When Russia was awarded the 2014 Sochi Winter Olympics, the costs were originally estimated at close to $12 billion. However, when the final budget information was compiled, more than $52 billion was spent in making the various forums and venues where the Olympic athletes competed.
There are some key takeaways here for the business owner and the Russian Olympic Committee:
n It is easier to go over budget than win a gold medal
n In budgeting, it is always better to overestimate than to underestimate
n “Scope Creep” of a project can and normally does allow a budget to increase
I recently visited with a business owner who failed to pay attention to his budget management. He found out, somewhat surprisingly, that just because you have checks in the checkbook does not mean that there is money in the bank. Honestly, that is what he told me.
He recognized that in his inadequate budgeting process he always underestimated his expenses and overestimated his revenue. Well, you can guess where he is now — visiting with legal counsel to figure out how to preclude a pending series of lawsuits due to lack of payment of past-due invoices.
Running a business requires that someone needs to carefully watch the bank statements and know where the cash flow is coming from. Cash is king in any business. Knowing where the cash is coming from is vitally important in keeping the business operating successfully.
Take the analogy of a car and driver. The driver continues to look forward while driving, occasionally looking out the rearview mirror and side mirrors to see what may be following or approaching. The same is true of the successful business owner. She or he is constantly looking forward, but also is looking backward and sideways to identify and capitalize on new opportunities that may be available. Like the car driver, the business owner who is constantly paying attention to his or her competitive environment is in the best position to be able to identify new markets which may be available for potential new customers.
During the 2014 Winter Olympics the media constantly addressed the inferiority of many of the facilities in Sochi, regardless of the program being over budget by almost 400 percent. The point here is that just spending money and not paying attention to what the return on investment is fails to yield positive dividends.
Here are some simple tips to ensure that you stay within your budget at all times.
n Make a budget for every expense
n Ensure that you stay within your budgeted amount
n If your expensed amount is greater than your budget, reduce the scope of the purchase.
These are simple steps, which are both easy to implement and very practical. When you have to reduce your scope, a simple test we always suggest is, “Do you really need the additional capability?” In many cases, the answer is no. It would have been nice to have but wasn’t necessarily a real requirement.
Remember the 2014 Winter Olympics — underestimated budgets and significant cost overruns may work for a large governmental activity, but never work for a business. Develop a budget for each and every expense. Identify and determine what budgetary reductions can be made if your expenses exceed the budgeted amount. Know where your cash is coming from.
All of these steps will ensure that your business is successful, your banker will want to help you and you will not have to visit legal counsel to develop past due invoice settlement challenges.