The Joy of Budgets

For the commercial manager responsible for producing and maintaining profitable income, budgets are an essential tool of resource management. While business plans set out the organisation’s commercial and financial objectives, budgets set out the allocation of resources necessary for their achievement. Budgets are not the same as cash flow projections or in fact any financial projection, but form part of the business planning cycle.

In any organisation, budgets should be prepared by those departments to which they relate and not be handed down from higher management levels. Since each department of the organisation must believe in the budget as its own plan for operations, management cannot juggle figures just because it likes to. If senior management seek any changes to the budget, they must persuade and convince the originators of the validity of their reasons, otherwise the process becomes a sham which damages management and employee relations.

The Commercial manager needs to build a budget” which sets out all the planned investments and liabilities which are involved in the getting and retaining of profitable business.
Depending on how a company is organised, some of these costs may fall outside the direct responsibility of the commercial manager, and be under the control of a transport or IT department head. However, such transport and IT which is directly used for getting and retaining business, is of specific interest to the commercial manager as it is part of the overall cost incurred in producing income and the calculation of overall contribution and efficiency.

Although not an exhaustive list the main investments and liabilities that are of interest or direct responsibility for the commercial manager are set out below.

Total income as estimated from expected sales revenue and investment, is the starting point for preparing a balanced budget, as it provides the money for expenditure.

The potential expenditure in a commercial manager’s budget will include the following:
* Warehouse costs which are those incurred by the product, that includes heat, light, power, and warehouse wages. Additional sales volume may require extra storage that will also incur added costs that should be reflected in the budget.
* Distribution costs are those which include fuel, postage, freight, and associated salaries, also allowing for increases in volume
* Advertising and promotional costs should include all agency fees, plus all space placed in the press, television, radio and internet, print expenditure, promotional schemes, exhibition and PR expenditure.
* Website costs should include all design, registration and management charges.
* IT costs should include all software costs and licences required for getting and retaining business and all rents or leasing charges for marketing activities. Where IT hardware is owned, it need only appear in the budget on replacement, but IT support contracts must always be included.
* Selling, Customer Relations and sales administration should include salaries and expenses of all direct sales and support staff, sales office admin staff, heat, light, telephone and stationery. Any additionally planned expansion of sales may also require an increase in staffing and related expenditure.
* Market research costs should include all ad-hoc and continuous research costs.
* Bad debt is an accepted part of any business where credit terms are allowed. Thus a budget should include provision for all the expected bad debts of customers. In budgetary terms this may be expressed simply as a percentage of income, against which actual results may be compared.
* Sales vehicles costs should include the leasing costs of all sales vehicles that are leased, excluding fuel. Where sales vehicles are owned, they only appear in the budget on replacement, but maintenance costs must always be included.

Every budget should always include a contingency element in in order to deal with unexpected situations.

Budgets are meant to be a planned balance of income and expenditure. Thus normally the planned expenditure on fixed and variable costs plus a contingency should be balanced by the income from expected sales. Statements comparing budget to actual should be written not in the usual terms of higher or lower, but in plain English terms of better or worse than predicted by the budget to provide consistent reporting clarity.

Budgetary discipline is the basis of business planning and a fundamental management tool, providing a benchmark against which actual performance may be measured and acting as an effective buffer against unplanned and ad hoc expenditure.

© N.C.Watkis, Contract Marketing Service 21 Sep 17

September 25, 2017   Posted in: business development, business efficiency, Business Marketing, business performance improvement, business performance indicators, business performance management, business performance measurement, marketing development, marketing management, marketing metrics, marketing performance measurement, marketing ROI, performance management, performance measurement indicators