Simple Financial Planning

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Preparing the annual financial plan doesn’t make most people’s “Top Ten Things I Do For Fun” list. You may still have a headache from last year’s process.

Nonetheless, a solid plan is essential for long-term leadership success.

Budgeting often falls into one of two unhealthy extremes. I call these the “punitive” and “pie in the sky” cases.

In the punitive case, you work hard to beat your budget, only to be told that you did such a “great job” that what you saved is being taken away next year, since you “obviously didn’t need it.”

The pie in the sky case is the opposite. Often the result of an adrenaline fueled motivational push, the resultant plan is unrealistic.

Everyone senses it. No one calls it out. When reality kicks in, cuts or layoffs often ensue.

Both extremes have a high motivational, productivity and human cost. Both cases reduce organizational impact.

This year, consider an alternative look at creating your plan. Take a quick look at the sketch. You’ll see four lines representing four cases.

The optimistic case captures results exceeding expectations – your vision or dream scenario. This is a “top down” approach.

The likely case is what you expect to happen. Most of your detailed planning time should be invested here, using a combination of historical and forecast data. This is a “bottoms up” approach.

The conservative case captures results below expectations. Sales fall short, soft economy, late product release, etc.

The unexpected case represents a major negative shift – a recession, unexpected competition, pandemic, loss of manufacturing capacity or key personnel, etc.

The gates between the cases are results based contingencies, factoring in both top and bottom line numbers.

Considering all cases results in a range of revenues and costs. Moving between them involves the fundamental principle of pre-decision, which are the gates. Gates require forethought, but result in more effective operations through out the year.

Now – before you order an extra case of Advil – this is NOT four times the work.

Here are three steps to implementation:

First, invest the bulk of your time in the likely case. This is the detailed budget you will track throughout the year.

Second, choose three percentages to apply at a macro level to create your optimistic, conservative and unexpected cases.

Example – if your likely sales are $100 and you choose 25%, 20% and 30% for the other cases, then optimistic equals $125, conservative equals $80 and unexpected equals $70. Decide what your financial gates are based on these results.

Third, schedule a quarterly review. During this meeting, compare actual and expected results, and open or close your gates as appropriate. If new data presents itself, then adjust accordingly.

Finally, this process isn’t just for business. If your income depends on commissions or bonuses, you can use the same methodology to build your personal plan by considering the four cases in the context of your own household.7

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