I recently sent an email to our Goalfix community – the message in the email was: “Fortune favours the prepared mind”- is a well- known quote from the great scientist, Louis Pasteur.
I also added my own observation – “And Success – like fortune- is often the result of our preparedness – of the choices we have made.”
On reflection, I thought that the message – given its importance – deserved some additional comment. As most people in my sphere of influence know, I am a corporate financial consultant and specialise in building predictive financial models.
In the corporate world it is common practice for companies to prepare annual budgets which of course is a step toward being prepared. This is a common activity and I would suggest is standard operating practice for all well managed companies.
Sadly however the process is often regarded as a “necessary evil” – another chore to be carried out by the company.
And in some instances is nothing more than a projection based on past historical performance.
In essence, an extrapolation of the recent past.
Alternative approaches to the budgeting process include:
- traditional historic budgeting (incremental or extrapolation budgeting)
- zero-based budgeting
- priority-based budgeting
- activity-based budgeting.
Clearly the methodology should be based on the nature and characteristics of the business and will be influenced by management’s approach to the process. The delegation of responsibility, inclusion / exclusion of operating personnel, disruption of normal activities and time required are all factors requiring careful attention.
Personally, in my business career, I found the process to be very enlightening and beneficial -although the outcome was invariably static.
True preparedness lies in the combination of both a comprehensive understanding of all the elements that affect business performance and the flexibility to determine the effects of changes to the base assumptions.
Factors needing consideration and evaluation can include:
- general economic conditions
- competition
- product range
- government / state interventions – legislation
- leadership and management competence
- culture and employee attitudes/commitment
- financial capabilities/ constraints
- financial management capability
On occasion I am quizzed about my passion for financial modelling and my reply is always the same- always based on being a pragmatic businessman – not an academic.
Simply put, over 5 decades in business, in different industries and different economic conditions I have found the properly researched, properly built, flexible financial models are invaluable management tools.
Being predictive, they may not be precisely accurate, but in my experience offer, undoubtedly offer the best solution to meet the essential requirements of true preparedness.
Food for thought – hopefully. More importantly a call to action – for at the end of the day, only action produces results.