecasting vernacular: “plug”.

Plug is an interesting word. The dictionary defines it as both a noun (a thing) and a verb (an action). I’ve also talked about words like this before. You used to go to a party, and now you can also go and party. I think that plug is a much earlier iteration of this particular phenomena. Usually a word is used as either a noun or a verb. I am not so sure that this is the case with the word plug when it comes to its business usage. I think that when you hear the word “plug” in business, it is both a thing and an action at the same time.

As a noun plug can usually mean either:

“an obstruction blocking a hole, pipe, etc.” or “a device for making an electrical connection, especially between an appliance and a power supply…”.

As a verb Plug can usually mean either:

“block or fill in (a hole or cavity)” or “mention (a product, event, or establishment) publicly in order to promote it.”

For now, I think I’ll ignore the appliance power cord and product promotion definitions for obvious reasons, and focus on the other two.

As the ends of various months, quarters, and years come into view, forecasting takes on a role of increased importance. Depending on the business performance, as these end of period times roll around forecasting can take on both a greater frequency and intensity, especially if the numbers are not in management’s desired range. As I have noted, forecasting is essentially the comparing of what you think the numbers are going to be with what you want the numbers to be.

I have also noted the “volumetric force” associated with forecasts. This is the management drive and desire for all forecasts to be either at or exceeding the desired targets. This desire to respond to or please management has a tendency to render forecasts possibly slightly more optimistic than what they might normally be, so that management can smile. But what do you do when the forecast obviously does not meet the desired levels?

You insert what is called a plug into the forecast.

You find a way to provide the management desired levels in the forecast numbers. You forecast the performance that is defined, and then you add in an amount equal to the difference between the goal and the defined forecast, which is undefined. This undefined amount is known as the “plug”.

You are in effect using the verb definition of the word “plug” as a noun. You are essentially filling a hole (a verb) in the forecast with a plug (a thing). It is normally the noun function that is turned into a verb, but here we have the verb function that is turned into a noun.

I guess it is a little thing (a very little thing) but it amuses me, so I have included it.

I have also noted in the past that if a forecast is knowingly presented to management, and it does not at least meet the desired targets, that whoever submits such a lacking forecast could be subject to a significant amount of incremental management attention and assistance. As I also noted this attention and assistance will usually continue until the forecast realigns with the desired targets.

The quicker the plug is inserted into the forecast; the faster management can feel better about the forecast.

I think this may somehow be related to the genesis of the saying “The beatings will continue until morale improves.” This quote is attributed to Captain Bligh, or the HMS Bounty, when told of the forecast associated with how the crew felt about reaching Pitcairn’s Island. It is also apparently quite applicable to a multitude of other management groups.

Plugs were developed in forecasts as a way to create a real and accurate forecast (that potentially does not meet management expectations), yet also provide an acknowledgement of the expectations of management in order to avoid the incremental assistance of management. Plugs are the as yet unidentified portion of a forecast, that will (hopefully) be defined in the future, and will result in the meeting of the desired targets.

This results in the equation:

Actual Forecast + Unidentified Forecast (Plug) = Presented Forecast

Plugs are an acknowledgement that the actual forecast doesn’t meet the desired levels, but the miss to forecast has been identified and is being worked, so that extra management reviews of the forecast (or beatings, as the case may be) are not going to be necessary.

On the surface, this type of forecasting technique sounds great. The actual forecast can be presented to management, as well as the desired number that management wants to see. They get both reality and what they want.

However, if you are going to use the Plug Gambit in a forecast, you need to understand that it is a double-edged sword, and it has a limited shelf life. It is a double-edged sword in that a forecast is being presented to management that is in essence telling them that their desired number is going to be achieved. If it is not, then there will be significant, and now merited management attention visited upon those that delivered such a faulty forecast.

The plug in a forecast also has a limited shelf life in that it is expected to reduce as time passes, and the measurement period draws to a close. An example is that a plug in a forecast during the first month of a three-month quarter might be acceptable. However, the same plug in the third month of a quarter should definitely garner incremental management attention.

So, there you have it. A plug is an artifice, inserted into a forecast in order to avoid (at least temporarily) unwanted incremental management attention associated with the forecast. It is an identified amount, but from an unidentified source. It can be sales to unidentified customers, or cost reduction from unidentified actions.

Once a plug has been inserted into a forecast, it is almost impossible to improve the level of the forecast. This is because as new opportunities are identified, they reduce the amount of the plug, as opposed to actually improving the forecast.

With this in mind, it is my understanding that the latest management approach to limiting the use of plugs in forecast is to in fact request and drive for improvements to any forecast that does contain a plug. This has the effect of requiring double the desired growth as the plug must first be filled before the forecast can be increased. This move by management will no doubt engender some as yet unknown, new methodology for forecasting, as the ongoing escalation associated with business forecasting continues.

This is very similar to the idea that the fastest cheetahs only caught the slowest gazelles. This natural selection meant that only the fastest gazelles (and cheetahs) survived. The ongoing evolutionary race is forecasted to continue going forward on the African Savannah.

However, I think it is pretty obvious that in this example, gazelles do not get to insert plugs into their speed forecast.

Accountability, Alternatives, Budgets, Decisions, Finances, Leadership

Growth Industry

I think it is safe to say that most everyone is looking for their next career opportunity. What do they do next? Where do they go next? What is the next step in their career progression? When I have been asked in the past what someone’s next career step might ought to be I have invariably said that everyone should spend some time in sales, and that everyone should do whatever they can to be able to understand the business numbers.

I am not going to back away from that comment. Good leadership needs to understand what it takes (and just how difficult it is) to generate a top line. No matter what everyone who has not been in sales may think, I have found that it is just not that easy to get someone to give you their money, regardless of how good the product or service is that you are selling. (Apple products don’t count here. I truly believe that customer set has been brain washed.) Even so, I think we have all been in situations where management has predicated all of their well scripted strategies for sales growth, regardless of product, business or market conditions, only to miss those growth targets and then try to deal with the business consequences.

I also stand by the assertion that numbers, and derivation of such numbers (or in some cases the divination of said numbers) is required for business and organizational operation. I have cited several quotes on numbers in the past. Robert Heinlein said “If it can’t be expressed in numbers it is opinion not science.” Mark Twain said “There are lies, damn lies, and then there are statistics.” A leader’s long term (and short term) success will be based on their ability to understand and communicate what the business’ numbers are, and why they are what they are.

What I think I am now going to add to these two suggested experiential requirement sets is that leadership needs to spend some time in what my experience has proven to be the only consistent growth industry that I have seen across all industries, markets and businesses: Cost Reduction.

In business there are many things that can (hopefully) be influenced in business performance, but very few things that can truly be controlled. Businesses can try and influence the market to perceive them differently. They can employ various media and advertizing to try and create a progressive image in the market for their goods and services. They are in essence trying to convince the market of their particular product or service advantages and benefits.

Whether or not the market accepts, agrees or is influenced by this positioning is outside the direct control of the business. The business will always try and craft its market message in the most beneficial light possible, but it is the market which gets to decide which parts if any in the message and value proposition are accepted. Entire industries of analysts and consultants have grown up around this market value proposition analysis in efforts to try and actually decipher the facts associated with these messages.

Whether individual customers accept or agree with the proposed business value proposition is also somewhat outside the control of the business. The business can employ dedicated sales staffs and teams to tailor the message specifically to each customer as well as work to identify the value of the solution to that customer. This provides greater input and positioning for the business, but yet again it is the customer that ultimately controls the relative success of the business proposition. They get to say “yes” or “no” to the proposition.

The point here is that a business can do absolutely everything right in the dissemination of its message to the market and its pursuit of the ever elusive customer order, and still fail, sometimes for reasons that are entirely outside the control of the business. They can work and influence and sell in every way imaginable and still not get the order, or enjoy the top line growth they have planned for and need.

Herein lays the rub.

Senior management doesn’t really care about that. A plan has been made and the numbers have been committed. Those numbers have been combined with the overall organization’s other business’s numbers and an total organizational plan has been committed to the corporate leadership. You don’t get to easily miss your financial commitments to the organization.

Where do you think all those ideas for those colorful punishments on your favorite Game of Thrones or Walking Dead television shows came from? Exactly, people who missed their planned or forecasted targets.

While it may be generally frowned upon by senior management to miss the top line plans and forecasts for growth, it is wholly unacceptable and more than likely to be a punishable offense to miss the business profitability and earnings commitments. Herein lies the squeeze: While the top line may not be achieving the required heights, the profitability and earnings commitments to the organization cannot be reduced proportionately, if at all.

The only solution is to cost reduce.

I don’t want to make it sound as if cost reduction is only something to be taken on in times of business stress or top line under performance. It may have once been that way, although I cannot remember it. Suffice it to say in today’s day and age that for a healthy business cost reduction is both a growth business and a never ending process. If you are not doing it now, you had better get started because it will probably be necessary sooner rather than later.

It is well known that the sooner you can make adjustments of any kind in a business year, the less drastic the adjustments need to be. If you can recognize in month two that there is an issue, you have ten months to correct. If the issue is not recognized until month seven, you only have five months to correct, and now the correction must be twice as large.

What I mean here is that if there is a one million dollar short fall in the earnings commitment / forecast and it is recognized in February, you can correct spending (costs) to the tune of one hundred thousand dollars a month. If the same one million dollar issue is recognized in July, you will need to reduce costs by two hundred thousand dollars a month to recoup the same million dollar correction.

Remember that. The later you wait, the more drastic the cost reduction action will have to be. Plan early, act early. Hoping things that are not fully within your control (sales) will improve usually results in much more painful activities associated with those things that you can in fact control – costs.

There are all kinds of costs associated with a business, not just people costs. Here is where knowing the numbers thing comes into play. What are these costs? How do you control or reduce them? And, almost more importantly, how long will it take to implement the changes associated with reducing them?

We have probably all seen these knee-jerk cost reduction actions:

Travel bans – which basically just limited the people who should be traveling and not so much reducing the number of people who shouldn’t have been traveling in the first place. Travel is not a light switch with only the “On” and “Off” positions.

Hiring Freezes – that really aren’t freezes because there will always be the need for the flow of the life blood of new talent that every organization requires.

I have even seen the removal of coffee and other amenities from the corporate break rooms. I don’t know how much was saved, but it did succeed in generating a significant number of grumpy people.

There are any number of other “cost reductions” of these types, but they are for the most part superficial. They do not address the specific issue that the business’s basic cost structure does not match its revenue and hence earnings positions. True cost reduction comes from addressing the long term and fixed costs associated with a business. Can fixed assets be reduced? If so, how and how long till they are affected? Is there outsourcing or off shoring that may be needed? Not everyone can be the best at everything, so looking for external help may be a potential solution. Are there allocations or other programs that need to be reviewed? The list goes on, but the costs must be dug out, isolated and analyzed before action can or should be taken.

This activity will serve to teach the leader, or would be leader what the costs are, in human terms or otherwise, associated with cost reduction. Changing the course or the costs associated with a business is much more fundamental than just freezing travel or hiring. It is also much more invasive. It’s not easy. You have to challenge yourself, your team and your business to change, and that is never easy. No preconceptions regarding business costs should be exempt. All costs should be questioned. When addressing cost reduction, remember what Sun Tzu said about war (as in this case they will be somewhat similar):

“The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected.”

So is the art of cost reduction.

Budgets

Budgets

Leave a comment


Everybody lives on a budget. Well almost everybody. It seems the US congress hasn’t needed a budget for the last few years so they haven’t bothered to create one. I guess that comes from the fact that if they need more money they can just trot down to the treasury and print some more. They also have the added benefit that if they spend more than they actually have no one seems to mind.  Aside from that one glaring exception we all must live within our means, and that means we have a budget.



The same principle should apply to business. Organizations should have goals, and for the most part these goals need to be quantitative. In case you are missing the link here, goals and budgets should be closely related.



Budgets are great management tools in that they provide goals, but they are goals that have a certain amount of variability based on business levels and directions. They provide both statistical as well as real number targets for leaders to manage to. This enables the business leader to have some leeway and variability of the budget goals based on the overall business performance. It allows them to make business decisions and to manage.




Warren Buffet, who is widely thought of as one of the wisest and most capable business men around, has also come out in favor of budgets, specifically with respect to the aforementioned members of congress. His approach to having congress set and operate within budget, and like the rest of us live within it was simple. He said:




“…pass a law that says that anytime there is a deficit of more than 3% of GDP all sitting members of congress are ineligible for reelection.”




He was saying that the US government budget would be linked to the GDP measurement and must be within three percent of it. I like the sentiment, but the only problem with this solution is that those that would be measured and or limited by the budget, are also those that would have to “pass a law” requiring it. Past experience does not indicate there is a willingness within the congress for this type of behavior.



Regardless of that, the budget approach is correct. If there is a good economy and GDP rises, then there is more money for congress to spend. If there is a poor economy and GDP stays flat or worse, falls, then there is not as much money to spend. And just like a business that sees its revenues fall, cuts in its spending must occur.




Lets again look at what has become one of my favorite discussion topics in business: travel. I have traveled a lot for business in the past, and don’t particularly relish the thought of future business travel, but I absolutely agree that some travel is required for successful business to be conducted. There is no substitute for face to face contact, either with customers or with other members of the business unit. I also understand that travel costs money and there is a finite amount of cost that any business can bear and still be both viable and profitable.



All business groups or functions should have a travel budget. It should be expressed both in real dollar terms, and as a percentage of revenue terms. If times are good and the business is growing it should be expected that revenue will be growing and there will be more customers to visit and that the actual amount spent on travel may be more that the real dollar target, but it can still be in line with (but hopefully less than) the statistical percentage of revenue. The idea here is that you don’t want to limit your revenue growth because you decided to limit your travel to a fixed dollar level.




Just as in tougher business times you would not want your travel expense to meet the dollar level set in the budget when revenues fell short of their projected levels. This would cause travel to increase as a proportion of revenue to a statistically unacceptable level of revenue. This would adversely affect the business’ profitability. If the overall business levels are reasonably accurate, then both the fixed level and statistical level targets can be used as measurements.



Rewards can be provided for achieving budget goals and penalties or reduced rewards assessed for not achieving them. This logic can then be applied across the entire business against almost all cost categories as well as most revenue structures. If the business has time sensitive aspects then the amount of time that is budgeted per project or event can be used in the same manner. If the business is service oriented as opposed to product oriented then the number of labor hours, or the number of employees associated with conducting the desired level of business can be budgeted.



Good leaders will understand the various trade-offs that will come into play with the various goals and budgets that they have to attain and work with. Leaders that consistently work within their overall budget constraints, either real dollar, statistical or both depending on prevailing business conditions and the accuracy of the initial conditions, should be rewarded both monetarily as well as with increased responsibilities over time as they have demonstrated good stewardship of the business. Those that don’t demonstrate these traits should not expect these types of rewards.




I stated “over time” as a criteria as there will always be a stochastic or unpredictable aspect associated with business. That means that sometimes you can and will do everything right regarding your budgets and objective, but there will be unexpected events outside of your control such as disruptions in supply chains, natural disasters, changes to commerce laws, etc. that will preclude you from being successful.




It happens.




It doesn’t happen all the time though. Many of the issues can be predicted and de-risked. Those leaders that can predict and prepare for these unforeseen events will minimize their affects, continue to be able to perform, and progress. Those that can’t handle these types of events will need to learn the requisite skills if they wish to continue to advance.




Senior management cannot and should not try to both set objectives and then dictate how the business leaders are to achieve these goals or operate within these budgets. It usually neither works nor enables the next generation of senior leaders to grow into their future roles. One size does not fit all and differing leaders will have differing approaches to solving their specific problems.




Setting both goals and budgets enables leaders to understand what is expected both on an overall basis as well as on an individual or specific budget basis. It also enables those leaders to make decisions regarding tradeoffs within the specific budget structures as to enable the attainment of the overall organization’s goal. A rigorous reward structure with BOTH positive reinforcements and negative consequences needs to be in place regarding both goals and budgets to support this approach. It also requires a senior leadership team that understands that some leaders will succeed and be rewarded, and others may not be rewarded and will need to gain more experience, but that the overall business will benefit.