Budgets and Managing Money

Module One: Budgeting Methods

The Module Will Cover:

 Types of Budgeting Methods
 Levels of Involvement in Budgeting Process

Four Main Types of Budgeting Methods

There are four common types of budgets that companies use:
1. Incremental
2. Activity-based
3. Value Proposition
4. Zero-based.

These four budgeting methods each have their own advantages and challenges, which will be
discussed in more detail in this guide.
 

 
 
1. Incremental budgeting

Incremental budgeting takes the previous year’s actual figures and adds or subtracts a percentage to
obtain the current year’s budget.  It is the most common method of budgeting because it is simple and
easy to understand.  Incremental budgeting is appropriate to use if the primary cost drivers do not
change from year to year. 

However, there are some problems with using the method:

It is likely to perpetuate inefficiencies. For example, if a manager knows that there is an opportunity to
grow his budget by 10% every year, he will simply take that opportunity to attain a bigger budget, while
not putting effort into seeking ways to cut costs or economize.

It is likely to result in budgetary slack. For example, a manager might overstate the size of the budget
that the team actually needs, so it appears that the team is always under budget.

It is also likely to ignore external drivers of activity and performance. For example, there is very
high inflation in certain input costs.  Incremental budgeting ignores any external factors and simply
assumes the cost will grow by, for example, 10% this year.
 

2. Activity-based budgeting

Activity-based budgeting is a top-down budgeting approach that determines the number of inputs

required to support the targets or outputs set by the company.  For example, a company sets an output
target of $100 million in revenues.  The company will need to first determine the activities that need to
be undertaken to meet the sales target, and then find out the costs of carrying out these activities.

3. Value proposition budgeting

Value proposition budgeting is really a mind-set about making sure that everything that is included in
the budget delivers value for the business. Value proposition budgeting aims to avoid unnecessary
expenditures – although it is not as precisely aimed at that goal as our final budgeting option, zero-
based budgeting.
 
4. Zero-based budgeting
As one of the most commonly used budgeting methods, zero-based budgeting starts with the
assumption that all department budgets are zero and must be rebuilt from scratch.  Managers must be
able to justify every single expense. No expenditures are automatically “Okayed”.

Zero-based budgeting is very tight, aiming to avoid any and all expenditures that are not considered
absolutely essential to the company’s successful (profitable) operation. This kind of bottom-up
budgeting can be a highly effective way to “shake things up”.

The zero-based approach is good to use when there is an urgent need for cost containment, for
example, in a situation where a company is going through a financial restructuring or a major economic
or market downturn that requires it to reduce the budget dramatically.

Zero-based budgeting is best suited for addressing discretionary costs rather than essential operating
costs. However, it can be an extremely time-consuming approach, so many companies only use this
approach occasionally.
Levels of Involvement in the Budgeting Process
We want buy-in and acceptance from the entire organization in the budgeting process, but we also want
a well-defined budget and one that is not manipulated by people.  There is always a trade-off between
goal congruence and involvement. The three themes outlined below need to be taken into consideration
with all types of budgets.
 
Imposed budgeting

Imposed budgeting is a top-down process where executives adhere to a goal that they set for the
company.  Managers follow the goals and impose budget targets for activities and costs.  It can be
effective if a company is in a turnaround situation where they need to meet some difficult goals, but
there might be very little goal congruence.
 
Negotiated budgeting

Negotiated budgeting is a combination of both top-down and bottom-up budgeting methods. 

Executives may outline some of the targets they would like to hit, but at the same time, there is shared
responsibility for budget preparation between managers and employees. This increased involvement in
the budgeting process by lower-level employees may make it easier to adhere to budget targets, as the
employees feel like they have a more personal interest in the success of the budget plan.
 
Participative budgeting

Participative budgeting is a roll-up approach where employees work from the bottom up to recommend
targets to the executives.  The executives may provide some input, but they more or less take the
recommendations as given by department managers and other employees (within reason, of course). 
Operations are treated as autonomous subsidiaries and are given a lot of freedom to set up the budget.
 
Budgeting involves the coordination of financial and nonfinancial planning to satisfy organizational goals
and objectives. No full proof method exists for preparing an effective budget. However, budget makers
should carefully consider the conditions that follow:

 Top management support

All management levels must be aware of the budget’s importance to the company and must
know that the budget has top management’s support. Top management, then, must clearly state
long-range goals and broad objectives. These goals and objectives must be communicated
throughout the organization. Long-range goals include the expected quality of products or
services, growth rates in sales and earnings, and percentage-of-market targets. Overemphasis on
the mechanics of the budgeting process should be avoided.
 Participation in goal setting 
Management uses budgets to show how it intends to acquire and use resources to achieve the
company’s long-range goals. Employees are more likely to strive toward organizational goals if
they participate in setting them and in preparing budgets. Often, employees have significant
information that could help in preparing a meaningful budget. Also, employees may be motivated
to perform their own functions within budget constraints if they are committed to achieving
organizational goals.
 Communicating results 
People should be promptly and clearly informed of their progress.
Effective communication implies:
 Timeliness
 Reasonable Accuracy
 Improved Understanding.
Managers should effectively communicate results so employees can make any necessary
adjustments in their performance.
 Flexibility 
If significant basic assumptions underlying the budget change during the year, the planned
operating budget should be restated. For control purposes, after the actual level of operations is
known, the actual revenues and expenses can be compared to expected performance at that
level of operations.
 Follow-up 
Budget follow-up and data feedback are part of the control aspect of budgetary control. Since the
budgets are dealing with projections and estimates for future operating results and financial
positions, managers must continuously check their budgets and correct them if necessary. Often
management uses performance reports as a follow-up tool to compare actual results with
budgeted results.
 Module Two: The Fundamentals of Finance

The Module Will Cover

 Basic Concepts
 Generally Accepted Accounting Principles
 Your Role in Company Finances
 Improve Organisation’s Finances
 Identify the Key Players in Your Organization

Basic Concepts

Recording Financial Transactions

A useful budget is prepared under the same umbrella of guidelines as the company’s actual financial
statements. There must be consistency in the way the numbers are prepared. As such, it is necessary to
understand some key terms.

Bookkeeping is the exercise of recording all the transactions that take place in a business. Transactions
take place between the business and:

 Customers who buy products and services sold by the business

 Employees who are paid wages and provided benefits
 Vendors, who sell services, equipment, and supplies to the business
 Government agencies, which collect taxes from the business
 Sources of equity capital (investors or owners who put money in and take it out of business)
 Sources of debt capital (banks and lending institutions)

Accounting, on the other hand, is the methodology used to accomplish this goal and to prepare related
statements and reports. Accounting guidelines govern how businesses record transactions. They also
dictate the design of the recordkeeping system that a business uses and how reports are prepared,
based on the information gathered and put into the system.

This brings us to another question. Often, we hear the terms “financial statements” and “financial
reports” used interchangeably. Is there a difference?

For the purpose of our courses, yes, there is a major difference. A financial report is a document
prepared for internal company use. It can come in many forms and be used for many purposes. A
financial statement is a formal document prepared in a specific format as outlined by your region’s
Generally Accepted Accounting Principles (which we will discuss in a moment) or another governing
organization (such as your tax legislation).
Types of Costs

There are two parts to a budget: sources of cash and uses of cash. When we think about uses of cash,
we can break them down as follows.

Sunk Costs

A sunk cost has already been incurred; it just needs to be paid. It is the result of a past irrevocable
decision and is sunk in the sense that it cannot be avoided. As a result, sunk costs may not impact future
decisions.

Recurring Costs

Quite simply, recurring costs recur and require a periodic outlay of funds. Material costs, supplies, heat,
and lights are prime examples.
Generally Accepted Accounting Principles

Accounting forces people to measure things in a relatively consistent manner. A good budget is
prepared based on consistent rules as well. Accountants refer to the rules in their rule book as generally
accepted accounting principles (GAAP). The objective of GAAP is to ensure comparability among
different companies and the overall reliability of the information.

While there can be slight differences between regions, GAAP typically includes the following principles:

 The matching principle: Earnings and expenses must be booked in the relevant accounting or
budget period when one benefits the other. This is necessary to properly evaluate results.
 The cost principle: Assets and service, and the resulting liability, are taken into the accounting
records at cost.
 The consistency principle: A company’s accounting procedures need to remain consistent over
time. If they are changed, the reasons for the change and the financial impact of the change must
be documented in detail.
 The objectivity principle: Whenever possible, the amounts used in recording transactions are
based upon objective evidence rather than on subjective judgments.
 The realization principle: This principle defines revenue as an inflow of assets (not necessarily
cash) in exchange for goods or services. It requires the revenue to be recognized at the time, but
not before it is earned.

Budgeting Terms

A budget is an operating plan that outlines projected revenue and expenses for a particular period of
time.

A projection is a prediction for the future, based on past data, extrapolation, and summarizing key
factors.

Forecasting is the process of putting together several projections to create a projection for the future.
(Think of a weather forecast.)

Extrapolation is the process of applying past data to the future to arrive at a reasonable projection.
Your Role in Company Finances

What’s My Role?

Understanding the cycle of finance will help you figure out where you fit into your company’s financial
structure. No matter what your role is, you can help save your company money. Small savings add up!

What if
 You work in the company’s payroll department, and you could save $2.50 per employee check,
per payday? How much could you save your company over one pay period?
 You supervise a team that produces widgets, and you find a way for them to produce two extra
widgets a day without any extra cost? If they sell for $49.99 each, how much income would the
extra two items bring in per year?
 You find a new advertising method that has the same reach but saves $30,000 a month. What else
could you do with that money?

Improve Organization’s Finances

Effective financial management is vital for business survival and growth. It involves planning, organising,
controlling and monitoring your financial resources in order to achieve your business objectives.

Following tips should help you to gain control of them.

1. Have a business plan: A business plan will establish which will define where you want to get to over
the next few years. It should also include detail, how you will finance your business and its activities, as
well as the source of money.

2. Monitor financial state: Business progress should be monitored regularly. On a daily basis, you should
check the deposit, sales and stock levels. Alongside, review your position against the targets of your
business plan every month.

3. On-time customer’s payment: It is a serious problem for any business if it receives late customer
payments. To avoid that risk, you should make your credit terms and conditions obvious from the
outset. Issue invoices quickly that are clear and accurate. Use a computerised credit management
system to keep track of customers’ accounts.

4. Knowing day-to-day expenses: Even the most profitable of companies can face difficulties if there
isn’t enough cash to cover day-to-day costs such as rent and wages. You should be aware of the
minimum your business needs to survive and ensure you do not go below this.
5. Up-to-date accounting records: If your accounts are not kept up-to-date, you could risk losing money.
A good record-keeping system will help you to track expenses, debts and creditors, apply for additional
funding and save time and accountancy costs.

6. Tax deadlines: Failing to meet deadlines for filing tax returns and payments can incur fines and
interest. These are unnecessary costs that can be avoided with some forward-planning.

7. Cost Cutting: Your business should be operated at its most efficient manner. It’s one of the easiest
ways to reduce costs. Areas to look at in an average office include heating, lighting, office equipment
and air conditioning.

8. Stock control: Efficient stock control ensures you have the right amount of stock available at the right
time so that your capital is not tied up unnecessarily. A good system to keep track of stock levels –will
allow you to free up cash, as well as the right amount of available stock.

9. The right type of funding: It is essential that you choose the right type of finance for your business –
each type of finance is designed to meet different needs. Smaller businesses usually rely more on
business overdrafts and personal funding, but this might not be the best kind of funding for your
company.

10. Tackle problems: It is always very stressful facing financial problems as a business, but there are help
and advice available to help you tackle them before it gets massive. Ask for professional advice as soon
as possible.
The Big Picture

Once you’ve thought about your role, think about your organization and look at what financial-based
roles exist. Understanding their responsibilities will help you get a better picture of what your role is,
and it will help you identify who to go to when you need help.

Here is how many mid-sized organizations are structured, although not all organizations will have all
roles:

The board of directors usually leads the company’s financial direction. Their vision is usually carried out
by the Chief Executive Officer (CEO). The CFO, or Chief Financial Officer of a company, is just behind the
CEO.
Identify key positions

Use your organisation’s chart to explore prominent metrics, such as span of control, budget and
headcount, to see who your most influential players are. Other factors to consider are age and tenure. If
you can see the change coming, you can better prepare for it.

Getting your management team in on the act also helps them get to know your workforce as a whole,
increasing visibility into your talent base. This way, they can recognize valuable workforce assets beyond
their own department and outside of their own office building.

Identifying the Key Players in Your Organization

Numbers alone are not enough to identify key players. In fact, they can give you the wrong picture
sometimes.

For example, your key employee might not complete many tasks; they might even track the least time
on your team. But without them, the overall productivity would plummet because they enable others to
be more productive.

They spend more time helping others that they themselves don't accomplish much. In turn, others can
work out their issues faster and do more.

So how do you account for that? By employing quality data. The most systematic and useful tool for
gathering performance quality data is 360-degree feedback. They enable you to hear how everyone in
the company think about each other, which gives you a full picture of an employee's performance.

To contrast, traditional performance appraisals, where a manager assesses an employee performance

are terribly short-sighted as they take into account only what the managers see.

360-degree feedbacks are easy to implement:

1. Create a survey where you ask a person to rate everyone in your company (including
themselves) on some attributes and add a short comment.
2. Distribute it to everyone in the company (you can even include your clients/customers and
other external stakeholders).
3. Tabulate the results and go through them.
4. Talk with others about the feedback so they can improve.
 Module Three: The Basics of Budgeting

The Module Will Cover

 Defining a Budget
 Types of Budgets
 Understanding Where Your Budget Fits In

Defining a Budget

A business shouldn’t open its doors without having some idea of what to expect, and it shouldn’t close
its doors without knowing what happened. A business should also plan and prepare for its future. One
way to do this is to budget, to plan ahead for future income and expenses.

Budgets provide the baseline against which to measure actual performance. The actual performance of
an organization is documented by the accounting system and the reports it generates. Supervisors
should compare expected performance against actual performance. With this information, supervisors
with budget responsibilities act as physicians to assess the current financial health of their organization.
They should look for areas where they have done well and areas that need attention.

If the latest report from the accounting office says sales are too low compared to the budget, the sales
manager has to figure out why. If overtime costs are running too high, the production manager has to
figure out why. And if there are too many rejects on the shop floor, it may be up to the quality control
officer to figure out why.

Why should we bother with budgets in this age of change? Sometimes, you go through all that work,
and then senior managers make changes that knock your whole budget for a loop. However, even
though planning is difficult, we must plan in order to maintain focus and prevent wasting resources. A
budget is an educated guess that reflects your long-term plans. Planning is the key characteristic of
budgeting.

Types of Budgets

As companies grow, their budgeting process understandably becomes more complex. No matter how
big it gets, however, you can prepare a budget for almost any singular aspect of the operation.

Sales Budget

Your sales budget incorporates the estimated number of products or services that you will sell in an
upcoming period. Total revenues are estimated by simply calculated by multiplying the number of units
by the price per unit.
The sales budget is normally the starting position for the budgeting season. The sales budget normally
grows from a reconciliation of business forecasts, capacity estimates, proposed selling expenses
(advertising, sales salaries, etc.) and the number of sales estimated for the period.

The sales budget drives a very important part of the expense budget: the Merchandise Purchases
Budget. This budget would be used in a company that manufactures, builds, or further processes
materials for future sale. This will also spill over into inventory level budgets, which assists in warehouse
capacity planning, plant usage, and labour.

Expense Budget

Expense budgets include things like office equipment, stationery, travel, and refreshments for meetings.

Sales expense budgets should be derived almost directly from the sales budget. Overhead and general
costs associated with the sales process can normally be estimated as a derivative of the sales volume in
a variable budget.

General and administrative expenses usually are the responsibility of the office manager(s) who should
base a budget on past history, with a forecast component that takes into account staff levels, inflation, a
new technology that may reduce or increase expenses, and other management policies (such as
bonuses and raises).

Production Budget

The production budget is prepared after the sales budget since this process takes the sales budget and
estimates quantities to be sold and then calculates the cost of staffing, construction or manufacturing
materials, and other expenses required to create the products. Often, production budgets are based
solely on a per-unit cost basis. So if production was to be 10,000 units and the budget was estimated at
$1,000,000 in expenses, there would be a unit cost budget of $100/unit.

Manufacturing Budget

A manufacturing budget should include the cost of raw materials, direct labour, and manufacturing
overheads. Many manufacturing firms prepare three sub-budgets that account for the three items
mentioned: raw materials, direct labour, and manufacturing overhead.

Labour Budget

The labour budget includes the names and numbers of all positions within the company and includes the
salary, benefits, replacement, vacation, and pension contributions budgeted for each position. Some of
the company’s labour costs may not be captured here, such as direct sales or direct manufacturing
costs.

Overall this is a large budget component because, for most companies, labour is a large part of the
overall expenses.
Capital Budget

This is the manager’s plan to acquire fixed assets such as furniture, computers, and office space, to
support the operations of a business. The capital expenditure budget lists equipment that will be
scrapped within the budget period as well as replacement costs and acquisition prospects.

Plant capacity planning will play a role here. If the existing facilities are insufficient to handle forecasted
capacity, then new equipment and/or a plant may need to be acquired.

Cash Budget

Another budget that is normally performed once all of the other budgets are gathered and assembled in
the cash budget. This is very important to highlight the flow of cash throughout the year to pinpoint
when cash requirements may exceed existing cash resources.

If you find that you will be short on cash at a particular time, work can be performed now to plan for it.
Excess cash forecasts can also be a problem: no one wants excess cash sitting unused if it could be
invested and yield a greater return.
Understanding Where Your Budget Fits In
Your budget should flow down from your company’s plan, like this:

Three to five years

Company's big picture
(financial and
philosophical)

Upcoming year
Company's short-term
Strategic Plan financial picture

CompanyUpcoming
Budget year
Departmental
SmallBudgets
pieces of the
company picturecompany picture
 Module Four: Parts of a Budget

Any plan should have four key parts:

The five W's and the H

The Story Historical context
Look as far into the past as you're planning into the future

Past financial statements and reports

The Numbers Future reports on known projects and plans

Statistics relevant to your industry like percentage of

The Statistics returns, number of defects per 100, etc.
Financial ratios and percentages

How will you know when a plan is achieved?

The Indicators Measurable baselines and targets
 Module Five: The Budgeting Process

The Module Will Cover

 Overview
 Step One: Gather the Budget Package
 Step Two: Lay the Ground Work
 Step Three: Identify Your Goals
 Step Four: Gathering Your Resources
 Steps Five & Six: Planning and Doing

Overview
The budgeting process typically has six steps.
Step One: Gather the Budget Package
If you are in charge of preparing a budget, your organization will usually give you a budget package.
Typically this contains:
 Company-wide budget and goals
 Description of your department and its goals as laid out in the strategic plan
 Business or performance indicators
 Past financial statements and budgets
 List of accounts and profit and cost centres involved
 Proposed budget, if there is one
 Allocated budget amount, if there is one (sometimes you are given a pot of money to budget; at
other times you need to determine what you need and then fight for it!)
 Templates for completing the budget

Step Two: Lay the Groundwork

If you dive into the budget package right now, you won’t be able to find your way out! Before you get
into things, outline a few key pieces of information.

Standard of Precision

Find out how precise your budget should be.

 How detailed do you need to be with your numbers – down to the penny or rounded to thousands
of dollars?
 What period of time should you budget for – the month, quarter, year, or beyond?
 What accounts do you need to budget for?
 Are there any special rules or formulas (such as depreciation) that are simplified for budgeting?

Line of Control

You will need to know what parts of the budget will be monitored and who will control them. This is a
very important part of the plan and hard to get right. VP’s certainly don’t want to be counting every
pencil, but line managers will probably need to report on more than the year’s final figures.

Preparing for Monitoring

Regular monitoring of expenditure is essential; not just to verify expenditure against the target but also
to identify changing patterns or circumstances that need corrective action.

You should have procedures in place within your department to monitor progress against budget and
objectives at regular intervals (generally monthly). In addition, appropriate reporting and authorisation
mechanisms should be in place.
To monitor expenditure, the types of information you need include:

 Budget for the area of activity for the full year and profiled for the year to date. When profiling
the budget, planned expenditure patterns should be considered. For certain types of
expenditure (particularly non-staff costs), it is likely that expenditure will peak and trough at
particular points in the year.
 Actual expenditure to date
 Future expenditure commitments
 Balance of annual budget remaining. When actual expenditure and commitments together are
compared to the full-year budget, this will indicate the balance of budget remaining at the
review point
 Forecast outturn. This is the expected position against the budget at the end of the year after
taking into account all anticipated expenditure. The forecast outturn may not be equal to the
original budget
 Analysis and explanation of any positive or negative variances when comparing expenditure and
forecast outturn to budget, together with a documented action plan in order to address adverse
variances
Step Three: Identify Your Goals
You should also write down what high-level goals your budget must-have. Some basic examples might
be: increase sales by 20%, hire two new staff, or increase production by 5%. For best results, goals
should have SPIRIT!

Specific

Be specific about what you want or don’t want to achieve. The result should be tangible and
measurable. “Increase production” is pretty ambiguous; “increase production by 5%” is specific.

Prizes

Reward yourself at different points in the goal, particularly if it’s long-term. If your goal is to increase
production by 5%, for example, you might order pizza for the team when you meet the halfway point,
and again at the 5% mark.

Individual

The goal must be something that you want to do. If your boss wants you to increase production, and you
aren’t interested, you’re not going to want to work towards the goal. Find something about it that you
can link to and motivate yourself.

Review

Review your progress periodically. Does the goal make sense? Are you stuck? Do you need to adjust
certain parts of it?

Inspiring

Frame the goal positively. Make it fun to accomplish. You could make a poster of the end result, frame
it, and post it on the wall.

Time-Bound

Give yourself a deadline for achieving the goal. Even better, split the goal into small parts and give
yourself a deadline for each item.
Step Four: Gathering Your Resources
Next, make sure you have all the information you will need. Make a list of additional sources of
information and people who can help you out if you get stuck. We have included a basic checklist below.
Feel free to customize it and use it for your next budget!

Item Typical Department

Direct compensation policy, including pay grades, salary

ranges, salary caps, and merit increases

Indirect compensation policy, including benefits,

bonuses, profit sharing, etc.

Promotion policy
Human Resources
Any policies on mandated raises, such as cost-of-living
increases or union agreements

Legislation on mandated government payments (tax,

insurance, etc.)

Organizational chart with a headcount for your

departments

All relevant financial information (historical for three to

five years plus the current year)

Chart of accounts

Accounting policies
Accounting
Capital asset registers

Templates or tools that they use

Organizational chart of cost and profit centres with your

responsibilities clearly marked
 Item Typical Department

All relevant sales information (historical for three to five

years plus the current year)

Projected sales for the following year Marketing and Sales

Information on expected trends, planned promotions,

and other factors that could affect your budget

Economic forecast for the following year

Strategic Plan for the following year

Information on expected trends, planned events, and

other factors that could affect your budget

Fiscal calendar with important events marked Budget Management Team

Complete budget package

Policy on-budget completion, reviews, monitoring,

reporting, and management

Additional resources and tips

Goals for your team

Your Supervisor
Their expectations of you

Their goals

Knowledge, ideas, or experience that will help you Your Team

Any relevant financial information

Steps Five and Six: Planning and Doing

Step Five: Planning Your Work

Now you can create a detailed plan of what needs to be done when it is due, and how you’re going to do
it. Make sure you leave enough time to let the budget sit for a few days and then to do a thorough
review.

Here is a template that you can use.

Task Resources Required Target Date Due Date Complete

Step Six: Do It!

Now that the groundwork is in place, you can start working through the budget package. (If you don’t
have a budget package, you should still have enough information about what is expected of you to
complete the required documents.) Delegate tasks where appropriate, but make sure you maintain final
control over decisions. And, always double-check the numbers (even your own!).

Where can you get your numbers from?

Where at all possible, gather historical data and extrapolate it. This means analysing the data, identifying
patterns if they exist, and then applying those lessons to next year’s budget.

For example, let’s say your office supplies expenses have increased by $500 each year for the past three
years. To arrive at a reasonable budget number, take last year’s expenses and add $500. Or, let’s say
that your marketing budget is always 25% of your sales revenue. Take the estimated sales revenue and
calculate the percentage.

The next best choice is to take relevant historical data and use it in place of actual historical data. For
example, let’s say that you need to budget for a computer upgrade next year. Your department has
never done one, but a department of similar size did upgrade last year. You can use their information to
get a good idea of what your expenses will look like.

If no exact or relevant historical data exists, your next best choice is an expert’s estimate. For the
computer example, perhaps your IT department or the computer company can let you know
approximately how much the upgrade will cost. Or, find information from industry averages or even
competing companies.

You should always be able to find data and information from one or all of these sources. You should
never put in a number just for the sake of putting something in that line. That’s a recipe for disaster!
 Module Six: Budgeting Tips and Tricks

Top Ten Excuses for Being over Budget

 Those reports are probably wrong.

 I sent a revised budget; didn’t you get it?
 I didn’t plan for a hurricane (or you can insert some other calamity)!
 It’s only a little over budget; 10% of a million dollars is just a drop in the bucket!
 We can make it up next year.
 My intern created that budget and obviously messed it up.
 It’s like buying a house – an investment in our future.
 I was supposed to get a lot of help (or resources) from such and such a department, and they
didn’t come through.
 Last year was worse, so I thought this would be okay!
 I made a budget for the last two years, and two years out of three isn’t bad!

Up-Front Budget Manoeuvres

 Involve key people in your budget planning

 Do some selective padding in case of emergencies
 Tie your budget requests to your organization’s values
 Create more requests than you need and give them up freely
 Shift the time frame
 Be prepared

Not-So-Nice Budget Manoeuvres

 Threaten and blackmail your budget competition

 Be a dictator instead of a democrat
 Request things you don’t need just, so others don’t get the money
 Inflate last year’s expenses
 Trust no one!
 Module Seven: Monitoring and Managing Budgets

In the chart below, record how budgets are monitored and managed in your organization. List the
advantages and disadvantages of each method.

Method Advantages Disadvantages

 Module Eight: Crunching the Numbers

The Module Will Cover

 Understanding Ratio Analysis
 Basic Financial Ratio Analysis
 Cost-Benefit Analysis

Understanding Ratio Analysis

If you understand simple ratio and proportion analysis, you can get more information and exercise more
control over departmental expenses. You can also use ratios to do final reality checks over your budgets
by comparing your budgeted ratios to actual ratios from prior periods.

Ratio analysis sounds intimidating, but it isn’t. Ratios are simply numbers that let us compare. For
example, if your car gives you 20 miles to a gallon of gas, and the new SUV you are looking at gives you
10 miles per gallon, you have just done a ratio analysis to compare the operating costs of the two
vehicles.

Ratios measure relationships between particular numbers. By periodically plugging figures from your
company’s two central financial records (the profit and loss statement and the balance sheet) into
certain simple ratio equations, you will be able to track certain aspects of the business. Ratios also
enable you to compare one company against industry standards.
Sample Balance Sheet

Acme Widgets Inc.

Balance Sheet
For the Month Ended February 28, 2020

Assets Equity

Cash $2,500 Owner’s Capital $5,000

Accounts Receivable 7,500 Cumulative Net Income 3,300

Supplies 1,500 Less Withdrawals and (1,300)

Dividends

Total Assets 0 Total Equity $7,000

Liabilities

Accounts Payable $500

Notes Payable 4,000

Total Liabilities $4,500

Additional Facts and Figures

 Gross Sales: $22,000

 Net Sales: $17,000
 Gross Profit: $15,000
 Net Profit: $10,500
Current Ratio

This is possibly the most common ratio used in the business world. It’s usually presented like any other
ratio, with two numbers separated by a colon. This ratio compares assets to liabilities – in other words,
what the company owns vs what it owes. This can give you a quick picture of the health of a company.

The formula for current ratio is:

Current Assets
Current Liabilities

So if we used the numbers from our sample balance sheet, we could calculate that Acme Widgets Inc.
has a current ratio of about 2.6:1.

A current ratio of about 2 is considered adequate for most businesses. If a business has a relatively
unstable cash flow, however, it might be necessary to maintain a current ratio of more than 2.

Quick Ratio

This ratio is very similar to Current Ratio, except that it removes inventory from the calculation of assets,
on the assumption that inventory is harder to liquidate than other assets. Anything above 1.5:1 is
considered acceptable.

The formula for the quick ratio is:

Current Assets−Inventory
Current Liabilities

Debt Ratio

The equation for the debt ratio looks like this:

Liabilities
Assets

You can then multiply the result by 100 to get a percentage.

Take the business example of Acme Widgets. It has $11,500 in assets and total liabilities (current pus
long-term) of $4,500. So, for this business, the debt ratio is about 39%. This is a very stable situation –
Acme Widgets probably wouldn’t have any trouble borrowing money from the bank, and its
shareholders would probably be comfortable with this percentage of the debt.
Net and Gross Profit Margin

These two ratios measure the amount of money that the business earns as a percentage of overall
revenue.

Gross profit margin takes into account only the cost of making the product or service. Therefore, its
equation looks like this:

Gross Profit
Gross Sales

The net profit margin shows what the business has earned after selling its products and paying all
expenses – the true bottom line. Its equation is:

Net Profit ( After Interest ∧Taxes)

Gross Sales

The results of both equations are expressed as a percentage.

Return on Sales Ratio

Return on Sales Ratio allows a business to determine how much net profit was derived from its gross
sales. This ratio is very similar to the Net Profit Margin, but it factors in all expenses, including interest.

Net Income (Before Interest ∧Taxes)

Gross Sales

This ratio tells us whether expenses are under control and whether the business is actually generating
enough revenue to pay for its costs. The higher the Return on Sales Ratio, the better it is for the
business.

Debt to Net worth Ratio

Debt to Net worth ratio indicates the relationship between a business’ net worth and the debt which a
business carries. It can be calculated with this formula:

Total Debt
Net Worth

The result of this calculation is an indication to banks and other creditors whether a business can handle
additional debt. It is a determination of risk, where a high debt ratio can indicate that the business is
carrying a lot of obligation and likely to be hampered in borrowing any additional money.
Too low a ratio, however, may indicate that a business is too conservative and could effectively borrow
more money to generate more profits. When the ratio is higher than 1, it is an indication that there is
too much debt for net worth.

Cash Turnover Ratio

Cash Turnover Ratio provides an indication of how often cash flow turns over to finance your sales. It
can be calculated with this formula:

Gross Sales
Current Assets−Current Debt

When your cash supply is tight, you are having trouble meeting obligations related to business
operations like salaries, utilities, paying suppliers, and purchasing inventory. Generally, your cash
turnover ratio should be between 4 and 7.

Collection Ratio
Collection Ratio shows the number of days it takes for your business to get paid for sales where you are
providing credit.

Here is the formula:

Accounts Receivable x 365

Gross Sales

This figure should be near the point at which you declare an account overdue. Too long a period means
that you are overextending your credit and basically becoming a banker for your slow-paying customers.
The period should be no more than 1.5 times your credit overdue period.

Investment Turnover
Investment Turnover Ratio shows the ability of your business to use its assets to generate sales income.
Calculate it with this formula:

Gross Sales
¿ Assets

A good indicator of the strength of your business is your ability to generate more and more sales from a
stable asset base. If the ratio is declining, it can indicate that the growth of the business is not being met
with a matching growth in sales proportionate to your investment in assets. In general, the higher the
ratio, the stronger the business.

Return on Investment
Return on Investment analysis provides a clear indication of business profitability. It shows how much
profit a business is able to generate in proportion to its net worth.
The formula is:
Net Profit
Net Worth
This figure shows what level of actual return you are getting on the money which you have invested in
your company. Unless you are actively working toward a healthy return on your business investment,
your business has little chance to grow and thrive. A respectable goal is to aim for a 12% return in order
to remain healthy and viable.
Basic Ratio Analysis
There are several Basic Financial Ratios. Among them, the widely recognized are:

 Liquid Ratio
 Turnover Ratio
 Operating Profitability Ratios
 Business Risk Ratios
 Financial Risk Ratios
 Stability Ratios
 Coverage Financial Ratios
 Control Ratios

Analysis

Cost-Benefit Analysis

What Is Cost-Benefit Analysis?

Cost-benefit analysis in project management is one more tool in your toolbox. This one has been devised
to evaluate the cost versus the benefits in your project proposal. It begins with a list, as so many
processes do.

There’s a list of every project expense and what the benefits will be after successfully executing the
project. From that, you can calculate the return on investment (ROI), internal rate of return (IRR), net
present value (NPV) and the payback period.
The difference between the cost and the benefits will determine whether an action is warranted or not.
In most cases, if the cost is 50 per cent of the benefits and the payback period is not more than a year,
then the action is worth taking.

The Purpose of Cost-Benefit Analysis

The purpose of cost-benefit analysis in project management is to have a systemic approach to figure out
the pluses and minuses of various paths through a project, including transactions, tasks, business
requirements and investments. The cost-benefit analysis gives you options, and it offers the best
approach to achieve your goal while saving on investment.

There are two main purposes of using Cost-Benefit Analysis:

 To determine if the project is sound, justifiable and feasible by figuring out if its benefits
outweigh costs.
 To offer a baseline for comparing projects by determining which project’s benefits are greater
than its costs.

Module Nine: Getting Your Budget Approved

At some point, you will have to build a case to support your budget and present it. Or, you may need to
participate in a full-fledged budget review. Engage participants in a discussion of what happens in your
organization.

Building a business case is worth a workshop all on its own, so we won’t have time to go through the
entire process here. However, we do have a few tips to help you create a powerful presentation to get
your budget approved.
Know what to expect.

Get as much information about the presentation as you can.

 When and where will it be held?

 Who will be there?
 Who else will be presenting?
 What do they expect? (Handouts, summaries, graphs, etc.)
 What format should your presentation be in? (PowerPoint presentation, speech, overheads, etc.)
 What do you need to bring? (Tip: Always bring extra copies of handouts.)

Make sure you provide what they expect.

Double-check your budget to make sure it’s in the proper format and that all of the elements in the
budget package are complete. Make sure that you don’t need to complete anything else for your
presentation.

Be prepared.
Your presentation should cover the basic points of your case. However, you should also have a well-
organized notebook or electronic document handy with all the supporting information. (Another
method is to create extra slides in PowerPoint and keep them hidden unless you need them.) This way,
you won’t overwhelm your audience, but you’ll be prepared for tough questions.

Stay calm.
When presenting, go slowly. Pause frequently and ask for questions. Most people have a tendency to
talk faster when they are nervous, so make a conscious effort to slow your speech down. If you’re
presented with a tough question, take a deep breath and collect your thoughts. Don’t be afraid to ask
for a moment to gather that information – although it shouldn’t take too long if you have a document
already prepared with extra information. If you don’t have the answer, tell the committee the truth –
and let them know when they can expect the information.

Do a mock presentation.
Find someone that you trust to give you constructive criticism. Do the entire presentation just the way
you will for the budget committee. Ask your judge what things went well and what things you could
improve on. In the end, would they approve your budget?

Establish a Relationship.
In order to develop credibility with the key financial decision-makers, you will have to know how the
CFO thinks. Find out what their financial "hot buttons" are and use metrics they are used to seeing.

Identify Needs.
Survey and assess your facility's roofs, walls, and/or pavement to determine their condition and
document any deficiencies.
Formulate Solution.
Compile the data gathered during the assessment into a prioritized program based on Facility Condition
Indexes, replacement values, & remaining useful life.
Develop an actionable long-range asset management plan that will align facilities goals with your
organization’s strategic objectives for maintenance and capital projects to help you properly allocate
funds and mitigate risk.

Pitch Your Case

Presenting to the C-suite requires facilities departments to have a good awareness of what their
decision-making needs are, which include internal (e.g. the company mission and overall strategy) and
external (e.g. funding and the state of the market) influences. Know your data, but more importantly,
know how to put your data into a context that the CFO can relate to. Present your project's finances
using specific equations that reflect the way a CFO views facilities and related expenses from an
accounting standpoint. Distinguish whether the project will produce savings, reduce expenses, or
mitigate risk.

Track Performance.
Measure the results of your efforts and translate it into financial language. Use the data to illustrate the
effectiveness of past projects so that future projects won't be questioned. A successful track record will
continue to help build credibility with financial decision-makers
 Module Ten: Comparing Investment Opportunities

Every day, senior management must evaluate investment opportunities (such as an opportunity to build
a new plant or to purchase new equipment). Big decisions require information, and information is based
on planning. This is capital budgeting. Cash is always sacred, so every project requires a thorough
analysis to see if it is feasible, and ultimately profitable to the company.

Payback Period

Generally, an investment in new equipment or a new plant will result in net cash flow (through a
decrease in annual operating costs). The payback period is the time it takes to recover the initial
investment through this net cash flow.

Example:

Cost of machine $16 000

Annual net cash flow $3,500

Over a period of 4.6 years, this machine will have paid for itself. This is based on the budgeted annual
operating costs being accurate and shows how important an accurate budget is. In choosing investment
opportunities, a short payback period is desirable. The shorter period also reduces the risk of premature
obsolescence as well as changes in the business environment that may reduce the usefulness of the
purchase.

Break-Even Point

Identifying the break-even point for a particular project is a good way to evaluate whether or not a new
idea has the ability to make money. The formula is:

Break Even Point=¿ Costs +Variable Costs

Fixed costs are those that remain the same regardless of the level of production, like rent or office
equipment. Variable costs encompass the materials and labour required for the product. These items
are used more or less depending on how much product is produced.

Let’s say that you want to make a new kind of gadget. The fixed cost for each gadget will be $50. The
variable costs will be $5.56 for each gadget. The break-even sales point, therefore, is $55.56. Selling your
product for any less than this would result in a loss.
Cost-Benefit Analysis

Another type of analysis that can be as simple or complex as required is cost-benefit analysis. This allows
you to compare what an opportunity will cost versus the expected payoff.

Let’s say that you’re trying to decide between two robots to help you make widgets.

Robbie the Robot Rachel the Robot

Widgets Produced Per Hour 75 60

Value of Widgets Produced Per Hour 75 x 5 = 375 60 x 5 = 300

($5 sale price each)

Cost of Units Produced 75 x 1.5 = 112.50 60 x .25 = 15

Total Value – Total Cost = 375 – 112.50 = 262.50 300 – 15 = 285.00

Estimated Benefit

Initially, Robbie seems like the better choice if we just look at how many widgets produced per hour.
However, Rachel has an overall better benefit and therefore seems to be the better buy.

Return on Investment

This calculation enables you to see what a particular investment has returned, giving you a percentage
that easily allows you to see how this investment has performed. The basic equation is:

Payback −Investment
Investment

The result is then expressed as a percentage, which gives you the return on investment.

Let’s say that you put $100 into a savings account. Over a period of 20 years, you got $10 back in
interest.

110−100
100

Your return on investment, then, is 10%. Please note that when performing this calculation in the real
world, there can be many other factors affecting it and therefore complicating it. This is only the basic
formula.
 Module Eleven: ISO 9001:2008

This Module Will Cover

 What is ISO 9001:2008 39?
 Managing Connections

What is ISO 9001:2008?

“Say what you do and do what you say,” is the oft-quoted slogan that epitomizes the ISO philosophy.
Originating in Europe, ISO (International Organization for Standardization) came across the Atlantic in
the late 1980s and has developed firm roots in North America. Its goal is to offer international standards
for various types of businesses, including manufacturing and government agencies. Their standards are
updated periodically, so it’s important to make sure that you have the latest information.

The main motivation for engaging in the ISO certification process is to measure up to your customers’
quality standards and to keep them happy, or at least keep them. ISO 9001:2008 is extremely customer-
focused, and that can be justification alone for committing the energy and the resources to the process.

ISO 9001:2008 is a structured process through which a company can raise the quality of the products
and services it provides and then maintains that level. This is the set of standards that outlines the
structure for quality management systems, customer-related processes, product design and
development, purchasing processes, production and service processes, and continuous improvement.

If your company is ISO certified or plans to become certified, make sure you are familiar with the
standards as they can greatly impact how your budget is prepared and what it contains.
Making Connections

Company One

Peerless Data Corp. is a service organization. Its main service is providing information on companies and
organizations of every size and type. Each regional office serves as a centre for collecting and processing
data. Information is collected from field reporters, credit agencies, the companies and their customers,
and various research sources. All of this data is then organized and processed and eventually packaged
in its own file. Your office is therefore involved in producing research files as efficiently as possible. Each
office operates as a profit centre with the Operations Director making all decisions independently.

 Does ISO 9001:2008 make good sense for this organization?

 Why or why not?

 What benefits might this company see?

Company Two

Acme Widgets is a manufacturing company. It has seven employees right now, although it plans to triple
that in the next five years. They have one manufacturing plant that delivers to wholesalers.

 Does ISO 9001:2008 make good sense for this organization?

 Why or why not?

 What benefits might this company see?

Company Three

Super Training has a thousand employees. They deliver computer training worldwide to Fortune 500
companies. Their business is based on contract work. However, they only deal with the training
departments of the individual companies; they don’t provide the training themselves.

 Does ISO 9001:2008 make good sense for this organization?

 Why or why not?

 What benefits might this company see?

 Module Twelve: Directing the Peerless Data Corporation

This Module Will Cover

 Task Explanation
 Decision One: Office Relocation
 Decision Two: Reproduction Backlog
 Decision Three: Improving Supervision
 Decision Four: Job Enrichment
 Decision Staff Expansion

Task Explanation

In essence, preparing a budget comes down to making financial decisions that will affect all members of
the company. This exercise will test the decision-making capacity of the group.

About Decision Making

Your team will be playing the role of a manager who has been challenged to turn an unprofitable
operation into a profitable one. Each decision requires thoughtful analysis of the information available
so that you can evolve and/or evaluate alternatives. Your objective is to make the best decisions, and
your pay-off, naturally, will be in profit dollars. We will make five decisions one at a time and debrief
after each decision.

Decision-making is one of the most important measures of your ability as a manager. Decisions don't
just happen. Good decisions require planning and thinking through. They are an integral part of your job,
the price you pay for leadership.

In your workday, you deal with two kinds of decisions: the routine and the strategic. In the first, the
conditions of the situation which the solution has to satisfy are known, and the job is simply to choose
between a few obvious alternatives.

The routine decision is often governed by which alternative will accomplish the goal with the minimum
effort and disturbance. Not so for the strategic. Strategic decisions are more complex. They involve
either finding out what the situation is or changing it. The ramifications of strategic decisions are
broader: they can affect productivity, organization, capital expenditures, and so forth.

Decision-making, in brief, is about selecting a course of action from alternatives. In actual practice,
decision-making should be thought of as a process which includes five steps:
 Define the problem

Gather the facts and data

Organize the information

Develop options

Analyze the alternatives and make your decision

Define the problem

When we are examining our business closely, it can be very challenging to identify the problems we are
having; often, the symptoms are more apparent than causes. Symptoms will offer valuable clues to
underlying problems, so they are important, but until you have identified the real problem, or problems,
you're not ready for Step 2.

Gather the facts and data

Do the analysis and gather all the data that could possibly be contributing to the problem. Data can
comprise facts, opinions, assumptions, records, reports, and information from other people. If key
information is not available, delay your decision until you get it. In some cases, however, decisions have
to be made on the basis of incomplete knowledge, either because the information is not obtainable or
because it would be too costly to get.

Organize the information

Organize the information so it can be compared and analysed in a straightforward manner. If you are
working with a lot of information, an early task will include sorting what’s important from what isn’t. To
simplify things a little, look for relationships between different factors such as pros and cons, costs
across departments, growth, and so on.

Develop options
This is the guts of the decision-making process: developing as many good options as possible. Quality
and quantity are equally important. It is rare for a problem to have only one solution, so don't be
deceived. The important thing is to keep an open mind, let your imagination roam freely over the facts
you've collected, and jot down the possible solutions that occur to you.

Analyse the choices and make your decision

With the previous groundwork laid, you are now in a position to compare the different options
generated and make decisions based on what is available. Making the best decision, you can rely upon
testing the options against specific, strong criteria, including the risk involved, permanent nature of the
remedy, timing, achievability, your strategic plan, etc.

Sometimes you can quickly eliminate the unacceptable options and focus on a few alternatives with
fewer shortcomings. Ultimately, you will arrive at the best possible decision.

Background

Congratulations! You have just been promoted to Operations Director and assigned to the Big town
office of the Peerless Data Corp. Previous to this move, you held a similar position in a smaller office.
You're now ready to move into this more challenging job with higher pay and increased responsibility.
"Challenging" is hardly the word to describe the Bigtown office. You've been warned that it's a can of
worms; the lowest-performing operation of its kind in the country. You've been given the mandate to
make this unit profitable.

Peerless Data Corp. is a service organization. Its main service is providing information on companies and
organizations of every size and type. Each regional office serves as a centre for collecting and processing
data. Information is collected from field reporters, credit agencies, the companies and their customers,
and various research sources. All of this data is then organized and processed and eventually packaged
in its own file. Your office is therefore involved in producing research files as efficiently as possible. Each
office (yours included) operates as a profit centre with the Operations Director making all decisions
independently.

You have inherited a staff of ten people. Morale is low, that's obvious. Supervision has been neglected in
the past. The office itself is inadequate and overcrowded. Staff and equipment are not being used
efficiently. As a result of these problems, production is at a low of 40 files per day (where it should be 60
per day), growth is stagnant, and the office is operating at a loss.

Your objective is to build annual profits to $100,000 within a year's time. You can only accomplish this by
increasing file production from 40 units per day to 75 per day while keeping expenditures at a minimum.
As a secondary, long-term objective, you should give adequate consideration to growth, making sure
that none of your decisions provides immediate gains at the expense of future profits.
Company Information

This is general information designed to give you a better grasp of your operation. You won't use all the
information, but you may need to refer to some segments of it during the game.

The Home Office activates the process by requesting data compilation on a specific account. When the
request is received, the Coordinator sets up a file, directs the appropriate field office to visit the account
and collect local information. (Field Offices are not under your control.) While the Field Office is
completing its assignment, the new file is forwarded to the Researcher where a search for pertinent
data is done in the library and existing records.

Relative information is combined with the input from the field office; the data is organized, and a variety
of calculations, ratings, and adjustments are made. The file is then passed on to the Reporter, where a
formal report is dictated, summarizing all findings. (The Reporter has two secretaries who transcribe
reports.) The final report and file then go to the Quality Controller for review. The Q.C. verifies accuracy
and completeness, and then forwards everything to the Reproduction Aid. The RA copies every item in
the file (copy goes to the home office, original remains here).

Before the original is filed, it goes to Data Entry Clerks who transfer data to the Computer. Computer
stores the information for demand availability. The Expediter follows files from station to station,
controls movement, and fills in when employees are absent. Here is the list of employees you have
inherited, shown by title and salary.

Position Salary

Coordinator $45,600

Researcher $46,000

Adjuster $48,000

Reporter $48,000

Steno 1 $42,000

Steno 2 $43,500

Quality Controller $50,000

Reproduction Aid $42,000

Data Entry Clerk $48,000

Expediter $50,000
Your salary is $75,000.

Peerless Data has established four different salary grades which are reflected in the figures given above.

Grade Salary Range Description

Grade 1 $40,000 to $45,000 Clerical jobs

Grade 2 $45,001 to $48,000 Staff performing one function

Grade 3 $48,001 to $52,000 Staff performing more than one function

Grade 4 $52,001 and up Supervisor or executive

Employees cannot move from one pay level to another unless they are promoted, or a job is broadened
to include more than one function.
Decision One: Office Relocation
You currently occupy 4,000 square feet of office space which is barely adequate for your staff, files, and
operating equipment. There's no doubt that the cramped quarters contribute to the low level of
production. With your present lease about to expire (in 60 days), you commissioned a local real estate
broker to find the four best locations available, according to guidelines you provided.

You would like to meet your needs for at least three years, preferably five. The normal rate of business
growth is about 20% a year with a commensurate increase in personnel and space; your office should
eventually conform to this pattern. As a rule of thumb, total space usually allocated is 500 square feet
(per employee). Your current lease will revert to a month-to-month basis at the end of the 60 days.
Right now, you pay $6,000 a year; when your lease expires, your monthly rent will be $700. A recent poll
of your employees indicated that all of them would stay with your company if the move didn't increase
the commute from your present location more than 15 minutes each way.

Below are the four locations recommended by the real estate broker;

Location A

This location offers 9,000 square feet of operating space at an annual rental of $10,000. The owner
requires a five-year lease. He will provide the required painting and renovation work at no cost. You like
this space because it's adjacent to your present location, so the staff would not be inconvenienced. The
cost of your move to Location A would be $1,500. This space is available in 30 days, at which time you'll
be committed to paying rent (assuming you decide on this spot).

Location B

This site is on the opposite side of town from your existing office, about eight miles away, and will take
ten extra minutes each way during rush hour traffic. Space consists of 12,000 square feet. A three-year
lease is required at $10,000, with an option for two additional years at $10,500 a year. Location B will be
available in 90 days for you to move in. Refurbishing costs run about $2,000. The move itself will require
an estimated $2,000. Since your present lease will expire before Location B is available, the owner has
offered to pay the extra month's rent at your current location.

Location C

Location C is 6,000 square feet and costs $8,000 per year. It will be available in 60 days. You can sign any
length lease you want, up to ten years. The move here will cost $1,500, but the landlord has offered to
absorb the cost of the move if you sign a five-year lease. You'll have to pay for your own refurbishing,
however; at the cost of $1,200. This location is a five minutes’ drive from your present facility.

Location D

This location is a good buy and close to the airport, which is a plus for you. The space available is 12,000
square feet. You estimate your refurbishing costs at $3,000. Location D is in reasonable proximity to
your present site (about five minutes away). The cost of the space is $9,500 a year. The owner can only
give you a three-year lease since the entire area will be torn down and redeveloped by the city at that
time. The cost of the move is $1,500.

The cost of moving and/or repairs in all cases will be charged against your first year's lease.

Based on the above information, decide which of the office sites is the best move?
Decision Two: Reproduction Backlog
One of the problems you have observed is a consistent back-up, or bottleneck, created by the
reproduction station. Your Reproduction Aid can handle approximately 500 copies per day since each
one requires about one minute for processing. (It takes about 30 seconds to remove each document
from its file, position in copier, return to file, and about 30 seconds for the machine to process the
copy.) Each file contains an average of 15 documents (ten of 8 1/2 x 11, and five of 5 x 8). At the current
rate of 40 files per day there is a substantial accumulation of copy work throughout the week; when the
operator is out sick, or the equipment is down, the problem becomes more acute. The cost per copy on
your present copier is six cents per page. It's completely paid for and in good working condition.

You've considered two broad courses of action. One would be to add another Reproduction Aid at the
same pay level as the first. This would expedite the operation, increasing production 50%, to about 750
copies per day. The other course is to replace the present equipment with a more sophisticated copier
which, hopefully, would enable you to keep reproduction in concert with the rest of the operation. To
pursue this further, you invited three copy machine manufacturers to demonstrate their hardware. Your
notes follow.

Transfix

Each copy takes ten seconds of machine time; handling time is cut in half, to 15 seconds. Cost per copy
comes to four cents. The Transfix is sold at a price of $1,500 with a year's free service guarantee. After
the first year, a service contract of $250 per year is required.

Reprodata

Reprodata makes a copy in five seconds and cuts handling time to 10 seconds. The machine is leased
rather than sold outright. The three-year lease would be $3,000. Cost per copy determined by monthly
volume: first 10,000 copies at 10 cents, next 10,000 at five cents, any additional copies above 20,000
made during the month would cost three cents each. A service contract is desirable: it is $500 a year and
would be needed immediately.

Flocopy

This unit works on a different principle than the two previous copiers. It cuts each copy to size rather
than producing everything on 8 1/2 x 11. This paper is stored on an 8 1/2 inch roll, and each copy is cut
automatically to the exact length of the original. The cost per copy is, therefore based on a per-inch
basis. Copies that are 8 1/2 inches wide would cost at 1/2 cent per inch. For example, an original 8 1/2 x
11 costs 5.5 cents to reproduce.

Flocopy takes eight seconds for machine processing and eight seconds for handling each copy. It sells for
$3,600. Service is free as long as the manufacturer's paper and supplies are used.
NOTE: It is company policy to pay off all office equipment over the first three years of its life.

On the basis of the above information, what would be your decision?

Decision Three: Improving Supervision
One of your more urgent situations is related to supervising staff appropriately. Your personal
preference is to look after day-to-day operations and supervision yourself, but you obviously don’t have
the time to do an adequate job of it.
The person previously in your role tried to do it all, and it didn’t work because they spread themselves
too thin. Your staff really need a personable, high quality, full-time supervisor, and this need for
someone strong will become more important as the operation grows, and the staff numbers increase.

There are lots of ways that you can fulfil this need. You could promote Brad Matters to the role of
Supervisor; he has been working as your Expediter. Brad knows all the staff well and also has a strong
working knowledge of the different roles within the warehouse. Brad has been with the company for
five years and is well-liked by his colleagues. He's trustworthy, reliable, and would probably enjoy the
raise in salary that comes with the job ($6000 per year).
When you initially interviewed Brad before the take-over, you noted that he was quite content with his
job, and though he didn’t have any clear career goals that he shared with you, he has a good knowledge
of the operation and got along well with his peers. Brad is in his late forties, a committed family man,
and active member of the community.

A second option would be to hire a suitable candidate from an outside source. The human resources
department keeps a list of people who have appropriate strengths and could be candidates, including
Peter Hunt who works as an Assistant Supervisor at a large and successful operation although, is at quite
a distance being over 2,000 miles away. Peter is 40 and comes with good recommendations. You met
him once at a conference and were impressed by his experience, personality, and ambition.
If you decide to hire Peter, you'll have to wait about two months before he can start so that he can get
moved to a new city with his family, plus you’ll have to be prepared to pay his $5000 in relocation
expenses. Since he's already at the supervisory level, he'll also want a raise from $53,000 to $59,000 for
his new job.

A third option available is for you to hire someone locally. There is a possibility that you could find a
suitable supervisor with some experience that you could poach from another company. The chance you
take with this includes a limited number of competitors in the region, so you’d be more likely to find
someone in a related field which would require training, but there are probably some great potential
candidates. You estimate that the recruiting, hiring, and training would take 50% of your time for the
next three months. Assuming you can find the right person, the starting salary is $55,000 - $60,000.

What will be your hiring decision?

Decision Four: Job Enrichment

The moral problem that plagued you when you first took over has improved, but it's far from being
solved. Part of it, no doubt, stems from the specialized and often monotonous nature of the jobs. You
would like to cross-train certain staffers so that instead of handling a piece of a process, they can get
more involved in different activities; this will provide greater responsibility and sense of achievement.
You feel that job enrichment will also provide substantial production gains.

You have now reached a level of 50 files per day (1,000 per month) and estimate that a successfully
implemented job enrichment program will enable you to reach 60 a day at a gross profit of $15 each. As
a result, you are planning to combine four jobs (Coordinator, Researcher, Adjuster, and Reporter) into
one new position called Programmer. The four programmers would do their own coordinating,
researching, adjusting, and reporting; they would also share the two secretaries, who will transcribe
their reports on an equal-time basis.

In implementing this new program, one of your major problems will be training. A number of
alternatives are available. One would be to have your new supervisor, Peter Hunt, do it. Peter did a
study and came up with the following projections. It will take him three months of on-the-job training to
accomplish the transition; production can be expected to drop by 10% during this period. After the
training phase, he estimates that it will take three months of adjustment, during which time production
will function at current levels (50 per day). After six months, a permanent increase of 60 files per day
should be achieved.

On the other hand, you can have the home office staff do the training for you. They could accomplish
the training faster since they are running intensive one-day schools continuously. For example, on
Monday of each week they conduct a Coordinator's school, on Tuesday they cover the Researcher's job,
Wednesday is devoted to Adjusters, and on Thursday they concentrate on the Reporter's function. You
could only send one staffer at a time to the appropriate schools.

During the week you have incomplete staff on hand; you can expect a 25% drop in productivity. When
your four staffers are trained, the production level should rise to normal in a week, maintain that level
for a month, and then gradually improve at a rate of 40 files a month until you reach your objective of
60 files per day.

A third alternative would involve handing off the job to a consulting firm specializing in job enrichment.
Their fee for taking care of the entire job would be $6,000. To accomplish the task, they plan to make a
study of the jobs involved, and then construct a program that would permit the involved employees to
learn on the job. By using their own personnel as a backup during the training period, the consulting firm
will guarantee to maintain the current production level. Their timetable is as follows: one month to
make the study and preparations (they can start immediately), one month to accomplish the training,
and then a 20% increase in production (which will be permanently maintained).

What is your decision?

Decision Five: Staff Expansion
You've now achieved a production level of 60 files per day, reaching the company-wide average of six
files produced for each employee (excluding supervisors). Your geographic area of operation is capable
of generating 75 accounts (files) per day, however, and you'd like to step up to this new level as quickly
as possible. Since many of your people are apparently operating at, or near, capacity, you'll have to
increase your staff to accomplish this new performance objective. Your decision concerns the number of
people required and the jobs which the additional staffers will perform. The addition of extra people will
not affect your own personal workload or that of Peter Hunt, your Supervisor.

A recent study of workload/production utilization made by Peter Hunt showed how close to operating
capacity some of the staffers were:

Staff Operating Capacity

Four Programmers 90% each

Quality Controller 75%

Expediter 80%

Data Entry Clerk 75%

How would you proceed?