The new calendar year is a busy and exciting time. Just as it is important to be with friends and family through the holiday season, it is important reflect on your business and prepare yourself and your organization for the new year by preparing an annual budget, developing a strategic plan and providing feedback to colleagues about how the prior year went and how they fit into the company’s plans for the year.
We typically start thinking about the annual budgeting process in early November. It takes time to gather your thoughts, think deeply about what is realistic in the next year and receive important input from personnel. While most people focus entirely on sales, leaders must also consider what investments are required to drive sales results. We ask our partners when creating a budget to include the income statement, balance sheet, cash flow statement and capital investment plan.
Hopefully sales are increasing and you are expecting to generate a profit, but from a cash perspective, it could present challenges you would be unaware of unless you take a 360 degree view of your business. And that includes impact on your working capital cycle, how are you financing investments in your business and what, if any, key hires are necessary to achieve your plan.
Almost all small business owners either do not develop an annual budget or only have an income statement, missing an opportunity to improve the odds of success in the upcoming year. Getting alignment with your senior level managers is critical, and developing a budget allows this to happen. Not including a balance sheet and cash flow statement can jeopardize potential success; not considering the growth in the working capital cycle or what investments are required to achieve those results could cause you to run out of cash, miss important commitments and potentially miss payroll. It is only with a balance sheet and income statement that you can fully appreciate the impact of the decisions you are making.
If there is a cash shortfall, consider what should be done. Options include meeting with your bank relationship, contacting the Small Business Administration, taking on a capital partner or slowing down to a more conservative pace that oftentimes reduces potential risks to your organization.
Provide feedback not only to direct reports and other key personnel but ask them to provide feedback about improving the opportunity for better results in the new year. However, some people dread feedback. The only thing employees will remember is what they perceive to be criticisms of their contributions.
Infuse one or two areas where they can improve and liberally share the things they do well. Share how employees can contribute to the success of the business in the new year and that you have thought about how they can make a difference.
Finally, develop an incentive compensation plan that shares the incrementally higher rewards with your employees. Incentives should be based on both organization level and individual level measures. Ultimately employees want cash, so incentives that generate incrementally more cash are required to fund cash bonuses.
Tie improving results with hard work and additional compensation. The best employees are going to businesses that understand that high performers want to be recognized for their relatively higher contributions with additional remuneration that is partially financed by them.
While these suggestions create more work, I have been rewarded by this annual and important ritual because I have found that these efforts produce more than the desired results over time. Have a happy new year! ●
Jeffrey Kadlic is the Founding Partner of Evolution Capital Partners