Page 73 - Budgeting for Managers

Budgeting for Managers
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Estimation Methods
There’s a fundamental difference between how we estimate
income and how we estimate expenses.
Our income is the result of the decisions our customers
make and the actions they take. (Do they buy what we sell? Do
they buy from us? How quickly do they pay their bills?) We can
influence income by making a good product or service, market-
ing it well, selling it well, and maintaining good customer sup-
port and customer relations. But the decision is not ours. An
income estimate is a guess about how much we’ll make based
on what other people will do.
Expenses are different. Departmental expenses are the
result of decisions that we make within our department. The
real question isn’t “How much will we spend?” The real ques-
tions are “What do we want to do? What will it cost to do what
we want to do? How will we spend our money? What is the
total?” For expenses, we do need to think about what will hap-
pen, but what really matters is what we are going to do.
Thinking About What Will Change
If everything were going to stay exactly the same and we were
going to do everything the same this year as we did last year,
we would just copy last year’s actual figures for this year’s
budget and we’d be done. The art of budgeting is in deciding
what we think will change and what we think will stay the same.
We should think about changes in this order: changes outside
our control first, and then what we will do differently.
Changes Outside Our Control
If people are buying more (or less) of what we sell, we will need
to buy more (or fewer) components and pay for more (or less)
labor. If we’re buying the same amount of something, but the
price per item is going up or down, then we’ll need to adjust our
budget accordingly. When we think about changes outside our
control, we should review each line item: first income items,
then expense items.