As a business owner how many times have you experienced an increase in company profit followed by a sudden request for additional expenditures from one or more of your organizational divisions? The underlying reason for this is the people that staff your company will always tend toward spending every dollar that comes through the door. You may even have this tendency yourself.
There is a kind of group mentality that takes place in any organization when it comes to producing income. It is like an unspoken agreement among the staff members to produce enough money to cover what they believe they need to spend. The agreement does not include producing a surplus of income. The group wants to spend everything it has. It will only strive to increase its productivity if it sees the need to have more money to spend.
The problem with this collective way of thinking is you’ll never have a surplus account to cover expansion of the business, emergency situations, investing or unusual expenditures such as paying off a loan. An organization is wise to have a financial cushion to cover expenses associated with these events. The goal of the group being to spend everything that comes in right now; it is not the least bit interested in budgeting any of it for future needs.
To be successful at building up a surplus account you have to create the perception the money you are setting aside for these purposes is money being spent. You can’t wait to see what’s left over at the end of the week and plan to transfer that to your surplus account. There won’t be anything left over. The various divisions in your company will find legitimate reasons to spend it. Productions costs will suddenly go up, equipment will suddenly fail, or a department may suddenly find a sale on material or parts they must order in bulk this week to get the discount.
The head of your financial planning department has to be a person that can think beyond the groups’ collective determinations. That leader must be able to remove their focus on the details of daily operations and give their attention to the overall viability of your company. They must be able to establish a system where the surplus money is taken away from the total income before anyone else gets to see it. It must be perceived by all the divisions as an expense or they will find another way to spend it.
If you, as the business owner cannot lead your financial planning in this way, then find a more objective person to fill the position. Don’t allow your staff to spend everything. Implement strategies that ensure your staff will increase the company income to meet the demand for money they believe they need to spend. That is how you can maintain the viability of your business and accommodate future expansion.