As part of my job, I get ample opportunities to meet several entrepreneurs every month. Once we get talking about best practices towards building a strong finance function, I ask them if they prepare detailed budgets every year, if they prepare LTF (Latest Thinking Forecast) every month, basis actuals and new facts with respect to business forecasts. But invariably, I end up facing some of the entrepreneurs' myths that they harbour. I hereby present some of these common myths along with responses.
1. I don't need a business plan.
That's great. But I have a question. How many times have you travelled on an international trip, to a new destination, without finding out more about that location, checking on weather conditions, making any hotel reservations, finding out how much forex you need, a map (physical or digital) and most importantly, with only a one-way ticket?
Every time I ask this question, it is followed by a pin drop silence in the room and till date, no one has been able to give me any such instance.
Starting and running a business without a budget is very much like the situation mentioned above: if you don't know what's coming, you don't know the amount of resources you need to plan for, you don't know what kind of pricing/costing to undertake, which client/segment is profitable, and therefore what's the most sound financial /business strategy to adopt this year and going forward.
2. My business plan needs to be perfect before I start my business.
This is the other extreme. So much time and effort is sometimes spent on building, designing, detailing and constantly updating the model all the time, that there is very little time for starting the actual business activity. What's important is to have a good business plan and to get started with good amount of information in place. Don't waste too much time. You can always improvise your plan as you go; and budgeting is indeed an ongoing exercise. Also, once you start the business, you will have real business facts to fine-tune your plan appropriately. So have a balanced approach.
3. I don't need a loan or anyone's money. So I don't need a budget or a business plan.
When I hear this, I always ask the entrepreneur: How many times have you invested in someone else's business without reading the prospectus/pitch presentation or understanding their plan in detail? The answer, almost always, is: never.
Then why would you invest your hard-earned money into this business without understanding what's happening? How will the business close this year, what profits/losses to expect, what kind of investments would be required, etc.?
Sometimes a lot of good money is invested in certain business activities which could have been avoided if there was a good budget in place. Therefore, it is absolutely important for any entrepreneur to have a detailed budget/business plan in place, and track/monitor performance on a regular basis along with constantly undertaking corrective steps.
4. My business plan is in my head. I don't need to write it down.
I regularly speak at seminars and workshops where I see entrepreneurs making notes. Also, whenever we are in an important meeting, be it internal or with external advisors, I often notice entrepreneurs taking down notes. I ask them as to why are they doing so and the response is quite standard: 'So that I can refer to these notes later on. Also, I don't want to miss out anything that is important'. Well, then don't you think you need to similarly note down all key financial parameters, sensitivity areas, and targets of your company, that you can track and compare your actual performance against, on a regular basis?
Always make it a practice to have a formal financial budgeting model, and get your entire team involved in the process to ensure everyone takes ownership of those numbers. And most important of all, set up a finance calendar to ensure timely reporting of budgets vs. actuals.
(The author is Managing Director, SuperCFO, a CFO solutions company.)