By Sandy LeDuc
LeDuc and Sikowitz
The heady financial environment of the 1990s led many of us to believe that profits came easily. Sure, it was difficult to find enough qualified help. Some of our quality standards were pushed to the limits as we responded to high demand with our limited human resources. In spite of those problems or perhaps because of them, we made a fair amount of money. We managed much less with traditional tools than with our gut and usually just in time.
These days, as we wait for the economic recovery or for the next shoe to drop, we could find some comfort in the sense of control derived from preparing and monitoring an operating budget. This is a method that large organizations use to inform financial decision-makers and monitor accountability by managers. It forces management at all levels to predict the amount of financial resources it will need to achieve a particular level of sales.
This is a team activity. Thrash through sales predictions by lines of business. Compile marketing and advertising budgets. Operations people should be able to predict the flow of direct expenses such as raw materials and labor given the stated sales projection. Schedules of fixed costs such as occupancy, administrative human resources, insurance, and technology can be assembled by administrative personnel. Don't forget capital expenditures. Assemble it all and massage the result until it meets management's profit and cash flow objectives.
The use of historical and current data as well as expected trends is critical. Documentation should be required to help establish a methodology for budgeting that improves over time. The budget can be laid out monthly, quarterly or annually. Factor in seasonality where appropriate.
Don't stop there. Periodic monitoring of the budget against actual results is important to encourage management to adjust its direction as necessary. Accounting software available today makes this monitoring fairly easy.
Don't be surprised if the process takes you places you didn't expect to go. Once you look at lines of business you may be forced to eliminate some lines to meet your goals. You may be encouraged to think differently about some costs that were previously thought to be untouchable. Human resources and tasks may be shifted around to accomplish the goals.
Advantages abound. Open-book organizations gain the advantage of providing managers with a more holistic understanding of the business and an understanding of how resources flow through the organization. Closed-book organizations educate accounting personnel as to cash flow requirements and pulls them up out of the detail to a broader business view. In either situation, management moves into the future with a well-thought out plan which is imperative in these troubled times.
Fall 2002 -Volume 12, Number 4