Budgets:
Not Just For Accountants
"I can’t do a departmental budget! That’s what the accounting department is for," said John, head of production at a mid-size post-production facility.
I was introducing company execs to a zero-based budgeting system to assist them in strategic planning. One of the goals of the program was making managers more financially responsible. This concept has been shown by a significant number of studies at leading business schools to deliver positive results in bottom-line profits as well as job satisfaction.
But knowing that John could be a bit obstinate, I decided to take a different tack. "Do you get storyboards very often?" I asked.
"All the time. How else could we bid work?" John replied.
"What do you do with them?"
"First I look at their complexity. I decide if the due date is realistic, then I look at what resources will be needed. Next, I list the people who will be involved in the work, for how long, the amount of stock and other materials that will be used, and of course, equipment time."
"Is that all?" I asked.
"Well, the exec producer wants me to tell her how much it is all going to cost so I put in everyone’s salaries, etc.," John said matter-of-factly.
"Do you know what you just did?"
Silence. I answered for him. "You just did a budget without realizing it!"
John went on to do a budget for his whole department and it was as meticulously prepared as his production bids. He even tracked his actual costs month by month and was elated at the outcome. The next year’s budget was even better, based on the information learned in the first year.
In pitching my consulting services, providing a business perspective to creative and technical companies, I am often asked by working owners/founders what will make a difference in their companies. Assuming they are competent at the creative and technical tasks, I tell them that doing a company budget and instilling a sense of accountability and responsibility in the organization is a vital business tool. Never underestimate the value of a budget.
In many small- to medium-sized companies, including production and post-production facilities, budgets are not drawn up for the company as a whole or, if they are, it is considered the accounting department’s job. And often the accountants do it with little or no assistance from the operating departments. This only creates a budget for which only the accounting department is responsible. That’s a big mistake.
Yet management prepares zero-based budgets all the time. Translating tasks that are routinely done for the sake of production – bidding storyboards and scripts – to the operating departments is all that’s needed to create a successful departmental or company budget.
A budget puts the goals and objectives of the organization into financial terms. All companies have goals, so why do so few prepare an annual budget? You would not drive cross-country without a road map, so why run your company without the business equivalent? In these competitive times, with technology changing rapidly, a budget is essential.
The benefits of a well-thought-out budget are many. They include:
- Prioritized allocation of resources.
- Managing work efficiently.
- Differentiating between cost centers and profit centers.
- Providing a basis for improving and evaluating performance of key managers at all levels.
- Establishing a control mechanism for the company.
- Enabling management to take corrective actions early.
- Increasing profitability.
The essential components of the budget are:
- Revenue budget broken out by source, division, or product line.
- Production costs (i.e. cost of sales) related to the revenue budget.
- Overhead by department, prepared by those directly responsible for the area. (Done for all departments, whether operating or administrative.)
- Personnel costs by department.
- Capital expenditures by department, including all installation and setup costs;
- A final report detailing the organization’s plan on a monthly basis for the following year.
Throughout this effort, the accounting department and financial executive must direct the progress of the budgeting process. Their job will be to consolidate the components and prepare the budget totals, including the profit and loss statement, balance sheet, and the most often ignored report, the cash flow.
Of course, the budget is just a tool to guide the organization. To make the effort the most effective, a company must prepare monthly financial statements in the same format as the budget, incorporating better/worse-than-budget information on a line-item basis. Presentation should include year-to-date and current-month analyses. Providing the this information to department heads and others with P&L responsibility increases their accountability.
Used as a planning tool, the budget can help to prepare your organization for important events. For example, if you know when new equipment upgrades will be required, you can use the budget to manage your cash flow so that money for those purchases is ready when it is needed.
In these competitive times, and with the continual rise of boutique operations, companies must operate as efficiently as possible. Developing a budgeting and related accountability and responsibility system is not a simple procedure. Nor will it will be an overnight success. Most companies need two or three years to effectively incorporate the process into their organization.
Why am I bringing this up now? We are fast approaching the beginning of the fourth calendar quarter. If, like most companies, you are on a calendar year fiscal year, now the time is to begin your budget preparation for 2000. Your goal should be to have the full budget approved and finalized before the end of the year.
I am sure of one thing: once you begin the process and see the results it delivers, you will make it a standard procedure forever. You can count on it!
