Page 180 - Finance for Non-Financial Managers

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The Annual Budget: Financing Your Plans
ture. Every department needs more resources to do its job—or
at least that case can always be made and apparently sup-
ported. Most companies today are trying to get by with lower
costs than previously, as a hedge against the possibility that
sales or profits will be lower than planned. Whether an expen-
diture will deliver the expected benefit or not is a big question,
of course, but a manager can’t know the answer until he or
she makes the expenditure, so it’s hard to disapprove an
expenditure in advance unless it violates some predetermined
standard, like a budget.
Given that premise, managers can choose to accept every
rationale extended by an employee that seems logical, or they
can audit the validity of every request to spend money, or they
can simply make arbitrary choices until they run out of
money. Since none of those options is wise in today’s business
environment, senior managers must find a way to relate the
need to spend money to what’s really needed to support their
sales goals, their R&D goals, their expansion goals, or whatev-
er their operating plan calls for as the measure of success for
the coming year.
Enter the budget—a planning and analysis tool that enables
management to estimate the expenditures needed to support a
given level of sales and to set spending limits based on those
estimates. Remember that some expenses are variable with
sales, some are fixed, and some are somewhere between vari-
able and fixed (semi-fixed). You can begin to see the possibility
that we can create a budget that documents those relationships
and thus sets limits on reasonable spending for potentially every
item in the company’s chart of accounts.
We already know that variable costs grow or shrink in
direct relation to sales levels. If you think about it, though,
many other cost items in a budget have identifiable relation-
ships to other cost items, not just sales. Those relationships
can enable a company to base its spending decisions on its
own operating history.
For example, assume that last year group medical insurance