I’d like to introduce you to something called the Bucket Concept.
What we know is that many business owners avoid detailed financial planning. What I hope is that the Bucket Concept will help you get perspective of why detailed planning is so important.
So, I’d like you to draw a bucket in the middle of a piece of paper.
Now draw some water, about half way up. The water represents your total liquid capital that you can spend.
Now, draw a square above your bucket. That’s your business.
Draw another box next to it. That’s your house.
Draw another. That’s your pension fund.
Draw arrows coming in from your boxes into your bucket.
From your business will be your profit flowing into your bucket. This will come in every month.
But, there will also be one-off capital sums.
These can come from downsizing or selling your house, drawing your tax-free element of your pension and selling your business.
Now draw an arrow coming off the bottom of your bucket. This is your monthly expenditure.
Draw arrows for one-offs like Weddings and helping your kids get on the housing ladder.
Remember, in later life as you stop accumulating assets, what comes into your bucket may be less that what goes out.
The key question is are you going to have enough water in the bucket to take you to the time you kick the bucket?
Now, the only way to know is to complete a personal cashflow forecast.
Start with your current monthly expenditure. Then modify this for what you want and how your life changes.
Keep in mind that it is more common for people to transition into retirement; going from full-time to part time before doing no-time. This will need to be factored into your cashflow.
When you have a personal cashflow forecast you can use it to keep you on track, and is an initial method of quantifying those aims. Projected costs against projected incomes will identify those areas you need to focus on.
When you complete your personal cashflow forecast you will know your Life Number. This will be a figure of how much you need for the rest of your life.
When you have this you can work out if there is a shortfall or too much?
If there is too much cash you can think about stopping work early, spending a bit more.
If there is not enough you can exploring how to plug the leaks.
This could be modifying your expenditure.
But, not many people what to change their lifestyle and as a business owner you have the opportunity to put more into the bucket.
Your business is probably the only financial asset you have control of. You can’t effect the value of your house, investment returns, inflation or annuity rates.
Many business owners have the idea that they will build and sell their business to help fund their retirement. But, the reality is that most small businesses never actually get sold; they just close down.
This is such a serious issue that the Government commissioned a report. The Turner Report published in 2004 revealed that there is a Pension Crisis in the UK.
Lord Turner estimates 12 million people will not be able to retire because they cannot afford to. Many more millions will not live the life they really want when they stop work because of longer life spans, reduced pension returns and higher costs of living.
This was before the Credit Crunch and Recession which is having a profound impact on businesses and investment returns.
Many people, especially business owners make the mistake of vastly underestimating what it takes to maintain their lifestyle after they exit from the business world.
Annual income of £50,000 before tax requires an additional £1 million of liquid capital to go into an investment portfolio. For many, being a millionaire is a necessity rather than a dream.
Once you have set your lifetime goals, set a five-year plan of smaller goals that you need to complete if you are to reach your lifetime plan.
Then create a one-year plan, six-month plan, and a one-month plan of progressively smaller goals that you should reach to achieve your lifetime goals. Each of these should be based on the previous plan. Then create a daily To-Do List of things that you should do today to work towards your lifetime goals.
At an early stage, your smaller goals might be to read books and gather information on the achievement of your higher level goals. This will help you to improve the quality and realism of your goal setting.
Finally review your plans, and make sure that they fit the way in which you want to live your life.
What does SMART stand for?
A useful way of making goals more powerful is to use the SMART mnemonic. While there are plenty of variants (some of which we’ve included in parenthesis), SMART usually stands for:
S – Specific (or Significant).
M – Measurable (or Meaningful).
A – Attainable (or Action-Oriented).
R – Relevant (or Rewarding).
T – Time-bound (or Trackable).
For example, instead of having “To sail around the world” as a goal, it’s more powerful to say “To have completed my trip around the world by December 31, 2015.” Obviously, this will only be attainable if a lot of preparation has been completed beforehand!
Further Goal Setting Tips
The following broad guidelines will help you to set effective, achievable goals:
State each goal as a positive statement – Express your goals positively – “Execute this technique well” is a much better goal than “Don’t make this stupid mistake.”
Be precise: Set precise goals, putting in dates, times and amounts so that you can measure achievement. If you do this, you’ll know exactly when you have achieved the goal, and can take complete satisfaction from having achieved it.
Set priorities – When you have several goals, give each a priority. This helps you to avoid feeling overwhelmed by having too many goals, and helps to direct your attention to the most important ones.
Write goals down – This crystallizes them and gives them more force.
Keep operational goals small – Keep the low-level goals that you’re working towards small and achievable. If a goal is too large, then it can seem that you are not making progress towards it. Keeping goals small and incremental gives more opportunities for reward.
Set performance goals, not outcome goals – You should take care to set goals over which you have as much control as possible. It can be quite dispiriting to fail to achieve a personal goal for reasons beyond your control!
In business, these reasons could be bad business environments or unexpected effects of government policy.
n sport, they could include poor judging, bad weather, injury, or just plain bad luck.
If you base your goals on personal performance, then you can keep control over the achievement of your goals, and draw satisfaction from them.
Set realistic goals – It’s important to set goals that you can achieve. All sorts of people (for example, employers, parents, media, or society) can set unrealistic goals for you. They will often do this in ignorance of your own desires and ambitions.
It’s also possible to set goals that are too difficult because you might not appreciate either the obstacles in the way, or understand quite how much skill you need to develop to achieve a particular level of performance.
When you’ve achieved a goal, take the time to enjoy the satisfaction of having done so.
Absorb the implications of the goal achievement, and observe the progress that you’ve made towards other goals.
If the goal was a significant one, reward yourself appropriately. All of this helps you build the self-confidence you deserve.
With the experience of having achieved this goal, review the rest of your goal plans:
If you achieved the goal too easily, make your next goal harder.
If the goal took a dispiriting length of time to achieve, make the next goal a little easier.
If you learned something that would lead you to change other goals, do so.
If you noticed a deficit in your skills despite achieving the goal, decide whether to set goals to fix this.
Following on from the Primary Aim in my last post I’d like to show you a video from a Website called TED by Simon Sinek.
TED is a non-profit organisation devoted to Ideas Worth Spreading. It started in 1984 as a conference bringing together people from three worlds: Technology, Entertainment, Design.
Simon Sinek wrote a book Start With Why which is about how great leaders inspire.
The reason I have included this video is that I don’t believe you need motivation to be successful. Motivation is about getting hyped up and using adrenalin. What I believe in is inspiration by linking your Business Aim to your Primary Aim.
Imagine that you are about to attend one of the most important occasions of your life.
It will be held in a room and all your friends, you family, your business associates and anyone and everyone to whom you are important and who is important to you.
The lighting is subdued, soft, casting a warm glow on the faces of your expectant guests.
Everyone is sat down. Their chairs are handsomely upholstered and they are listening to you telling the story of your life.
What you did. The people you met. What you were most proud of but it is not you talking, but a recording.
At the front of the room is a raised section and on this is a table with candles and a box. And, you’re in the box; it’s your funeral.
Do you see yourself lying in the box, not a dry eye in the room?
How would you like the story to go?
That’s your Primary Aim.
What would you like to be able to say about your life, after it’s too late to do anything about it?
If you were to write a script for the tape to be played for the mourners at your funeral, how would you like it to read?
That’s your Primary Aim.
Once you have created the script, you are focussed. All you need to do is make it come true.
All you need to do is begin living your life as if it were important.
All you need to do is take your life seriously.
To create it intentionally.
To actively make your life into the life you wish it to be and to use your business to achieve this.
But, absolutely essential if your business is to have any meaning beyond work.
Because if your business is going to become an integral part of that tape, if your business is going to make a major contribution to the realization of your dream, if your business is going to become a significant component of your Primary Aim, you have to let your business know what that Aim is!
With thinking and planning you will have no clear picture of how you want your life to be, how on earth can you begin to live it?
How would you know what first step to take?
How would you measure your progress?
How would you know where you were?
How would you know how far you had gone?
How would you know how much farther you had yet to go?
So before you go return to work, ask yourself the following questions
What do I wish my business life to look like?
How do I wish my business life to be on a day to day basis?
What would I like to be able to say I truly know in my business life?
How would I like to be with other people in my business life; my family, my friends, my business associates, my customers, my employees, my community?
How would I like people to think about me?
What would I like to be doing two years from now? Then years from now? Twenty years from now? When my life comes to a close?
What specifically would I like to learn during my life; spiritually, physically, financially, technically, intellectually? About relationships?
How much money will I need to do the things I wish to do? By when will I need it?
These are just a few of the questions you might ask yourself in the creation of your Primary Aim.
The answers become the standards against which you can begin to measure you life’s progress. In the absence of such standards, your life will drift aimlessly, without purpose, without meaning.
In that regard, your Primary Aim is the vision necessary to bring your business to life and your life to your business.
It provides you with a purpose. It provides you with energy. And, it provides you with the grist for your daily mill.
This is step one of On-Track programme. Feel free to give me a call to help you develop your thinking and plans.
Here are six reasons to invest time, energy and money in creating a budget:
Number 1 – a budget helps you to avoid unpleasant and difficult situations
There are very real situations that range from ones that I hope no-one has to deal with, like your business being sued or going bust, to less dramatic but none-the-less unpleasant situations like having to let a valued member of staff go or working 70 hour weeks indefinitely.
We live in a bubble that these things will not happen to us, but they can and do. For example a budget will show what your break-even point is and the level of business it needs to achieve to avoid going bust. We have all heard the statistic that 9 out of 10 businesses fail in the first year. In most cases people did not realise the money they needed to be bringing in until it was too late.
So, in doing a budget you might realise you need to secure a bank loan or an overdraft facility and you might have 8 months to deal with it instead of one. You may very well go on to have a successful business where you might have gone bust without the time spent on a budget.
You may also have to confront that your business does not work and will not ever work. That is an important consideration to confront because it is one that we are most afraid of.
Number 2 – a budget helps you identify opportunities
You may well see that with even a modest investment in marketing, you could very realistically achieve a level of profit that would allow you to invest in a new member of staff. That in turn could allow you to consider a major new aspect to what you are doing.
If you do take my advice and create a budget you may find yourself in this situation where you experience real excitement at seeing what is possible in your business.
Number 3 – a budget gives you a feeling of control
When you have worked through the threats and opportunities and got to a budget you are happy with, you will almost certainly feel in control in a way that you have not before.
Feeling in control and happiness are closely related. This will help you reduce stress and it will almost certainly have a knock on effect on your performance at work and your profits.
In fact, I would go so far as to say that if you ever experience on-going unhappiness in your business, the first thing to do is review and rework your budget challenging every assumption on which it is built.
Number 4 -a budget increases motivation
These last two lead me on to the next benefit which is improved motivation.
A clear plan ahead with achievable goals and sense of having thought about upcoming risks will give you a great sense of motivation. If you have employees and involve them in the process, this will include them also. A budget can therefore bring your team together and motivate it.
Number 5 – a budget will improve performance
As we will see a good budget is not built on figures plucked from the air, but on actions that lead to results. If the actions are clear, performance will follow naturally.
When you under-perform it will be clear that you or your employees did not take certain actions. You can hold yourself and others to account. If you employ others you may even link pay to performance or to the actions that have been agreed.
Numbers 6- a budget will generate support
You can demonstrate opportunity to others. Investors want to see how they can get their money back.
A budget will show this and the willingness of an investor to put money into your business will open up further opportunities. A budget can be used to get a bank loan or overdraft.
Ok here are some of the drivers I can see for people avoiding budgeting:
If I have a budget I am accountable. Most of us value our independence as self-employed people. Once there is a budget there are targets for us to measure ourselves against. For example we set a sales target each month in a budget. When we move back to our role of marketing person, we suddenly have an accountability to meet that target. At a very basic level if we produce lousy results, they only show up as lousy against a target.
We have to confront what doesn’t work about our business. If there is a problem in our business it will emerge in a budget. That can be an uncomfortable.
We have to think things through. As Henry Ford said ‘Thinking is the hardest work there is.’ Our brains are designed to follow patterns. Getting them to consider new thoughts is hard work. A good budget is inherently a creative process and forces you to examine all your assumptions. That takes mental effort.
We can stay safe. Most of us are afraid of success. A budget will throw up opportunities to succeed. That can be equally as uncomfortable as confronting the problems in our business.
We do not have to challenge our opinions. Most of us have strong views about the way things are in our business. As you will see the process of budgeting entails re-examining our preconceived opinions. It may require letting go of cherished positions that we hold about the way things are.
If we employ people, the lack of a budget also allows us to make up the rules as we go along. If your sales team are meeting their targets you have less scope to tear a strip off them.
There may be more reasons I haven’t thought of but can you see there are powerful psychological forces at play that explain why so few of us have a budget?
Ok, we can now sum up the advantages of not having a budget which are:
I don’t have to be accountable
I am free to make it up as I go along
I don’t have to confront what doesn’t work
I don’t have to think
I can avoid feeling uncomfortable
I can hold onto my ways of doing things and opinions
I can bully others when I feel like it
If that sounds harsh please understand that I am hoping to shake us out of our habit of not budgeting because the benefits of having one are potentially so great.
In the next article I will cover the six benefits to having a budget.
I think there are times you and your accountant should be arguing.
To explain my thinking this I want to talk about a fantastic doctor who was around in Oxford in the 1950s. Her name was Alice Stewart was both unusual and brilliant.
Unusual because she was a woman, which was rare in the 1950s but also because she continued to work after she got married and had kids. And, even after she got divorced and was a single Mum.
Brilliant because at the time she was the youngest fellow be elected to the Royal College of Physicians.
Alice was interested epidemiology – the study of patterns in diseases. And, like every scientist she appreciated that to make her mark she needed to find a really difficult problem and solve it. The problem that Alice choose was the rising incidence of cancer in children.
At the time, most diseases correlated with poverty but the kids who were dying with cancer seemed to mostly come from affluent families. So, what could explain this anomaly?
Now Alice had difficulties getting her funding, a bit like many businesses today. Eventually she got £1,000 which meant she only had one shot for getting her data.
Now, she had no idea what to look for, it was a needle in a haystack so she ask every question possible.
Had the child eaten boiled sweets?
Did they drink coloured drinks?
Did they eat fish and chips?
Di they have indoor or outdoor plumbing
When did they start school?
And, when her questionnaires started to come back one thing jumped out with a clarify most scientists can only dream of. By a ratio of 2:1 the children who had died had mothers who had been X-rayed while they when pregnant.
Now that finding flew in the face of conventional wisdom. Conventional wisdom held that everything was safe up to a point and huge enthusiasm for the latest cool technology of X-ray machines. And, it flew in the face of doctors themselves who saw themselves as helping patients not harming them.
Never the less, she rush to publish her finding in the Lancet in 1956 and there was talk of the Nobel Prize. She was in a hurry to study as many cases as she could find before they disappeared but she didn’t have hurried. It was nearly because it took 25-years before the British and American medical establishments abandoned the practice of X-raying pregnant women.
The data was available but nobody wanted to know. A child a week was dying but nothing changed; openness and information can’t drive change.
So, for 25 years Alice had a major fight on her hands. But, how did she know she was right?
Well, she had a fantastic model for thinking. She worked with a statistician called George Kneale and he was everything Alice wasn’t.
Alice was outgoing and sociable while George was a recluse. Alice was warm and empathetic with patients, George preferred numbers to people. But, he said this fantastic thing about his job. He said “my job is to prove Dr Stewart wrong”. He actively sought disconfirmation; different ways of looking at the data with the aim of disproving her.
He saw his job as creating conflict about her theories because it was only by not being able to prove she was wrong that she had the confidence she needed to know she was right.
It is a fantastic model for collaboration; thinking partners who are not echo-chambers.
How many business owners have, or dare to have, such a collaborator?
Alice and George where great at conflict because they saw it as thinking. So, what does that constrictive conflict require?
Well, we need to find people who are different from ourselves.
That means we need to be counterintuitive and resist our instinct, the biological drive to work with people like ourselves. We need to collaborate with people with different skills, background and different experience.
It requires patience and energy and that is a intimate relationship with caring because you won’t commit the time and energy if you don’t REALLY care about the other person. And, it also means we need to be prepared to change our minds.
So, if conflict is thinking, how do organisations and businesses think?
Well, the truth is that many don’t. Not because they don’t want to but because they can’t. And they can’t because people are too afraid of conflict and too afraid of what the answers will be.
In a survey of European and American executives 85% acknowledged they had issues and concerns at work that they were afraid to raise. They were afraid of the conflict and arguments they didn’t know how to manage and felt they were bound to lose.
This means that 85% of business can’t do what Alice and George did i.e. think together. And, it means that most people who run business who do all they can to attract the best people fail to get the best out of their people.
So, how do we develop the skills we need?
First, everyone needs to see conflict as thinking and practice. We need to understand that argument is outside most people’s our comfort zone but this is where we can be most creative. Difficult questions get better answers.
Could it be that an Accountant is the perfect conflict partner for a business owner? At the end of the day, the entrepreneur is often the opposite to an accountant.
Could be it that the budget is where the conflict should be focussed? Budgets allow detailed planning but provide space for strategic discussions.
Here is a video from Xero on budgeting to show you what is possible with new technology:
David Cameron commissioned Julie Dean OBE the founder of The Cambridge Satchel Company to carry out an independent review of what additional support could be provided to the growing number of self-employed people.
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