I am probably in the minority, but one of the things I have always liked best about my job is managing a P&L. I have always been comfortable with math and maybe it’s just the sheer analytics of pulling a P&L together. It’s like being on CSI, at the scene, gathering the facts, doing all the analysis and then solving how the crime was committed and who did it. Now, I can’t tell you anything that will change whether or not you like managing your P&L, but hopefully I can give you some tips that will help you in your thought process and that will make the process better for you.
Years ago, it was good enough to come up with what you thought was your budget for the fiscal year and if there were variations along the way, no one was too upset if you made your numbers by the end of the year. In fact, if you beat your numbers by the end of the year, everyone cheered and maybe bonuses were bigger for you and your department or team. You may not have had a clear line of sight how you were making your revenue or how your expenses were going to change, but maybe you just crossed your fingers and hoped for the best. If you were “close enough”, maybe the consequences were not too bad as long as the rest of your division came through and overall things were better than the prior year. The economy was good, unemployment low, e-businesses and pharmaceuticals were flourishing and companies were spending more money on technology solutions, growing, changing and as a result, more opportunities for special work were not only probable, but likely.
Then came the Enrons, the WorldComs, Arthur Anderson and SOXA and the process has become so much more scrutinized and the P&L that you are providing that is rolled up into your company’s numbers is really, really important. Not only is it important over the course of the year, it is just as important quarterly and looked at in great detail monthly. It now really matters if that project finishes on time and that you can bill for it when you expected, for the amount you expected and that you get paid timely by your client. It’s even problematic at times if you billed for a project early as it causes a shift between your budget and actuals. And, god forbid, if you bill for a project in a different quarter than you expected! The rules have changed and you need to avoid surprises, not only the bad, but even the good as no good deed will go unpunished. And those of us with P&L responsibility have a great portion of our goals connected to this, so we need to give this aspect of our jobs the attention it deserves and be good at it or our livelihoods will certainly suffer the consequences.
Become Best Friends with Your Finance Person
I am not an accountant and I certainly can’t tell you all the things your finance representative can about how your company does their accounting. The rules are complex, and the best advice I can give you is to meet with your finance person as much as you need to so they can guide you. They will help by asking relevant questions or pointing out variances and can be instrumental in making sure you didn’t forget to consider a key piece of data in your analysis.
Don’t Wait Until the Last Minute
Do your homework all year. You don’t have to wait for the e-mail from Finance to start the process. It seems like every year, I have less and less time to pull together my budget. Maybe you will have two weeks, maybe a month, but do the things all year that will keep you from scrambling to pull all the information together you need for your budget at the last minute. Maintain project logs and include well thought out start and end dates, the project budget, whether or not it has been approved (signed) by the client and when you expect to bill for the project. If the project log is in an excel spreadsheet, consider adding a tab that keeps a monthly tally of what you are expecting to bill each month. Be careful you do not add up everything in the log and you are pretty sure which projects are likely to be completed and billable. I would strongly recommend sharing the project log with your client, as it can serve two purposes – first, it will serve as a communication tool to use with your client so you are both on the same page as far as priorities, likelihood projects will be approved and you agree on the price, and second, your client is likely in the same position you are and you will be saving him or her from having to pull together a similar document on their own of your expected charges that need to be part of their departmental budget.
Hopefully you have developed a business plan and have talked to your clients about new services you would recommend and are working on commitments to implement those services in the up-coming year. If not, there is no time like the present to start building your business plan, both short and longer term. You need an arsenal of ideas to pull from. Strategically planning where you and your client are heading will help you add value and not just sell products or services for the sake of selling. Your clients will appreciate having a roadmap too.
Keep a summarized document of your contractual provisions that impact your revenue or that change. For example, if your contract includes a CPI increase, any pricing increases or decreases, performance incentives or penalties, summarize them in a separate document so you have a handy tool to jog your memory when you are budgeting or explaining variances month to month. It will also help you when you are issuing your client’s invoices. I even like to keep such a document posted in my office as I refer to it often.
Get a good handle on your expenses and how they might change. Work with Finance to give you salary and benefit data and summaries of your expenses month by month if it’s not readily available to you. Factor in any changes you are expecting in staffing, leaves, severance payments, one-time expenses, capital expenditures (for things like new computer equipment) or licensing fees, legal expenses or travel. Depending on how your employees are paid, make sure you factor in which months may have additional pay and benefit expenses if paid weekly or bi-weekly. Look at what your vendors are charging you and rebid contracts or try to negotiate lower rates if their fees appear high. Talk with other departments and make sure you understand any anticipated changes in expenses that may be allocated to you. If you can, budget something for team recognition or celebrations. Understand seasonal expenses, such as special events like annual enrollment where printing, postage, staffing and other expenses may be higher than other times of the year and when you are typically billed for those expenses. Use the data available to formulate plans on driving your expenses down so your cost continues to improve year over year. Maybe a one-time expense to automate a process may lead to longer-term savings. Consider how you can utilize offshoring if that is available to you.
Keep a running tally of your budget to your actuals and understand any differences and shifts in revenue and expenses. Hopefully you have tools available that will do this for you, but if not, build something yourself or work with Finance. You should be tracking this data every month so you can adjust your plans accordingly. It is not a one-time process and thus you need to be continually adapting to change and updating your plans. The more clients you manage, the easier it may be to compensate for fluctuations (or not), but you need to come up with a process that works for you.
Talk and Confer With your Client
You must talk with your client prior to submitting your budget and make sure you plan for changes in their organization. Although your client may not be aware of all changes or may not be able to share all of the changes, they certainly will be able to tell you how their company is doing in a broad sense, such as if they are growing, if they are in an acquisition or divestiture mode, or if they are planning an early retirement window or other downsizing event. The more you are aware of your client’s challenges, the better you will be able to plan. Certainly if you are billing your client by the head, you better be planning for any anticipated changes in your revenue stream based on their corporate initiatives or trends.
I will be so bold as to suggest sharing your budget (at least revenue expectations) with your client, how you came up with your estimates and when you are planning to bill for various projects. Your client will appreciate your transparency and you will be collaborating on your assumptions. Your client is probably best equipped to comment on your budget, but you need to give sufficient time for the discussion and not spring it on them 2 hours before your budget submission is due. Plan ahead.
Involve Your Team
Some of the best ideas I have seen for revenue growth opportunities or expense reduction have come from my teams. They are dealing with inefficiencies and hearing about our clients’ pain points every day. Have some brainstorming sessions with them as you build your business plan and don’t forget to involve them in the budget process. If they understand how the budget was developed and feel they had a voice in developing it, they will be much more receptive when you hold them accountable for keeping projects on time and help keep you from having variances between your actual and budgeted numbers.
A Word About Revenue Targets
In a perfect world, you will come up your revenue target based or your base fees and anticipated project-based work (based on your thorough analysis), what additional services you have sold your client and you may have even built in a cushion with your client for “unanticipated projects” so if something comes up there is still room in their budget to get additional work done without sacrificing other project work. In a perfect world, you will submit your budget, your revenue will be the right percentage higher than the prior year because you have done your homework on a reasonable growth rate for your industry and your expenses will be projected to be less than last year and your manager will be singing your praises in the halls about the profit you will be contributing to the bottom line. Unfortunately, what tends to happen is that the first pass of your budget added up with those of your colleagues and other departments will show a short-fall between what was submitted and what was dictated by management as what was needed. So then the real fun begins.
Now management may come back and dictate your revenue target, calling the additional amount you need to contribute your “stretch” goals. Now you have a few options:
§ You can sit around and whine about it to your boss or peers, but generally this isn’t going to change anything, so probably not your best strategy.
§ You can pull out your business plan and see if there is anything on your list you could present to your client and reasonably accelerate. You talk with your peers and manager for additional ideas that you may have overlooked that make sense for your client. Hopefully your client hasn’t finalized his or her budget yet and you might be able to close another piece of business and feel confident you can make your stretch goals.
§ Maybe your analysis was so thorough that you know there is no way you are going to make your stretch numbers. So you pull together a presentation and schedule a meeting with Finance, your manager and possibly your group leader. You refine your numbers as best you can, and you negotiate the stretch revenue target as best you can. And the difference will need to become a plan to further reduce your expenses.
In the end, it helps no one to have an unrealistic target you can’t meet, but it equally helps no one if you are not proactive.
Learn From Your Mistakes
Try to document where your variances occur month to month and year over year. It can only help you get better. Have a plan. If things change during the year – a client cancels or adds a project or a project timeline changes, understand the impact it will have, and don’t forget to communicate with Finance. They will ultimately need to explain any variances.
Planning will be key in how successful you are in managing your P&L. Whether or not you enjoy this aspect of your job, learn to make your P&L one of your priorities and manage it, not let it manage you. Good luck, and I wish you much prosperity!
Please feel free to comment and let me know if I have helped you in anyway!