Page 46 - Budgeting for Managers

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The Parts of a Budget
Semi-variable (fixed base/variable volume). This is a single line
item that is the total of multiple elements. Some of the elements
do not vary per year (or with quantity of production) and others
do. The total costs of any small office are like this. Fixed costs
would include rent or mortgage and equipment leases. Variable
costs would include supplies. Sometimes, a single line item will
be semi-variable. For example, cellular telephone service has a
fixed monthly cost up to a certain number of minutes per month
and then a variable cost for additional use.
When you prepare a long-term budget, think about each line
item in your short-term budget. Would you consider the cost to
be fixed, variable, or some of each? Exactly how would you
predict the cost?
Forecasting Income
Forecasting income is harder than forecasting expenses.
Expenses come from decisions we make, work our team does,
and things our team buys. We are in control of them (or we
should be). But income is a result of choices made by our cus-
tomers. If they buy from us, our income goes up. If they don’t, it
goes down. We can influence income through marketing and
sales efforts and by producing a high-quality product that cus-
tomers want, but we don’t determine it. As a result, it’s harder
to estimate.
There are two basic approaches we can use to estimate
income. We can base our forecasts on past income or on our
marketing and sales plan. Let’s look at each in turn.
Past Income
If we’re going to make an estimate based on past income, total
numbers will not tell us enough. A month-by-month breakdown
will show us some useful information, but it’s more important to
get a picture of who is giving us money and why.
If we look at who is giving us money, we should ask these
questions:
• How many current customers do we have?