Archive for category effective budgeting
Move from loan dependence to independence
Posted by admin in credit, credit cards, economy, effective budgeting, equity on March 16th, 2010
Reaching the Commit stage is the gold medal of partnering— when “me” becomes “we.” As you link your success to each other’s well-being, you move from independence to interdependence.While this goal is sometimes attained in our personal relations, it is elusive for most business partnerships. This doesn’t mean it can’t happen, but long-term partnerships are rare. Businesses change, marketplace realities evolve, and alliances shift market forces in different directions. Achieving this level of partnership ensures that as long as the partnership provides mutual benefits and trust exists, abundance will flow.
The partnership becomes institutionalized when there is formal commitment to it. In our personal lives, people have weddings or other commitment ceremonies to publicly acknowledge their partnerships. Aside from the ritual, which is important, they send a message to the outside world that “we are in this together.” A business example is United Airlines, which ran a series of advertisements featuring their employees, who had just signed an employee ownership contract with management. The message was obvious: Since they were now owner-employees, their customers could expect service as if it were coming from the company leaders—because it was! In an extremely competitive marketplace, this is a powerful message.
What’s So Important About Accounting? – part 1
Posted by admin in Global Markets, effective budgeting, incentive, material costs, paperwork on August 2nd, 2009
For accountants, the i proof is in the y paperwork. Accurate, well-organized records are a must. Sloppy bookkeeping is the road to financial failure—or at least to slowing down success, perhaps a lot. As a first step in becoming “accounting literate,” take the time to write down all business activities, and make sure your records are accurate.
Good salespeople know all about the items they’re selling. Really good salespeople know the engineering calibrations, size, velocity coefficients, or other technical data about their product.
Why do salespeople need to know these things? Here are some reasons:
Extensive product knowledge impresses the customer.
Product knowledge gives customers faith in the salesperson’s claims that the product is exactly what they’re looking for.
It gives the salesperson better insight into the product and its uses, which makes him or her better able to help customers believe this product is the solution to their problems.
It makes the salesperson more successful. That means higher income, greater job security, and better opportunities for promotion, besides the obvious benefits for the company.
The same argument holds true when it comes to accounting knowledge for nonfinancial managers. The more a manager knows about how the people who deal in numbers handle department finances and the methodologies they use, the more that manager will be able to intelligently work with them, making everyone’s job a little easier. So, let’s take a few steps into that world of accounting.
The Management Function in Budgeting – part 1
Posted by admin in budget, effective budgeting, equity, market demand, market forecasts on August 2nd, 2009
A budget is not a budget until it has been carefully scrutinized by management. Even if the numbers add up correctly, they may not have been estimated properly. It’s middle-management’s job to assemble the budget, but it’s upper-management’s job to question the budget. They do this because the budget is the financial tool that will guide the organization in the coming year. Not only does it need to be accurate, it needs to be well-considered and realistic.
In our example, the company missed the mark rather dramatically, showing a profit margin 22 percent less than the one projected in the budget. What questions should management ask?
Why is the projected actual so far off from the budgeted amount? Perhaps it was the fault of the budgetingprocess being too optimistic or of a budget based on considerations unrealistic to the current situation. Perhaps there was a significant change in market conditions or materials costs. In any of these scenarios, management needs to understand why before it can accurately assess the new year’s budget.
Production costs for Units A, B, and C do not match their profit scenario. What gives? It may be that the unit production varies and standardization needs to be applied. If a more costly unit is not earning more exponentially, it may mean that (a) the unit is improperly priced, or (b) demand has slacked off and there’s too much inventory left in the warehouse. In either case, management must look at production standards and market demand before budgeting unit-production figures for the new year.
Fixed and Variable Costs in fiction – part 2
Posted by admin in Companies, effective budgeting, equity, material costs, profit margin on August 1st, 2009
But now let’s say each one of these units requires $3 worth of raw materials and another $2 in assembly charges to create, or $5 per unit. Since those costs are based on the number of units being produced, those costs are variable with the production flow. If you produce 5,000 units, that’s a variable cost of $25,000. Add to that your $10,000 per year in fixed costs, and you have overall production costs of $35,000, or $7 per unit. At a sales price of $9, the profit margin is $2 per unit.
But let’s increase production to 10,000 at $5 per unit in materials and assembly charges. That’s $50,000 in variable costs, plus $10,000 in fixed costs, for a total of $60,000 for 10,000 units. The price per unit is now $6, which yields a profit margin of $3 per unit.
Word About Costs When Creating a Budget Plan – part 2
Posted by admin in consulting, effective budgeting, production cycles, short-term income, variable costs on August 1st, 2009
Variable costs are a little different and allow you some budgeting flexibility. These are costs that fluctuate directly with the amount of business you support. Variable costs—costs that are business-dependent—include supply of goods and materials and, to some degree, part-time labor necessary to keep the business operating apace with demand.
Semi-variable costs are expenses with components that are fixed and components that are variable. For example, telephone expenses are semi-variable costs in that the monthly service charge is fixed and the charges for long-distance calls and the 800 number are variable.
Word About Costs When Creating a Budget Plan – part 1
Posted by admin in Companies, effective budgeting, fixed costs, management skills, market forecasts, short-term income on August 1st, 2009
When budgeting for labor costs, the distinction to keep in mind is between direct and indirect. Direct labor costs are those incurred in any work on products or services that can be tracked readily, such as wages for assembly line workers. Indirect labor costs are for activities related to products or services that are not readily tracked, such as salaries for supervisors and support personnel. Both direct and indirect labor costs can be either fixed or variable.
Let’s look at the three types of costs that make up the expenses part of a budget.
Fixed costs are perhaps the most important costs to manage. They are the costs that remain constant throughout and are impervious to the cycle of business. The rent you pay from month to month is a fixed cost because it doesn’t vary no matter what your sales pattern might be. To a large degree, salaries also are fixed costs, although they may have variable components in terms of performance bonuses. Utility costs are the same way. Any expense that remains constant no matter what the cycle of business is a fixed cost.
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.
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.