Page 184 - Finance for Non-Financial Managers

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The Annual Budget: Financing Your Plans
• Negotiating better prices and terms with suppliers and
developing alternate suppliers
• Planning more use of overtime to reduce the need to hire
more permanent workers (although there’s a cost in
terms of overtime premium that reduces the savings from
this option)
• Modifying planned sales and marketing campaigns where
results are not reasonably ensured
• Changing distribution methods, combining delivery
routes, reducing smaller orders, and so on
In a company where budget decisions are controlled by top
management, the negotiation process may indeed be simply an
edict to “cut 10%” from every department. In 1967, when
Ronald Reagan became governor of California, he created a
huge furor when he did exactly that in trying to balance the
state’s budget. He soon relented and found a more objective
way to reduce costs. But the lesson was still lost on many cor-
porate managers, perhaps because an across-the-board cut
avoids making hard, individual decisions.
In a more empowering management environment, top man-
agement will ask subordinates to remove more cost from less
critical functions and less from the more critical departments.

Hard Lessons Learned the Easy Way
Upper-level managers who mandate cutting a certain per-
centage across all departments may do more than create a
furor; they can also cause severe and lasting damage. What does a
savvy manager do who anticipates an order to reduce by 5% across
the board? He or she raises all figures by 5%. So management gains
nothing—unless it orders a 10% reduction. And a savvy manager who
is unsure about the percentage to be applied would likely pad the
budget for a worst-case scenario.
The result is that the managers are playing cat-and-mouse “negotia-
tion” games with the figures—a lot of time and effort wasted simply
because upper management prefers making budget cuts “the easy way.”
Good managers make hard, individual budget decisions for the good of
the company.