Tackling budget blues!

By BK Khaitan






Company's annual budgeting exercise is very challenging in today's environment
of global economic downturn. Unless budgeting is linked to the company's overall

objective, there are chances of utilizing funds for assets that may not

contribute much to achieving the overall objective.






For example, if the company plans to increase the sales turnover by 25% in the
new financial year, it has to work backwards and identify the steps required to

be taken. The company may decide to introduce new product range, or increase the

sales of the existing product range. If the company wants to increase the sales

turnover of existing product range, then it may decide to outsource production

or manufacture in-house taking into account several factors like quality, cost,

existing machine capacity etc.,






Incase of in-house production, if the existing capacity is not adequate, the
company may decide to modernize machines or may add new machines. To increase

the demand, which will result in more sales, the company may decide to launch

new schemes to attract more customers or it may decide to do R&D to cut down on

operating cost, which, in turn, will lower the sales price. To cope up with the

increase in sales, the company may decide to appoint more dealers or salesmen. A

decision tree can be made of each of these options with the main objective of

the company on top and going downwards with sub objectives.






Having done this exercise, the responsibility for achieving sub objectives like
lowering cost through R&D, modernization of machine to increase production

capacity by 25% etc can be fixed to department heads which will form as KRA for

them. In order to achieve the sub objective, allocation of fund is required

which will form as part of budgeting exercise.






If the budget is linked to overall objective of the company, the approval of the
budget will not be a constraint since the cost benefit analysis can be done very

easily.






IT initiatives, unlike other mainline functions, does not directly contribute
to increase in sales, but indirectly helps in reducing operating cost or

increasing efficiency. The justification of investment in I.T. should therefore

be made in terms of saving potential.






As far as possible, the annual budgets should be broken down into 4 quarters.
Quarterly budget helps in utilizing funds more efficiently. Monitoring of actual

expenses against budget should be done online. CAPEX raised for Assets should be

checked online with budget by the approving authority. A workflow application

can be developed to keep track of all CAPEX raised, pending for approval,

Pending for order etc. PO raised should be linked with CAPEX reference no.






At the end of each quarter, budget should be reviewed with actuals and any
unutilized fund should be diverted to other areas of investment.

 

The author is former Chief-IT manager, RPG Cables Ltd.