Page 74 - Budgeting for Managers

Creating a Production Budget
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For each income item, ask the following questions, in this
order:
1. What changes do we expect in quantity purchased from
current customers? What changes do we expect in quantity
purchased from new customers? (See “Planning the Future
in Detail,” below, for ways to answer these questions.)
2. Are there changes in our company’s prices for existing
items? We adjust our prices for these changes. (If you set
prices yourself, see Chapter 11 for some tips.)
3. Are we selling any new products or services? Using the
marketing plan, we estimate income from these new prod-
ucts or services.
4. Are we selling to any new markets? Using the marketing
plan, we estimate income from these new markets.
Along with the income figures, we’ll have our production
plan. Our production plan is crucial in guiding our expense
budget. You will see why later in this chapter, when we look at a
sample manufacturing budget.

Percentage Increases and Decreases
Some businesses estimate changes in line item values by
applying the same percentage-rate increase to several items.
There are reasons for doing this—some of them good, some of
them bad.
Sometimes, a company needs to cut expenses and the
financial office just tells all departments to cut every item by,
say, 10%. If you have a block budget, you can re-arrange your
budget, as long as you stay within the total spending limit. If
you have a line-item budget, you might have to negotiate
changes to keep one line item higher by reducing others more
than 10%.
Sometimes, a company responds to general economic indi-
cators such as the cost of living or market indicators such as an
industry-wide increase in prices, by adjusting line items in per-
centages. This only accounts for an expected change in price,
but two further adjustments may be required. First of all, you