Does Your Budget Leave A Lot To Be Desired?

Jun 11, 2014

If you have been reading my blogs for a while, then you know I am a big advocate for budgets. If this is the first blog you’ve read of mine, well I’m a big budget advocate! However, a poorly prepared budget is not often worth anything more than the paper on which it is printed. In order for a budget to be a useful tool, it is crucial that work is put into it!

budgetI recently spoke with a manufacturer who was doing what they perceived to be a budget, but in reality, all they were doing was determining future sales. The sales team was looking at prospects and future contracts and estimating what the sales for the year would be. Do not get me wrong, that is important and often times the starting point of a budget. The problem is right where the budget began it also ended. No determination was made to integrate that budget into the overall operational plan.

Some major issues associated with this could be staffing. If you are understaffed, you may not be able to meet customer demand, which of course could lead to the loss of customers. Or, being overstaffed, you may be paying for labor you are not using. The really scary part of this is of course losing customers but also the fact that if no one walks out to the “other side of the wall” they may not realize people are just standing around. With a budget you can compare actual versus budgeted and see if a cost is higher and determine why. The same would be true for material. If you purchase poor quality material you may be using more than you should use for production. It is hard to know for certain without knowing what the standard (budget) should be.

A good budget could start with sales but then determine the staffing and materials needed to support the sales. You also can determine fixed costs and incorporate those into the overall budget. A budget is only as useful as the work you put into it in the front end. When you are in the time period of the budget, it can be too late to determine what it is supposed to be. I’m not saying doing just a sales budget is a complete waste of time, since you have standards to compare to your sales. However, it sure does leave a lot to be desired.

Categories: Cost Accounting