Accountability through Transparency
A look at how to budget and plan for 2014
As you are reading this, you might take a look at how many days are left in 2013. Hopefully, you as the owner have met with your management team and are wrapping up the team’s final budget for 2014. By having worked with your team to achieve the 2014 budget, all members of the team “own” the budget. By having done this, you and the team now have the ability to bring accountability to the goals that the company needs to achieve in 2014.
I would like to use a budgeted dollar volume of $1.2 million as an example for your proposed budget for next year. The reason being is that it allows us to talk about each month needing sales of $100,000 to come to fruition. It also allows us to use easy-to-understand percentage costs of doing business. So let’s start with sales as the first example of holding a person responsible for a goal.
Sales will be responsible for bringing in an average $100,000 of business each month with a total of $1.2 million being brought in 2014. We all know that it doesn’t come in exactly at the desired amount each month. By setting up the amount and sales committing to bringing in that amount, we can then discuss accountability and whether or not the salesperson is doing their job. The key to this goal is that everyone in the company knows what is expected and whether or not the sales person is doing their job. The person doing sales should, in my opinion, be a professionally trained sales person. So, consider this as an idea - if the salesperson is paid 10% of what they sell, it would then be clear to all that selling $1.2 million would yield an income to the salesperson of $120,000. If the salesperson sells $2 million, they would earn $200,000. The key to the success for this working in the company is that the salesperson doesn’t prepare the estimate for the job that they sell.
The owner’s primary responsibility is to manage and lead the company. In order to do that, the owner must form a team to jointly run the company. The owner cannot do it all and have a life. Everyone but the owner can be fired out of the company. The owner isn’t fired, because they cannot usually find anyone to buy them out for what the they think they’re worth. In order for the owner to get out of the business what they want and need, the business must be producing a budgeted profit. So you guessed it, that’s how we hold the owner accountable! The owner works with and leads the management team. The management team sets the budget for the upcoming year, and in this case, the set budget is $1.2 million. A reasonable profit is 10% before taxes and one that is both fair and doable. So, to be clear, if the company produces a 10% net profit before taxes, the owner would be judged as having done their job. Anything less would be judged as the owner having not done their job and needing to improve their performance. The team that I’ve been referring to is “TSOAP.” The “T” is for “team,” the “S” is for “sales,” the “O” is for “owner,” the “A” is for “administration” and the “P” is for “production.” Each of the TSOAP team members would be responsible for the productivity of their area of expertise, based on the budget.
Administration is responsible for the proper flow of the job through the company, starting with the first request of service until the expiration of the warranty. They handle all communications into the office, to include requests of service, invoicing, collections, compensation for all company members and many other necessary items. They are also the communication “grapevine” within the company. They hear all kinds of things from all parts of the company, their subs and their vendors. They also reflect the image of what the company is doing from both the inside and the outside. They are what we call the “overhead” of the company. I would suggest that in this example, the overhead would be 20%. So again, here comes a measurement that they can be judged by. If the overhead comes in at 20% as it was budgeted to be, then they can be judged as having done their job. To be held accountable for the budget, they must also have control of the budget for overhead.
Production is responsible for producing the budgets that they agree to. I would suggest in this example that the job budget be set at 60%. In order for this to work, the budget must be reviewed and agreed to by production prior to the three-day right of rescission time frame expiring. Once the budget is agreed to by production, production then has the responsibility to make sure the job comes in on time and on budget. Here is the very tool that we need to judge production. If the job comes in on time and on budget, then they have done their job.
So here we are, with four very clear numbers that all members of the company can be held accountable for if they agree to it in advance. So to review, the theoretical numbers are 10% for sales, 10% for net profit, 20% for overhead and 60% for production. This brings the total to 100%, which is the total bid amount for the job. If they come in on time and on budget, then they have done their job and deserve the compensation that they have agreed to. If they are over time and over budget, then they deserve less than the compensation that they have agreed to. If they are under budget and under time, then they deserve the compensation that they have agreed to and they should also receive a percent of the over-budget amount that they have helped produce. Some might call this a bonus plan, an incentive program or the ilk!
I want to wish you and your TSOAP team an on-time and on-budget 2014!