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Finance for Non-Financial Managers
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cost the company 2% of wages paid and the insurer has
announced a 10% rate increase for the coming year. It then
makes sense to build a budget that includes health insurance at
2.2% of budgeted labor costs for next year (10% more than last
year’s 2%), with the comfort that the relationship will hold at
almost any labor level. Now the company doesn’t have to
reconsider health care costs with every budget revision. It can
simply let budgeted health insurance costs follow budgeted
wages, which are controllable.
Figure 10-2 shows some relationships that may help a com-
pany develop a budget with built-in controls on costs that might
otherwise be difficult to estimate, based on their relationship to
other costs that are more visible.
You can probably think of more of these relationships that
would apply to your company’s budget, but this will give you
an idea of the possibilities. Keep in mind that a line item that’s
budgeted based on a percent of sales, when the activity bears
no relation to sales, is a waste of time as a control tool. That
becomes calculation without accuracy and without value, other
than to fill a space in the budget file. Look for the relationships
that have meaning, even if the basis for a predominantly fixed
cost is simply last year’s actual expense plus an inflation fac-
tor, as it sometimes might be, such as when budgeting for
building rent.

The Budgeting Process—Trial and Error

So you’ve exerted diligent effort, honestly given your depart-
ment’s budget your best sense of accuracy, and provided for
every cost you think might be incurred to meet the goals you’ve
been assigned. You feel confident as you send your budget to
your boss. (You’re the first of her direct reports to get yours in—
another feather in your cap.) You wait for the feedback after all
the other departments submit their parts and all the depart-
ments, divisions, and cost centers get combined into a total
company draft plan.