Business and Budgeting Concepts

Budgeting

• Most companies use budgets, though some don't.

• Department heads at UC hold revenue and cost budgets.

• The government pays a lot of money for students to study at UC. International students are not government funded.

• The more technology-related the class, the higher the payment received by the university.

Definition of a Budget

• A plan outlining resources needed over a specific period.

• Usually quantitative, but can include qualitative aspects.

• Used to coordinate activities.

Three Key Budgeting Aspects

• How budgets are used to plan and control.

• Operational budget with a couple of products.

• Cash budget: Ensuring enough money to pay people.

• Companies go bankrupt because they can't pay bills, not necessarily because they aren't making a profit.

• Cash budget is critical for knowing when cash is coming in and going out.

• Budgeting is a big part of detailed formulation and action plan to achieve some goal or strategy

• Budgeting is about planning and control.

Planning & Control

• Action plan for acquiring or getting rid of assets.

• Looking at the resources, how to use the resources.

• Often a short-term, twelve-month plan, but doesn't have to be.

• Rolling budget: Every month or quarter, another is added.

• Budgets can include non-financial measures like customer satisfaction and delivery times.

Budgeting Process

• Budgetary control ensures everyone sticks to budgets.

• Planning: Coming up with objectives.

• Control: Checking to see how many students came and evaluate all those different parts and figure out okay these things worked really well, these things didn't work really well.

Advantages of Budgeting

• Identify future problems.

• Compels managers to plan.

• Provides a measure for comparing actual performance.

• Promotes communication and coordination. Coordination is critical in manufacturing companies.

Limitations of Budgeting

• IT department doesn't have a direct connection to inputs and outputs.

• Standards can change quickly. When COVID happened budgets were meaningless.

• Factors outside a manager's control affect the variance.

• Delineating a manager's responsibility may prove difficult.

• Human factors are involved.

  • Managers try to downplay expectations.

Types of Budgeting

• Incremental budgets:

  • Take what was done last year and incrementally change expectations.

• Zero-based budget:

  • Budgets go back to zero, and are built from scratch.

  • More time-consuming, but can yield better outcomes.

  • Warren Buffett's companies use zero-based budgeting.

Beth Fuller

• TikToker, Beth Fuller, who has a zero based budgeting philosophy for personal budgets.

• If you set a category of spending such as eating out and you track it the research says if you set up a budget they're probably going to only spend 50 or 80 and the one who set a lower limit actually spend a lot less.

• If you set a budget for doing something and you actually track your spending, you will actually spend less than your budget the research says.

Beyond Budgeting

• Companies that have decided not to budget.

• Budgets don't focus on strategy, and often contradict it.

• Very time-consuming and costly to put together.

• Constrained responsiveness and flexibility.

• Often deter change and add little value.

• Focus on cost reduction rather than value creation.

Mainfreight

• Warehouse logistics company.

• Never had a budget. Founded by an accountant who was one of New Zealand's First Billionaires because of main freight.

• No accounting or marketing department.

• First company in New Zealand to make a climate risk report.

• Key skill: Connecting clients with transportation companies.

• The company's cultural pillars:

  • Culture

  • Family

  • Philosophy

• Targets are about being better than the same week the year before.

• Tons of communication between senior management and branches.

• Profit calculation in the branches every week and talk about it with the senior managers to see how they're going.

• A lot of profit margin targets, they've got a lot of non financials, financials, they directly track a lot of stuff against last year

• Photo of every single employee, now they just list all their names.

• No job description. If you want to become a senior executive at Mainfreight, you've to start at the bottom and work your way up.

Mainfreight System

• Set a very strong culture.

• Lots of symbols, open plan offices, no reserved parking, shared lunch rooms, round meeting tables, even the CEO and CFO don't have offices.

• Long-term planning.

• Rewards and compensations, a lot of visibility.

• Minimally specified contracts, no organization chart.

• Weekly format and timings, twice-annual internal audits, buddy branches.

• Very autonomous, very low levels of management.

• Everybody gets promoted internally, they don't hire externally.

Budget Preparation Example

• Operating budget:

  • Sales budget, production budget, selling and admin budget income statement.

• CVP analysis often uses budgeted information not actuals because predicting the future so probably better to think about what things are going to look like in a future time period.

• Product sales:

  • 60 units of thing one and 40 units of thing two.

Sales Budget

• Projected number of units times the expected sales price.

• This equals the total amount.

• To get these numbers:

  • Past experience

  • Talk to marketing people

  • Market research

  • POS data

  • Economic conditions

  • Industry changes

  • Market share

  • New competitors

• What inventory do we need for these products at the end of this month: finished goods.

Production Budget

• Sell 60 and 40, ending inventory to be 25 and 9 gives projected budget in units.

  • Manufacture 65 units. Sell 60, increase inventory by five.

Direct Materials

• Two direct materials A and B for thing one and three direct materials A, B and C for thing two, and we have different amounts that we need for each of these products.

• Always start from production number, not sales number.

• List the materials at their prices.

• Figure out inventories want to increase. Raw Materials.