Among the many small mistakes that a great many business leaders make that lead to very large messes is the notion that January 1st brings with it some great power to defy all laws of economics, physics and nature. It is as if, for many, that the crystal ball that drops each year over midtown Manhattan contains some magic – a magic that enables, among other things, tremendous leaps in revenue and earnings run rates from one day to the next.
For how else would one explain the budgets drawn up in so many board rooms across America that call for huge jumps in sales, gross profit, EBITDA or other from Q4 of one year to Q1 of the next? In examining many of these plans, I have only been left to conclude that those drafting them must have believed that New Year’s Day brought with it some sort of other-dimensional power.
Otherwise, why else would any rational businessperson not take care to see that their budget process ensured that run rates from one quarter met up with those of the subsequent quarter? To fail to do so, will result in the creation of cliff events, where, seen visually, a vertical line appears on day 1 of a following period in order to facilitate the budgeting of the extraordinary, planned growth of the following period. Not only are such budgeting acts ill-conceived, but the subsequent attainment of the budgeted goals are nigh on impossible. That’s because to achieve a significantly higher run rate in a subsequent period, one needs to be on that run rate at the end of the preceding period. It’s just math.
It’s all well and good to declare a certain growth target for a coming year, say 10% versus the prior year. But leaders with their wits about them always ensure that the budget line for that growth connects up in a realistic way to the line of their current run rate on the day they draw the plan. To do things any differently almost always results in a cliff event and hopes for some amount of magic from the Waterford sphere.
Cliff events are easily visible on paper. They can be seen by anyone in your organization and can be tremendously demoralizing. They result in inevitable misses to the plan which are difficult to recover from and that often lead to people giving up before the game has really even started. When people feel there’s little left to play for, they simply stop playing. Cliff events have that effect on teams. They also create division between leaders and everyone else as everyone else sees them as calculated even Machiavellian moves to avoid paying bonuses, commissions and other at risk pay. But these messes are wholly unnecessary. Because there’s nothing magic about January 1st.
The best operators know this. They take pains to include their teams in the budgeting process and are careful to ensure that run rates line up quarter to quarter, always. By doing both, these leaders engender trust among those they lead, while creating enterprises that grow sustainably; because they grow thoughtfully – without aid of magic balls, 12 grapes, or any other hope-filled traditions – by simply selling just a tad more on January 1st than they did the day before.