Archive for July, 2009
Budget Components – part 3
Posted by admin in budget, effective budgeting, equity, manufacturing, short-term income on July 31st, 2009
A capital budget sets aside funds for capital expenditures. These are primarily new pieces of equipment or facilities, to be used over a period of years. Strategic in nature, a capital budget involves looking at the long-term profit that’s likely to come from investing in that equipment or building.
Many companies allow for flexible budgeting, a process by which budgets are adjusted to match output and/or marketplace factors that influence the company’s revenues and expenses. Companies with a sudden short-term, unbudgeted income opportunity may create a flexible budget that adds to the expense side of the equation, but also adds corresponding revenues from product sales.
Budget Components – part 2
Posted by admin in effective budgeting, equity, expenditures, manufacturing, market forecasts on July 31st, 2009
The revenue section’s real job is to measure revenue projections—what the company thinks its going to earn through all its sources throughout the cycle of the budget—so that it may balance expenses against them. Unless there is a sound strategic reason for it, a business without a positive bottom line won’t likely be a business very long. Expenses may be higher than revenues in certain months, but the goal is always to make sure revenues exceed expenses by the end of the year.
When it comes to the expense side of a budget, the more detail that can be included within reason, the more accurate a view the budget will provide of the firm’s financial condition. More important, managers will be able to control cash flow better when they have a deeper level of information at their fingertips.
Budget Components – part 1
Posted by admin in consulting, management skills, manufacturing, market forecasts, revenue on July 31st, 2009
Each budget will have two main sections, and a good manager will come to know each of these sections as intimately as his or her own family.
The first section measures company revenues, or income from sales, investments, and any other sources. You need to match up your expected revenues with your expected expenses, the other main part of the budget.
Say you work for a luxury boat manufacturer. Your company itemizes revenue from the sales of a certain type of speedboat. On the expense side, it then has to make sure the costs involved in building this boat will be less than the revenues it will generate. You don’t want to build speedboats that cost more than people pay for them.
Other roles of the budget
Posted by admin in effective budgeting, financial growth, market forecasts, revenue on July 31st, 2009
A budget has many uses beyond charting the company’s financial goals.
It can assist in measuring the feasibility of technology development— both its likelihood and its application—and can help provide marketplace forecasts. It also may help measure the impact of new legislation affecting the market and may reflect new regulations—both internal and external—that touch the company. It’s all there if you know where to look.
If your company makes ball bearings, the tactics for creating better bearings may be to define consistent settings on the milling equipment and monitor those settings as a way to reduce inconsistencies, thus reduce costs due to production problems. The procedure for doing so might involve a worker performing an inspection every half hour, noting the settings in a log, and reporting to the supervisor any variations beyond allowable limits. Or if your concern is with sales, the tactics may be to identify territory penetration for a sales force right down to the number of new contacts made per week with revenue computed on the number of sales per call made each week. The procedure would likely involve logging all new contacts and tracking the results. These are budget concerns and can be measured by the financial impact on your company of both revenues and costs generated.
Stepping into the Budgeting Process
Posted by admin in consulting, effective budgeting, performance objectives, production cycles, revenue on July 31st, 2009
Define the tactics that will help a department or company achieve its objectives. Goals and objectives can be achieved only if the company sets out a tactical game plan. There are different ways to get from Point A to Point B and a company’s success will depend on choosing effective tactics to reach those goals. The cost of pursuing those tactics also will be part of the overall budget, reflected as part of the cost of doing business.
The best tactics usually yield the highest reward, whether that’s in terms of annual earnings, market share gain, or growth potential. But tactics vary with each situation, each company, and each strategy. The important thing is that those tactics are reflected in the budget in terms of their effect on both the revenue and expense side.
Identify procedures to help achieve that goal. Procedures are to tactics what objectives are to goals. They are more specific, more operationally oriented—almost mechanical.
Stepping into the Budgeting Process – part 2
Posted by admin in consulting, effective budgeting, financial growth, performance objectives on July 30th, 2009
What company goals does the budget embrace? These goals usually include profitability, but they also include investing in the company’s ability to develop new product and service offerings to customers to help assure the company will be around tomorrow. Nearly all budgets help managers develop a balance between making money today and making money tomorrow.
What objectives can be identified in the budget? Goals are important, but only clearly identified performance objectives will make them happen. Objectives clearly spelled out are crucial so that all parts of the company understand and pursue the same goals.
If your company’s business is manufacturing and marketing luxury powerboats, its objective might be to increase sales 15 percent or establish a new outlet in a neigh-boring city. Increased sales of related paraphernalia as a financial objective might be a secondary objective. All such initiatives need to be reflected in the budget because all are strategic goals that will have either a positive or a negative impact on the bottom line.
Stepping into the Budgeting Process – part 1
Posted by admin in Taxes, consulting, effective budgeting, expenditures, management skills, production cycles on July 30th, 2009
Like any plan, a budget requires more than sitting down, crunching out some numbers that add up to a positive bottom line, and handing it over to the accounting department to plug in. Effective budgeting requires thought, careful planning, and a look at issues beyond the numbers. Consider the following components when you budget:
Be careful how the budget is created. Department managers who are strictly concerned with the bottom line may, just to look good, cut out expenses that are vital for the department to operate effectively. That’s not an effective way to do a budget.
Defining Budget Type – part 3
Posted by admin in Taxes, consulting, expenditures, financial growth, management skills on July 30th, 2009
One of the major facets of budgeting is cost control, and that’s also one of the major responsibilities of company managers. Budgets are the key to cost control, but only when managers have had a hand in developing those budgets. If management doesn’t understand and use the budget, it will do a company no good. Involve all pertinent staff in the budgeting process. That allows them greater ownership of the process and enables them to better stay with the budget they’ve helped develop.
Strategic budgets help a company decide whether to invest in a business venture that may take several years to become profitable. A management consulting firm, for example, might be considering whether to develop a software division. A strategic budget would help it figure out (1) whether over the long haul this made good sense, and (2) how long it will take before the venture pays off.
Defining Budget Type – part 2
Posted by admin in Companies, Money Tips, expenditures, financial growth, production cycles on July 30th, 2009
Longer business cycles require longer-lived budgets. Even though they may be subject to review and revisions, some items or operations unfold more fully over a longer time period. This results in a longer-term or strategic budget. While the operational budget anticipates financial flow for a year or less, the strategic budget reacts more intrinsically with a company’s long-term business plan. The net effect may be a less precise, but more comprehensive approach to financial management.
Not all companies need to create a strategic budget. Your company may be one of those happy to project from year to year, knowing that retained earnings and reserves may be all you need to set the stage for the subsequent year’s financial growth. On the other hand, if the company is involved in major capital acquisition that will depreciate over time, includes extensive research and development that runs up expenses for years before any revenue might be realized from the project, or involves extensive investment plans that will take several years to bear fruit, then a strategic budget may be more appropriate.
Defining Budget Type – part 1
Posted by admin in Companies, Global Markets, budget, expenditures, production cycles on July 30th, 2009
Budgets, like business plans, come in different makes and models depending on the purpose for which a company wants to use them. If its purpose is to plan strategies for the future, the company uses a long-term budget to set general goals for the next five or ten years. If its purpose is to plan the details of its operations, the company prepares a short-term budget, generally for a single year, to translate its goals into financial terms. Whether a budget is long-range or short-range, smart managers will revise them periodically, as conditions change.
The one-year budget is most commonly known as an operational budget, designed to help a company or the departments within that company get through one more year of sales and production cycles with some semblance of financial success. The 12-month time frame does make the budget somewhat strategic in nature, but by and large its purpose is to anticipate and plan for coming issues and trends within the business year.