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| How Budgets Are Like Pancakes |
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Preparing a budget can be a daunting task, but there’s a method to the madness. Beanstalk uses a process it developed, called FLAPJAC, to prepare budgets for dozens of clients each year. FLAPJAC has nothing to do with pancakes; rather it’s a methodology for creating a financial plan that may be one of the most important management tools going.
What do we know about pancakes? We know they’re flat. Pancakes are so flat they’re our benchmark for flatness. We often use them to describe the flatness of other things.
For example did you know that Kansas is flatter than a pancake? No joke. The Jayhawk State is geometrically more level than a flapjack. Recently, university researchers from Arizona State and Southwest Texas State proved it by comparing readings from a confocal laser microscope on an IHOP hotcake to elevation data for Kansas from the US Geological Survey. They found that Kansas is indeed much, much flatter than a pancake. In fact, the Kansas section of I-70 would have to have potholes 10 miles deep to be as bumpy as a pancake.
Budgets are like pancakes, too. But not because they’re flat. At least we hope our budgets aren’t flat.
Rather, budgets are like pancakes since the best way to make a budget is to use FLAPJAC. Of course, FLAPJAC isn’t actually a pancake. In this case, it’s a method Beanstalk developed to implement financial plans among its entrepreneurial clients. In short, FLAPJAC stands for Facts, Linkages, Assessment, Projections, Judgment, Assignment and Comparison.
As we enter the new year, it’s an ideal opportunity to prepare a budget for the next 12 months. Properly done, a budget can be an extremely powerful management tool, guiding a team to its objectives. Neglecting to budget is like having a team of rowers paddling independently, unsynchronized, toward no destination in particular. Sure, the current will take the boat somewhere, but probably not where you’d like to go.
To reach an intended destination, you need an effective budget. To make sure your budget is useful, follow these seven steps:
1. Facts. The best predictor of future performance is past performance. Gather actual income and expense data from prior years and months. Assemble market data from reliable sources.
2. Linkages. Derive relationships among factual data (growth rates, interdependencies, etc.). Understand drivers or source of all revenues, expenses and asset needs. For example, sales require manpower, and labor expenses are obviously a function of headcount. Determine the relationship among these factors to be able to estimate payroll cost based on sales and number of employees.
3. Assessment. Ask team members to estimate next 12 month’s activity levels for driver data (e.g., sales, headcount, etc.) based on market knowledge and trends discovered in step 1. Set achievable targets that require team to reach.
4. Projections. Apply operating assessments for drivers (e.g., headcount) to dependent variables (e.g., payroll expense) and formulate monthly prediction for revenues, expenses and asset purchases. Show net impact on cash and credit, too.
5. Judgment. Evaluate the reasonableness of the projections. Determine that proven data relationships are intact and that the plan makes sense when viewed as a whole.
6. Assignment. Allocate responsibility for meeting projections to appropriate team members. Make sure responsible parties have authority in given area.
7. Comparison. Monthly, measure actual results against budget.Praise favorable variances. Require responsible team members to address unfavorable variances (>10% of budget) and implement recovery plans. If variance becomes too large (say >35% of budgeted figure), consider recasting.
In our experience, companies using this process have demonstrated dramatically better financial performance than those who neglect to budget properly. Make it your new year’s resolution. Put yourself and your company on a diet. Exchange pancakes for FLAPJAC.
If you haven't yet made a useful budget for the next 12 months, let us know, and we'll help you. Contact us at mail@beanstalkcfo.com.
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