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The Aha Moment: Return of the Jedi

Peter Janis, founder and former CEO of Radial Engineering, explains why developing your 2021 budget during a pandemic might be a great opportunity.

Today’s entrepreneur is yesterday’s explorer and tomorrow’s Jedi! OK, that may be a stretch … but I believe that as an entrepreneur, I am exploring the world of possibilities, looking for solutions to daily problems and occasionally discovering something new. Most entrepreneurs are not very good at managing the details. We tend to look at the big picture, and love frontline action and the daily battle of selling against our competition. This is where the Jedi lightsaber comes in. I use a blue one.

Probably the most laborious of all tasks is budgeting. It is a real pain in the behind. At Radial, we would start the process at the beginning of October, when the sales manager and I would compare projections. I took a shortcut by looking back three years at each category, comparing the sales growth, applying averages and creative math, and then adding in new products. I would always push for reasonable increases. Meanwhile, the sales manager would take the long road by painstakingly reviewing dollar and unit sales all of major accounts, sales territories and major international markets.

Once he and I had come to a compromise, he would take the projections and then formulate a unit budget that would be sent to his sales team and to purchasing so they could plan raw materials and production schedules. At the same time, the accounting department would look at estimated hard and soft costs, discuss staffing requirements with the various departments, identify major capital expenses and so on. A big number to contend with was marketing. We set this aggressively at 5 percent of sales. The whole process took more than three months every year to complete, and at the end of it all, we never got it 100 percent right.

This is where many business people get it wrong. Since you know your budget will never be right, why produce a budget at all? The simple answer is that without a target, how can you hit a bullseye? But the answer runs much deeper than that.

Having a budget means you can produce monthly income statements that help you predict sales, cost of goods, expenses and bottom-line profitability. This analysis, in turn, ensures that you have put aside enough money to cover corporate taxes or make quarterly payments. For the sales department, it gives the salespeople a monthly target and allows you to create a bonus structure that is commensurate with success.

Related: The Aha Moment: Creating Discipline in the New Year, by Peter Janis, Dec. 23, 2019

As for creating the budget, the easiest way to get it done is by looking at product or customer categories. Run the numbers and project out reasonable growth expectations. Break it down by salesperson, historic peaks and valleys, and you have passed Sales Projection Budgeting, Level 1!

Your accountant should be able to pull together all of the expenses along with costs of goods using average margins, and you should be able to come up with a yearly profit picture. Keep in mind that it doesn’t matter so much if you’re wrong; what matters is that you have given your team a target. This keeps the eye on the ball and forces you to hustle if sales are slow in a given month.

I want to share a word about marketing. Having started my career in retail 44 years ago, I’ve seen our industry evolve from the Shure Vocal Master P.A. to today’s steerable line array speaker systems. Advances in technology forced us to learn about speaker dispersion and efficiency, sound system noise prevention, reducing feedback and so on. Early on, the retail music store was where you would go to speak with someone who could help you put all of the pieces together. To help educate store staff, I conducted hundreds of educational clinics across the country where dealers would invite interested consumers to attend. A motivated dealer could bring in a hundred or more for an event.

Over the years, interest in clinics waned as consumers adopted the internet as a way to learn about products. With the proliferation of chain stores, high staff turnover made it impossible to educate salespeople with any long-lasting effect. The store could no longer keep up with the pace of technology. Instead, the consumer self-educated, and then went to the store to make a purchase. Today, many do not even bother with visiting a store, opting to do both their learning and purchasing online. To us at Radial, the message was clear: We had to drive sales by educating consumers. We did this by increasing our expenditures on ads instead of adding expensive road-dog sales reps.

We budgeted 5 percent of sales on marketing and never cannibalized this budget to prop up profitability. When the market fell into decline, we pushed for more ad space, lower rates, and for our products to be considered for review. Because we paid our bills, we got plenty of attention and last-minute deals. We also managed to get editors to stop by our booth at major trade shows. When an editor has only three days to cover 2,000 displays, getting an editor’s attention plays an important role in driving awareness, as many consumers want to be first to hear about the latest product announcements.

The Aha Moment: Money Matters, Part One, by Peter Janis, Jan. 28, 2020
The Aha Moment: Money Matters, Part Two, by Peter Janis, Feb. 27, 2020

Right now, most performance-related businesses are engulfed in the fog of COVID-19. It may be months before the public can safely assemble in spaces such as houses of worship, nightclubs or concert venues. This makes it the ideal time to address budgeting, hold blue-sky meetings with your staff and maybe come up with a BHAG—Big Hairy Audacious Goal—for the upcoming year. I always presented a BHAG at the beginning of every year. It could be the launch of a new product range, a focus on international markets in countries that had yet to be penetrated, or the reorganization of our production and shipping departments to increase efficiencies. Some of these crazy ideas will push you out of your comfort zone and can lead to new opportunities.

For instance, we decided to enter the hi-fi market with Hafler and Dynaco knowing full well that it would take several years before we could enjoy positive results. The intent was to diversify so that if our main live sound business somehow was affected, we could derive revenue streams from hi-fi and other new markets. Who would ever have predicted a global epidemic in our lifetime? All this to say, when things are slow, take advantage—’cause when things ramp up again, you may be too busy to get anything done!