Your business goodwill plays a major role in your budgeting process.
How you feel about your business, and how you perceive others to feel about your business, has a major influence on your budget forecasting. If you think, or know, that others think highly of your business and your products, you’ll know you have a greater chance of success. If you know or believe that customers or suppliers avoid dealing with you, you’re going to aim lower.
Goodwill comes from good management. It is the “unidentifiable” value that adds itself to your business through a combination of your smart and ethical business decisions, and from you knowing and understanding your business and all its components. That decision process, and the understanding of what your business is doing is covered by the 8 “E”s of Good Business.
The 8 “E”s of Good Business
The 8 “E”s of Good Business can be divided into three categories: the guiding principles for every decision you make, and the measurement and management of the outcomes of those decisions.
The first category covers:
This was formally stated as test to be applied to all decisions, by everybody at all levels, in the Australian Government. In reality, it must have been applied to every business decision ever made.
The efficiency relates to ensuring value from the resources applied with a minimum of waste; effectiveness indicates the extent to which goals are achieved; economical relates to minimizing the sum of current and future costs; and ethical relates to the application of integrity and fairness in dealings, which are tied to the generation of goodwill. The four must be balanced to optimize the transaction but there will be any number of internal and external forces – past, present and future – influencing that balance.
Equity, Earnings & Energy
The second group covers the three main financial reports used by every CFO of every successful business:
- Equity – the Balance Sheet
- Earnings – the Profit & Loss Statement
- Energy – the Cashflow Statement
The “Equity Report”, or Balance Sheet, shows your assets and liabilities – what you have and what you owe – and your net equity, at a chosen point in time. A well-presented Balance Sheet, with earlier comparative figures, that clearly shows each category and sub-category of assets will give you and a reader a good idea of your liquidity and the strength and agility of your business.
The “Earnings Report”, or Profit & Loss, or Statement of Income and Expenditure, has its purpose explained by its various names. It shows, on paper, how much profit, or loss, your business has generated by adding revenue and deducting the various categories of expenses incurred for the period. It doesn’t show whether you have been paid for the sales you have made, or whether you have paid the expenses you have incurred while generating the profit, or loss, you are reporting.
The “Energy Report”, or Cashflow Statement, or Statement of Cashflows, shows you the “comings and goings” for each “type” of cashflow, namely:
- Operating – from the core business activities
- Investing – purchase (and sale) of assets used within the core business, and the purchase or sale of other investments and the dividends or interest received therefrom,
- Financing – borrowings and capital raisings, and associated interest and dividends, along with loan reductions
In effect, the Cashflow Statement provides you with a high-level forensic journey from the opening cash figure to the closing cash figure for the period in question, helping you to see whether your business is currently energetic, energizing, treading water, or becoming lethargic.
There’s a lot more to say about cashflow and energy at a later date.
For now, think about applying the “7E” test to everything you do in, and for, your business.
Learn the “ins” and “outs” of the Equity + Earnings + Energy reports – it’s easier with numbers you know; your numbers that have been generated by your decisions – and use that knowledge as the foundation for the decision-making based on the Efficient + Effective + Economical trio.
Ethics & Goodwill
And make sure that every decision that you make is Ethical, so that the other party to each and every transaction – be they a supplier, an employee, a contractor, a customer, or a traditional owner – will happily participate in another transaction with you. It’s that desire, intention, willingness, call it what you will, of others to interact with your business again that generates what is ultimately the most valuable component of your business. Goodwill.
The Goodwill you generate is very often the largest component of your equity in your business, yet it doesn’t show on your Equity report. There’s not a line for it on your Earnings or Energy reports either, but it has a major influence on the business outcomes that are presented in those reports and future reports. Goodwill has a presence, or not, in every number on every report.
Given the importance of goodwill to your business, then perhaps an “Ethics Report”, the eighth “E” should be added to your suite of business management reports. That makes sense given that you have ethical considerations as part of your decision-making process.
What do you put in the Ethics Report? Do you list the nice things and not so nice things that people – both inside and outside of the business – have said about you, at least those you’ve heard – and keep score? Do you review your own decisions, and ask could that have been more environmentally friendly, or more consumer-friendly, or culturally considerate?
Did your salespeople pressure customers – existing and potential – too hard, so that now they might not pick up the phone? Have you lost customers recently, and if yes, do you know why? Have you won customers, and do you know why? Was it purely on price, or were you doing something extra, or not?
Could you have looked after suppliers better, perhaps ordering earlier so you didn’t have to harass for quick delivery, perhaps not taking quite so much of their margin, or paying them earlier rather than dragging them out to 90 days, or more, perhaps forcing them to consider legal action?
That sort of information, that qualitative information, is not on the other reports, but whether you know it or not, will have a major impact on your future business. If you are aware of it, you can use it when planning for the future.
Your Budget is Your Own Report Card
Your budget is influenced by your Goodwill.
Your budget is the sum of your forecasts. Your forecast revenues, your forecast costs, your forecast cashflows, your forecast staffing decisions, your forecast investment decisions, and your forecast financing decisions. Every one of those decisions considers how your customers, your suppliers, your employees, your financiers, your industry, your community, and ultimately you, feel about your business.
More correctly, it’s how you believe those different groups feel about your business, and in turn how you feel your business, and how its people and products are received by the business community. In effect, your budget is your self-assessment of how you believe the past behaviour of your business, internal and external, will impact your future results.
If you’re happy with your budget, then you’re giving yourself, your business, a Pass mark. You’re happy with your decision process, and your results. Well done, but keep looking for areas to improve, because they are always there, and aim for excellence with a Distinction or a High Distinction.
If you’re not happy with the budget, but feel it is the best you can do going forward, then look for the reasons you are not happy. It might require further learning, or a revision of your decision process, or your business values. Perhaps all.
But seeking further learning and reviewing your business values, and applying those to your decision process will improve your business and increase its standing in the community. That will generate further goodwill, and let you set future budgets with greater confidence.