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Enhanced version of budgeting for seminar in Oct 2009
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Budgeting – A Management Tool
Oct 23, 2009Dick Lam
春有百花秋有月
夏有涼風冬有雪
若無閒事掛心頭
便是人間好時節
Budget, in a nutshell
• Look at your chart of accounts or your monthly income statement
• Empty the cells by months• Fill-in the figures you think that
most likely reflect the following year situation
• Tell the people to act on it next year
• Finish!!!
Structure of the courseSome
underlying concepts
Changing Mind
Persuasion
Theory of Constraint
Theory of Exchange
Consistency
Budgeting
Action Items
Strategy
Constraint
Organization
Kaizen Plan
Budget
ManagementCulture
志不强者智不达 ; 言不信者行不果
What am I doing here?
• Exert my influence to persuade you to accept budgeting in your business activities– It is beneficial to the company and
you– Align your internal budgeting
process to company budgeting
Factors of successful persuasion• people like those who
appreciate them• mutual benefit• like to listen those are alike to
them• authority/professional• Scarcity• make explicit commitment
Hope, I could do the above for you
Sigmund Freud
preconscious
subconscious
conscious
sup
er-e
go
ego
id
Interact with the outside world
Changing Mind
What is in our mind?• Idea & Concept• Theory• Stories• Skill
7 Re to change people mind• Reason• Research• Resonance• Representational Re-description• Resources & Rewards• Real world events• Resistance
口開神氣散 , 舌動是非生 !
THE CAN DO ATTITUDE
• You CAN DO everything, but not all at once.
• You CAN DO everything, if it’s important enough for you to do.
• You CAN DO everything, but you may not be the best at everything.
• You CAN DO everything, but there will be limitations.
• You CAN DO everything, but you’ll need help.
This is me…• BBA in Accountancy (HKBU)• Master of Arts in E-Business (CityU)• Fellow of ACCA• Worked in various enterprises and
industries, mainly manufacturing in mainland China, focus on management accounting, business strategy, tax planning, supply chain management and new business setup in PRC
• Before 2009 working in a US company as Director of Administrative Services
• Now, Operation Controller in a Fortune 500 company
• Email: [email protected]• Blog: http://dicklam128.wordpress.com• and more ….
Reference• Sonshi - http://www.sonshi.com/learn.html
• Tao - http://www.wenhuacn.com/zhexue/daojiao/dianji/01laozi.htm
• The World is Flat• Harvard Business Review, Dec 2007
Issue• Changing Mind • 5 Minds for the Future• Maverick at works• Halo Effect• Myself & Other More Important
Matters • Wikipedia• 社會心理學 – 浙江教育出版社
Content
1. The need for budget & budgeting
2. Reasons for ineffective budget3. Budgeting Process4. Application of Budget5. Paradox of Budget6. Implementation of Budget7. In-depth meaning of budgeting
How little we know, how much to learn…
Why do you come to the class?
道隐于小成，言隐于荣华。
Another Angle….• Who is keeping the check book
in your family?• Do you plan for next year or the
following months for your family?
• Your spending is to:– fulfill need and want of you & your
family– generate income for the above
purposeFamily = Father and mother i love you
Social Exchange Theory
• people will do things that are rewarding
• the frequency of a person doing an action depends on the value of the outcome and probability of getting it
• everything we do has costs (to be minimized) and rewards (to be maximized) associated
• Maximization subject to constraint
• We are all busy to keep our ledger balanced!!
天下熙熙，皆为利来；天下攘攘，皆为利往。
What do we exchange?
• Reward• Social Respect• Social Support• Social Recognition• Praise• Where there is unequal inter-
dependence (reliance upon one side), power emerges as one owes to the other
Not to be served but to serve
Servant Leadership vs. Superleadership
• Servant Leadership represents a philosophy in which leaders focus on increased service to others rather than to oneself.
• A superleader is someone who leads others to lead themselves by developing employees’ self-management skills.
• Superleaders attempt to increase employees’ feelings of personal control and intrinsic motivation.
非以役人 , 乃役于人
Servant Leadership – 10 Characteristics• Listening• Empathy• Healing• Awareness• Persuasion
• Conceptualization• Foresight• Stewardship• Commitment to
the growth of people
• Building communityRobert Greenleaf
SERVE
S…See the Future
E…Engage and Develop People
R…Reinvent Continuously
V…Value Results and Relationships
E…Embody the Values
Source: “Leading at a Higher Level”, Ken Blanchard
Manageable Change/Calculated Risk• Change is exciting when it is
done by us, threatening when it is done to us
• Budget is the outline of any manageable change for the coming year
Do not ask the Lord to guide your footsteps if you are not willing to move your feet.
Author Unknown
Before you start to think of Budgeting
• Do you regularly read the financial statement?
• Do you regularly read the departmental profit & loss?
• What kind of target are you assigned?– Market Share?– Sales?– Cost?– Net Income?Offering ownership to promote commitment
In God, we trust; all others bring data
Profit = Sales - Cost
Everything happens in a company will finally go to PNL
夫未战而庙算胜者 得算多也
未战而庙算不胜者 得算少也
多算胜 少算不胜 而況于无算乎
孙子兵法 - 始计篇
Say goodbye to all your Tacit Knowledge
• Before doing battle, in the temple one calculates and will win, because many calculations were made;
• before doing battle, in the temple one calculates and will not win, because few calculations were made;
• many calculations, victory, few calculations, no victory, then how much less so when no calculations?
Calculation – The Art of War
Human beings is not rationalbut rationalizing!!
曲則全，枉則直，窪則盈，敝則新，少則多，多則惑
Why rationalizing?• Deep need for consistency
• When doing something, we need to have consistency and alignment between our actions and our belief
• Where there is inconsistency, either change– What they are doing; or– What they believe
• Worry about what people think about us if inconsistent
Excessive money reward is an excuse of wrong-doing
What is the need?• Bonus Determination
– But should the profit target be after the bonus?
• Resources Allocation– A battle for struggling resources
• Setting Expectation– Under-committed but over-
performed; or,– Over-committed but under-
performed • Political Tool or Economic Tool
– Can you determine your budget ultimately?
为善无近名，为恶无近刑。
Primary value of budgeting• A tool for simulation/induction• Help us identify risk & opportunity
for the following year• It is a financial model
o Objectiveso Assumptiono Strategyo Constrainto Methodology
o Calculationo Walkforward /
Defenseo Contingencyo Execution Plano Conclusion
Budgeting – An iterative process
2. Reasons for ineffective budget? It is an exercise of top
management? It is of no value to real practice? Nobody monitor the departure
of budget if any? Who is doing the budget? Or
who is doing my budget?? Do you have the same
perspective as previous slide towards budgeting?
Top Down vs. Bottom Up
• Failure to link up the budget to daily operationo Plan lags behind realityo Budget is a dream (lofty goals)o Who takes care of it?o System compatibility
• Failure to link up the budget to performanceo No reward system linked to budgeto Manipulation
• No Budgeting basiso Zero Base vs. Incremental Base
Devil is hidden in the detail!!
• Too many estimation without solid groundso Management assigned targeto Inertiao Too many buffer / pretext
• Mixed up of new projects with old oneo Too detail will lead to blame inevitably
3. Budgeting Process
• What is the objectives of your budget?
知足不辱，知止不殆，可以长久
Assumptions
• What is the inflation rate? Economic Growth %?
• What is the % increase in salary? General and Promotion – the overall increase ceiling
• What is the % between direct and indirect staff?
• Exchange rate, Rent, Contract price
• What else…
Your strategy to target…
There is no leader without at least a follower…
Constraint
• Only project with payback period < 3 years being considered
• Headcount Ratio– Direct vs. Indirect - 3 : 1
• Gross Margin > 15%• Emerging market at least 10%• Cost Reduction: 5% on SG&A
from 2007With scarcity, we have economics.
The Theory of Constraint• 5 Focusing Steps
1. Identify the constraint2. Decide how to exploit the
constraint3. Subordinate all other processes
to above decision4. Elevate the constraint5. If, as a result of these steps, the
constraint has moved, return to Step 1. Don't let inertia become the constraint
TOC Thinking Process
• Gain agreement on the problem• Gain agreement on the direction for
a solution• Gain agreement that the solution
solves the problem• Agree to overcome any potential
negative ramifications• Agree to overcome any obstacles to
implementation
上下同欲者勝
What is your constraint?
• Any way to broaden it?• Can you pinpoint the constraint
year by year over the past 5 years?
• Why the constraint in the past disappear? And how?
• Balance the cost & benefit of doing it…
Are you the constraint of the budget?
Questions of change
• What to change?• What to change to?• How to cause the change?• How to maintain the change?
McCain: I use my career to promote change..
How to change1. Establish a sense of urgency2. Create the guiding coalition3. Develop a vision and strategy4. Communicate the change
vision5. Empower broad-based action6. Generate short-term wins7. Consolidate gains and produce
more change8. Anchor new approach in the
culture
What should be your focus?• Strategy
– Internal vs. External– Expansion/Integration/Breakeven– Sales/Operation/People
• Organization Structure– Resource re-allocation– Rightsizing / Business Process Re-
engineering• Organization Culture
Walk the Talk and then Talk the Walk
Methodology & Calculation
Simple Formula
Sales XXXXXXXXX
Cost of SalesMaterials XXXLabor XOverhead XX
---------------------XXXXXX
Gross Margin XXX
Sellind, Distribution & Admin XX---------------------
Net Income Before Tax X=============
Sales
Sales: The Beginning of Budgeting
• Everything starts from Sales• Everything must be related to
Saleso Costo Expenseso Headcounto Capital Expenditure
• Focus on value-added cost & expenses
• Critical: Who determine the sales target?
Direct
Indirect
Good news: the Africans do not wear shoes!!
Sales Bridge• 2009 2010• Market/Customers
Segmentation• Identify the risk & opportunities• Outline sales strategy &
execution plan• Tell the story of Sales
– Truth to the Teller– Truth to the Audience– Truth to the Moment– Truth to the Mission
(HBR Dec 2007)
Storytelling: a force for turning dreams into goals and then into results
What is your sales strategy in 2010?• Selling product or services
(what services?)• Segmentation / Classification
Market/Product• Existing Business vs. New
Business– Level of confidence
• Do you have the right people in place?– If no, then…..
• What is your sales expense budget?
Finish your job; people in China is hungry for yours
Projection > Prediction
Critical Elements: Surprise and Fulfillment
2009 Gross 2009 2009 net Inc/(Dec) in New (Lost) X Y Z Net 2010Customers Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget
ABCDEFGH
Total:
Projection > Prediction
只要信 , 不要問 ; 我办事 , 你放心 !?
2009 Gross 2009 2009 net Inc/(Dec) in New (Lost) X Y Z Net 2010Products Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget
ABCDEFGH
Total:
Questions to new program• Is there any measurable
evidence of the value of the program under review?
• Are the goals and objectives of the program important enough to warrant the expenditure being made?
• What would happen if the program were not provided at all?
• Are there other less costly and more effective ways of achieving these objectives?
Walk in stupid everyday
Last 2 Questions…
• Where would the program fit in if all programs were displayed in order of importance?
• Would the benefits be greater if a portion of the funds spent on the program under review were used instead of other programs?
Keep it fun
Keep the sales
• Why customers loyal to your company?
• Have you ever got the satisfaction score from your customers?
• How do your customers look at you?
• Exploration vs. Exploitation– Sales & Marketing / Customer
Service– Product Engineering (PE)
Make your people happy so that they can make your customer happier
Product & Service
Awareness
Image
Distribution
Trial
Performance
Repeat
Value
Trust
Loyalty
Customer Loyalty
“Brand is the psychological contract between a company and its employees and between those employees and their customers
We have to keep doing more than our customers expect us to; we can’t worry about what other companies might do.”
Mavericks at Work
But our PRC Competitors defeat us by …
• offering good enough products• lower price• massage & rebate
Dragon at your door!
Re-define your own standard• the GiveAway %• the Quality standard• the Brand• the cost structure• ……
Pre-moterm Analysis!!!
Keep the people and their heart…
• Why people loyal to your company?
• Have you ever got the satisfaction score from your people?
• How do your people look at you?
• Exploration vs. Exploitation– Find the right people within and
without the organization– Elicit the intelligence from the
incumbents
Keep the likeables, dump the Assholes.
Low-cost ways to please …..• Personal thank – an employee for a
specific job well-done• Specific praise – in a letter or
thank-you note• Provide information – as possible
about the company• Include in decision – in the
decisions you make• Give Opportunity – to learn as
many new skills• Celebrate successes – with passion• Provide free time & flexibility – at
their conveniencePeople quit people, not companies
Materials
Bills of Material
• Convert the sales budget to production budget
• Is there any time lag between sales & production?
• In other words, any inventory days for finished goods?
Revisit the assumption in BOM• In house vs. Outsourcing• Scrap Rate
– List of scrap rules– Too low or too high?– Zero defect rate? Target DPPM– Any buffer? Simple scrap vs.
Compound scrap
Wastage is allowed (not aware of) when time is good
Do you have the detail?• Budget in Store Keeping Unit
(SKU)– Determine the cost of goods sold
– Identify what volume of raw materials required
– So as to set out the following works:• Purchasing strategy about pricing /
vendor selection / order allocation / replacement
• Measurement: Purchase Price Variance (PPV)
• Budgeted Inventory Level• Obsolete Inventory in the warehouse
Anything else?
NOW
Know the Present,
Know what you “really” have
Past Purchasing Activities!!!!• Any new suppliers introduced?• Any suppliers disqualified?• What PPV generated?• Order allocation on the right
track? (i.e. according to suppliers score card)
• Any sourcing changed and the effect?
• Any replacement and the effect?前事不忘 , 後事之師
To whom do you review first and how?
Non-refundable VAT
Based on 60% 40% Based on 60% 40%Ttl Cost Local Import VAT RM Cost Local Import VAT
Sales 104.50% 104.50% 149.29% 149.29%
CostMaterial 70.00% 42% 28.00% 28.00% 100.00% 60% 40.00% 40.00%Labor 10.00% 14.29%Overhead 20.00% 28.57%
100.00% 76.50% 142.86% 109.29%
Gross Margin 4.50% VAT Rate 4.00% 6.43% VAT Rate 4.00%3.06% 4.37%
Based on Total Cost Based on Raw Materials Cost
Any implicati
on?
Illustration of PPV
• PPV = Standard Cost – Purchase PriceBudget
RM: IC-xEUR 1.20 EUR: HKD 9.50 HKD 11.40 ==> Standard Cost 11.40
Scenario 1EUR 1.20 EUR: HKD 9.50
Purchase Cost in HKD 11.40
PPV: -
Scenario 2EUR 1.26 EUR: HKD 9.05
Purchase Cost in HKD 11.40
PPV: -
PPV = Net PPV + Exchange Difference
Net PPV: = (1.20 - 1.26) * 9.50(0.57)
Exchange Difference: = (9.50 - 9.05) * 1.260.57
Material Requirement Planning
Pull In / Push OutWhat is your target inventory days?
How do you measure it?
How much do you know your purchasing?
• Order placement & delivery arrangement
• SPQ / MOQ• Lead time• CAR• Customers composition of your
major vendors• ……..
Passion attracts Passion!!
Labor
Routing
• Process by process for completion of the production of a product
• Labor hours required for each process of a particular labor type
• In principles, it is the labor hours for each work station
• Then, no. of laborer is determined for a particular volume of production
Takt time….
• The routing hours should be the actual working hours, i.e. hours under perfect state of motion, no waiting
• As a result, efficiency factor can be measured
Efficiency & Low Season Factor
HKDAllowance Hourly Rate 10.15
Standard Mthly Normal Factor Mini H/C Ttl Labor TtlQty Hours Hours OT Saturday Total H/C 20% H/C Thereon Hours Cost Hours Cost Hours Cost Hours Cost
37,491 Jan-10 32,144 168 42 25 235 137 164 200 200 47,000 477,050 32,144 326,262 6,396 64,919 8,460 85,869 56,061 Feb-10 48,066 136 34 20 190 253 304 320 320 60,800 617,120 48,066 487,865 9,694 98,399 3,040 30,856 54,396 Mar-10 46,639 184 46 40 270 173 207 220 220 59,400 602,910 46,639 473,382 9,251 93,902 3,510 35,627 60,689 Apr-10 52,034 176 44 40 260 200 240 250 250 65,000 659,750 52,034 528,142 10,366 105,218 2,600 26,390 73,996 May-10 63,443 152 38 50 240 264 317 320 320 76,800 779,520 63,443 643,947 12,637 128,265 720 7,308 81,710 Jun-10 70,057 168 42 40 250 280 336 350 350 87,500 888,125 70,057 711,078 13,943 141,522 3,500 35,525 93,529 Jul-10 80,190 176 44 50 270 297 356 360 360 97,200 986,580 80,190 813,931 15,930 161,687 1,080 10,962
103,695 Aug-10 88,907 176 44 40 260 342 410 420 420 109,200 1,108,380 88,907 902,402 17,693 179,588 2,600 26,390 85,917 Sep-10 73,664 168 42 40 250 295 354 370 370 92,500 938,875 73,664 747,687 14,836 150,588 4,000 40,600 35,105 Oct-10 30,098 144 36 - 180 167 201 250 250 45,000 456,750 30,098 305,495 6,082 61,732 8,820 89,523 33,511 Nov-10 28,731 176 44 - 220 131 157 200 200 44,000 446,600 28,731 291,624 5,809 58,957 9,460 96,019 26,422 Dec-10 22,654 184 46 - 230 98 118 150 150 34,500 350,175 22,654 229,936 4,486 45,535 7,360 74,704
742,522 636,626 220 264 284 284 818,900 8,311,835 636,626 6,461,750 127,124 1,290,312 55,150 559,773 20% 7%
Normal Rate 10.15 Low Season Factor 7%
10.88
Theoretical Hours 636,626 Inefficiency Factor 20%Inefficiency Hours 127,124
Total Hours 763,750
Total Labor Cost 8,311,835 =========
Standard Routing Allowance Factor Low Season
How to deal with fluctuation?• Pre-build, but cost of holding
inventory• No pay leave, annual leave in
low season• Alliance with other factories• ………
4 unexpected leadership qualities• Selectively reveal your
weaknesses
• Rely heavily on your intuition to gauge the appropriate timing and course of actions
• Manage employee with tough empathy
• Capitalize on differences
Rob Goffee, Gareth Jones
Internalization vs. Understanding
Overhead
The detail worksheetName Position Sep-07 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Existing
FinDick Lam Controller 1 1 1 1 1 1 1 1 1 1 1 1 1 65,000 Stephen Ip Manager 1 1 1 1 1 1 1 1 1 1 1 1 1 35,000 Lily Lin Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 14,800 Tina Tan A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 9,500 Linda Lee A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 7,500 Samantha A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 7,500 Debora A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 7,500
------------ --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------7 7 7 7 7 7 7 7 7 7 7 7 7
SalaryJan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
65,000 65,000 65,000 68,250 68,250 68,250 68,250 68,250 68,250 68,250 68,250 68,250 35,000 35,000 35,000 38,500 38,500 38,500 38,500 38,500 38,500 38,500 38,500 38,500 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 9,500 9,500 9,500 10,450 10,450 10,450 10,450 10,450 10,450 10,450 10,450 10,450 7,500 7,500 7,500 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 7,500 7,500 7,500 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------Salary 138,750 138,750 138,750 147,950 147,950 147,950 147,950 147,950 147,950 147,950 147,950 147,950
MPF 6,938 6,938 6,938 7,398 7,398 7,398 7,398 7,398 7,398 7,398 7,398 7,398 Medical 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100
Double Pay 11,563 11,563 11,563 12,329 12,329 12,329 12,329 12,329 12,329 12,329 12,329 12,329 Bonus 13,875 13,875 13,875 14,795 14,795 14,795 14,795 14,795 14,795 14,795 14,795 14,795
Simple is beauty!
From macro to micro…• 2 levels are enough• Working is even more important
Department RMB USD RMB USD RMB USDCustomer Service 515.00 68.67 Engineering 1,520.00 202.67 Finance 4,412.10 588.28 HR 2,423.00 323.07 IT - - KPO 900.00 120.00 Manufacturing 945.00 126.00 Operations 950.00 126.67 PMC - - Production 2,020.00 269.33 Program 2,195.00 292.67 Project - - QA 1,915.00 255.33 Security 2,350.00 313.33 Supply Chain Management 300.00 40.00
--------------------- ------------- ------------- ------------- ------------- -------------Total 20,445.10 2,726.01 0 0 0 0
=========== ======= ======= ======= ======= =======
Nov-07 Dec-07 Total 2007
Thanks to Comparison: We found beauty!
Another example: Traveling
6,000 10,000 8,000 15,000 30,000 Department China Singapore Taiwan Korea US China Singapore Taiwan Korea US Total
FinanceDick or Financial Controller 2 1 1 1 2 12,000 10,000 8,000 15,000 60,000 105,000 John or Finance Manager 1 1 1 1 1 6,000 10,000 8,000 15,000 30,000 69,000
18,000 20,000 16,000 30,000 90,000 174,000 Sales A
X 4 2 2 1 3 24,000 20,000 16,000 15,000 90,000 165,000 Y 2 1 1 1 2 12,000 10,000 8,000 15,000 60,000 105,000 Z 2 1 1 1 2 12,000 10,000 8,000 15,000 60,000 105,000
48,000 40,000 32,000 45,000 210,000 375,000
66,000 60,000 48,000 75,000 300,000 549,000
Is it too detail?
Income Statement
• Putting Sales, Cost & Expenses altogether
• But how do you work out the cost & expenses detail?
• Product PNL / Customer PNL
CQ + PQ > IQ
Zero Base PNL
• Identify the cost nature so as to determine the breakeven point
• Then, is it possible to reduce the fixed cost?– What minimum capacity should be
maintained?
A simple example …..Selling Price 10
Material 5Labor 1
6
Variable Margin 440%
Fixed CostRents 100,000 Salaried Labor 300,000 Office Expenses 70,000 Depreciation 50,000
520,000
Break-evenUnit of Sales 130,000 Sales 1,300,000
What is the fixed cost?
Standard Cost of Sales -72%Material (3,671,172) Labor (222,581) Overhead (411,229)
----------------Total Standard Cost (4,304,983)
83.9%Material Variance
4510 Purchasr Price Variance - Non4511 Purchasr Price Variance - Copp4512 Invoice Matching Variance - Non4513 Invoice Matching Variance - Copp4514 Purchase Price Variance - Internal4523 Std Spoilage 41,639 4532 Obsolete4527 Scrap (24,289) 4525 Std Packing Expense 31,229 6109 Packing Material (31,229) 6176 Non Refundable Vat - 4530 Std Cost Revaluation4534 Rework Material Expense (17,350) 4535 Inventory Adjustments4552 Import Duty4522 Standard Freight-in 69,398 4553 Frieight-In Charges (69,398)
Others
-----------------
71.5%Labor Variance
5000 COS - DIRECT LABOR 222,581 5001 Inventorized variance5120 OT (92,581) 5121 Basic (130,000)
Others
Overhead Variance6001 Cos - Overhead 411,229 6004 Sample Charges (8,000) 6006 Freight-In For Pp&E6009 Indirect Materials-Cos (23,720) 4999 Customs Handling Charge (12,000) 5138 Direct Labour-Employee Benefit (3,000) 5152 Direct Labor-Insurance (17,884) 5156 Direct Labor - Bonus (10,833) 6101 Canteen (21,978) 6120 Indirect Labor-Basic(Poh) (26,430) 6121 Indirect Labor-Ot(Poh) (11,812) 6138 Indirect Labour-Employee Benef (2,000) 6139 Indirect Labour-Insurance (5,112) 6153 Indirect Labour-Housing6156 Indirect Labour-Bonus (2,202) 6166 Office Supplies (12,000) 6167 TOOLING CHAREGS (1,200) 6168 EXPENDABLE MACHINERY & EQUIPME(5,000) 6169 Expendable Mould & Tools (25,000) 6170 Maintenance (1,000) 6172 Maintenance-Machinery & Equipm (2,000) 6175 Maintenance-All Other (1,000) 6177 Heat & Utilities (15,000) 6179 Utilities - Water (2,000) 6180 Quality Ass. Expenses (1,000) 6181 Rental Expense-Misc (38,296) 6185 Lease/Rental - Machinery (8,000) 6186 Travel & Meeting Expenses (3,000) 6188 Entertainment (3,000) 6189 Miscellaneous (Engineering) (5,000) 6190 Motor Vehicles (2,500) 6191 Legal & Audit Fee (6,500) 6192 Expense Supplies-Janitorial (1,500) 6196 Expense Credits-Tool Room (5,000) 6197 Misc. Gov'T Fee/Stamp Duty (5,261) 6199 Telephone Expense (5,000) 6204 Dormitory Expense6205 Overhead - Others (2,500) 6220 Indirect Labor-Basic(Oh) (70,555) 6221 Indirect Labor-Ot(Oh)6222 Indirect Labour-Insurance (3,848) 6223 Indirect Labor-Bonus(Oh) (10,097) 7145 Contract Serive (Oh Setup) (8,000) 6225 INVENTORIZED VARIANCE6184 EDUCATION & TRAINING (5,000)
Provision for Long Service Pay (8,000) Recreation CentreOthers (10,000)
-------------0
Profit Map
84
Sales
Variable Cost
Fixed Cost
$
Qty
Total Cost
Breakeven point
Profit
Loss
A Paradox of Pricing Formula
• Price = Unit Cost + Mark-up %• Cost: Variable Cost, Fixed cost• Variable Cost: more output,
fixed unit cost• Fixed Cost: Lump Sum / Output
– more output, less unit cost– less output, more unit cost
Suggestion: Convert fixed cost to variable cost as far as possible
How detail?• No free lunch!!• Nothing is impossible provided
there is sufficient resources• Work out the detail of resources
requirement so as to materialize the goal, regardless of its nature – self determined or assigned
• Detail is to differentiate your aspiration from dream
The more the detail, the stronger the confidence
In the new middle, we are all temp!
HK'000Sales 35,000
Cost 28,000
Gross Margin 7,000 % 20.0%
Selling Expenses 2,500 General Admin 1,800
EBITDA 2,700 7.7%
HK$'000C/M Budget F/(U) %
Sales 30,000 32,000 (2,000) -6.3%
Cost of Sales 24,000 26,500 2,500 9.4%Commission 1,000 1,100 100 9.1%
25,000 27,600 2,600 9.4%
Gross Margin 5,000 4,400 600 13.6%16.7% 13.8% -30.0%
Selling ExpensesA & P 1,300 1,500 200 13.3%Staff Salary 1,000 977 (23) -2.4%Staff Welfare 100 98 (2) -2.0%Entertainment 30 25 (5) -20.0%Traveling 60 55 (5) -9.1%Others 10 11 1 9.1%
2,500 2,666 166 6.2%
General Admin.Staff salary 800 810 10 1.2%Staff welfare 80 75 (5) -6.7%Rent & Rates 100 100 - 0.0%Communication 30 25 (5) -20.0%Others 20 19 (1) -5.3%
1,030 1,029 (1) -0.1%
EBITDA 1,470 705 435 61.7%4.9% 2.2% -21.8%
• Do you know your business?
• If yes, do you know the expenses pattern or relationship with sales?
• If yes, can you tell in the budget?
What do we need to do?
• Identify the cash need upfront• Uncover what leads to liquidity
issue• Smooth out the cash deficit &
surplus• Evaluate the cost of capital
知彼知己，百戰不殆 ；不知彼而知己，一勝一負；不知彼，不知己，每戰必殆
Poka Yoke (Avoid any inadvertent Errors)
• Unintentional Errors• Overlook• Misunderstanding• Judgment• Inexperience• Frequency• No Benchmarking Standard• Accident• Intentional
Poka Yoke in action - Reasonableness• Trend by month• Benchmarking• Comparison
– Compare with previous years– Compare with current year
forecast– Compare with industrial standard
• Check figure• Encourage Q & A• Index
Walkforward / Defense
• EBITDA bridge• Quantify all identified risk &
opportunities• Give detail of cost reduction
and others• Defense your budget• Prepare the detail for challenge• Identify the focus area of
Income Statement實踐是檢驗真理的唯一標準
What is cost saving plan?
ABC Company2009 BudgetCost Reduction
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Total How1. Material Saving
Connector - - - - - - - - - - - - - Housing - - - - - - - - - - - - - Wire - - - - - - - - - - - - - Packing - - - - - - - - - - - - - IC - - - - - - - - - - - - -
- - - - - - - - - - - - -
2. Utitlity - - - - - - - - - - - - -
3. Re-structureDepartmentIT - - - - - - - - - - - - - Finance - - - - - - - - - - - - - Production - - - - - - - - - - - - - Material - - - - - - - - - - - - -
- - - - - - - - - - - - -
Any productivity improvement plan?• How do you measure operator
productivity?• How to improve it?• What is the financial impact?• 7 Waste
• 8th Waste …..• What is the target Hourly Rate?
– Labor cost & Overhead
Excessive Production
Rework
Excessive Conveyance
Waiting
Excessive Action Inappropriate task
Excessive Inventory
2008 Income Statement Walkforward(in 000's)
2007 Actual/ Price/ Exchange New Transfers Cost Lost 2008Forecast Contract Inflation Rate Programs In Reductions Programs Other Budget $ %
Back-to-Back Sales - - Outside Sales - - #DIV/0!Intercompany Sales - - #DIV/0!
Sales - - - - - - - - - - - #DIV/0!
Direct Material - - - #DIV/0! Material % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!Material Adders - - - - - #DIV/0! Material Adders % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!Labor - - #DIV/0! Labor % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!Overhead - - - #DIV/0! Overhead % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!Intercompany Purchases - - #DIV/0! Mat Interco Sales % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!Scrap - - #DIV/0!Restructure - - #DIV/0!
Cost of sales - - - - - - - - - - - #DIV/0!
Gross Margin - - - - - - - - - - - #DIV/0!Gross Margin % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Selling - - - #DIV/0!Research & Development - - #DIV/0!General & Administrative - - - #DIV/0!Total operating expenses - - - - - - - - - - - #DIV/0!
Op expenses % of sales #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!- -
EBITDA - - - - - - - - - - - #DIV/0!EBITDA % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Depreciation - - #DIV/0!Amortization - - #DIV/0!Interest expense cash - - #DIV/0!interco interest - - #DIV/0!Non-cash interest expense - - #DIV/0!Translation loss (gain) - - #DIV/0!Management fee - - #DIV/0!Other (expense) income - - #DIV/0!
- Total Non-operating - - - - - - - - - - - #DIV/0!
Income before income taxes - - - - - - - - - - - #DIV/0!
Income taxes - - #DIV/0!Tax rate #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Net Income - - - - - - - - - - - #DIV/0!
Inc / (Dec)
More on Walkforward template• Projects profitability highlight
(new/lost)• Cost reduction/increase
highlight• Variable Budget
New Project Evaluation …..REQUESTED CAPITAL: 1,547,151
REQUESTED EXPENSE: 62,286
Capacity Expansion: 2008 2009 2010Total Gross Sales 3,930,777 3,930,777 3,930,777 Payment Discount 0.0% - - - Rebate 0.0% - - - Total Net Sales 3,930,777 3,930,777 3,930,777
% Tot Cost % SalesDirect Materials 89.0% 2,797,206 2,797,206 2,797,206 71.2%Material Adders 1.4% 44,755 44,755 44,755 1.1%Labor/Overhead 7.1% 224,044 224,044 224,044 5.7%Logistics/Whse 0.0% - - - 0.0%Import Duties 2.5% 78,616 78,616 78,616 2.0%Total Incremental Cost 100.0% 3,144,621 3,144,621 3,144,621 80.0%
MARGIN on Incremental Sales 786,155 786,155 786,155 786,155 MARGIN % Sales 20.0% 20.0% 20.0% 20.0%
Cost Reduction:Total Cost Reduction - - - Requested Expense 62,286 62,286 62,286 COMBINED MARGIN 723,869 723,869 723,869
Ul/CSA Expense - SG&A % Sales N/A N/A N/A
EBITDA 723,869 723,869 723,869
Depreciation: (Enter Depreciable Life) -----> 7 221,088 221,088 221,088 Taxable Income 502,781 502,781 502,781Tax Rate 0.00% 12.50% 12.50%Tax Payments 0 62,848 62,848
Working Capital Items: DSO (Enter DSO) -----> 30 (327,565) (327,565) (327,565) Inv Turns-Normal (Enter Inv Turns) -----> 10 (279,721) (279,721) (279,721) Freight (Enter Days in Transit) -----> 7 (61,145) (61,145) (61,145) AP Days (Enter AP Days) -----> 75 582,751 582,751 582,751
Total Working Capital (85,680.0) (85,680.0) (85,680.0)
EBITDA 723,869.0 723,869.0 723,869.0Tax Payments 0.0 (62,848.0) (62,848.0)Working Capital Change (85,680.0) 0.0 0.0NET CASH FLOW (1,547,151) 638,189 661,021 661,021
CASH FLOW ECONOMICS:RRR 13%NPV $ (6,585)IRR 12.8%PAYBACK (Years) 2.4
Balance Sheet Items
• Inventory• A/R• A/P• Fixed Asset
Working CapitalStock Days 45 days
Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04Cost of Goods Sold 4,750 3,253 2,540 3,548 4,500 5,000 6,150 5,500 4,700 6,700 (qty or cost)
Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04Inventory 6,377 4,523 4,314 5,798 7,000 8,075 8,900 7,850
Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04Purchase 3,000 2,897 3,044 4,024 4,750 5,575 5,825 5,100
Opening + Purchase - Cost of Goods Sold = Closing=====> Purchase = Closing + Cost of Goods Sold - Opening
Creditors Day 75 daysJan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04
Accounts Payable 7,441 8,516 10,296 12,337 13,775 13,713
Cash CycleCash Cycle
CashDaysCreditors Days
Stock Days Debtors Days
Actual Trends
DSO
Inventory
Days DPO Cash Cycle
Dec 2007 160 32 85 107
Jan 2008 161 32 75 118
Feb 2008 84 37 88 33
Mar 2008 102 39 88 53
Apr 2008 127 36 93 70
May 2008 85 24 73 37
Jun 2008 83 21 77 27
Jul 2008 82 22 83 20
Aug 2008 80 22 95 7
Sep 2008 104 26 107 22
Cashflow
• Fund for investment opportunity
• Rainy-days fund• Profit without cash inflow is
fictitious profit• Usage of cashflow statement in
budgeting– Notify when cash injection needed
and cash return happens– Yardstick for liquidity performance世路難行錢為馬 , 愁城欲破酒為
軍
Cashflow working• Net Income is not cash which
include non-cash spending – depreciation & amortization
• Receivable is cash held by customers– A/R , Cash
• Payable is cash hoarded from suppliers– A/P , Cash
• Capex is spending ahead• Your cash position is reflected
by the bank statement/cash ledger
Cashflow templateCashflow Cur: HKD'000
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08Net Income 157 (258) 45 22 166 72 57 454 618 489 338 223 Add:
Depreciation 117 117 117 117 117 125 125 125 125 125 125 125
Change of WCA/R (545) 2,172 (1,816) (249) 694 (374) (890) (1,246) (854) 338 890 374 Inventory 1,274 (632) 10 474 (605) (1,160) (1,339) (622) 574 880 453 1,156 A/P (803) (1,233) 784 (702) 380 1,323 1,412 706 (580) (1,063) (579) (1,062) Others
--------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------(73) 307 (1,022) (478) 469 (211) (817) (1,162) (860) 155 764 468
Capex - - - - (200) - (1,200) - - - - -
Cash (Surplus)/Loan Required(50) (165) 861 339 (552) 15 1,836 583 118 (769) (1,227) (815)
--------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------150 - - - - - - - - - - -
Bginning Cash Balance 150 300 300 300 300 300 300 300 300 300 300 300 Net Cashflow 150 - - - - - - - - - - -
Ending Cash Balance 300 300 300 300 300 300 300 300 300 300 300 300 ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Sweet lemon; Sour grape!?
Weekly cashflow forecast
Asia Harness Week Week 45 Week 46 Week 47 Week 48 Week 49 Week 50 Week 51 Week 52 Week 53 Week 54 Week 55Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast
10/26/08 11/2/08 11/9/08 11/16/08 11/23/08 11/30/08 12/7/08 12/14/08 12/21/08 12/28/08 1/4/09 1/11/09
Beginning Cash 226 226 441 122 422 292 292 58 258 105 146 476
VAT Receipts - - - - - - - - - - - - Other Receipts - Cash Receipts (A/R collections) 100 100 100 10 100 100 100 41 100 138
Total Cash Inflows - 100 100 100 10 - 100 100 100 41 100 138
Cash Payments (A/P Checks and wire transfers) (1,197) (1,919) (1,100) (1,100) (1,277) (1,200) (1,713) (1,000) (1,270) (1,100) Payroll (200) (40) (200) (40) Capital expenditures (188) (57) Other nonworking capital itemsVAT PaymentsTax PaymentsOther Payments
Total Cash Outflows - (1,385) (1,919) (1,300) (1,140) - (1,334) (1,400) (1,753) (1,000) (1,270) (1,100)
Loan / (Excessive cash) 1,500 1,500 1,500 1,000 1,000 1,500 1,500 1,000 1,500 1,000
Total Intercompany - 1,500 1,500 1,500 1,000 - 1,000 1,500 1,500 1,000 1,500 1,000
Interest - - - - - - - - - - - - Principal - - - - - - - - - - - -
Total Financing - - - - - - - - - - - -
Other - - - - - - - - - - - -
Ending Cash 226 441 122 422 292 292 58 258 105 146 476 514
Contingency
• Challenge of Assumptions• Sensitivity Analysis• Backup/Compensating plan
– If plan A fails, plan B will follow• Opportunity of Cost Innovation
曲突徙薪亡恩澤，燋頭爛額為上客
Execution Plan (Monitoring)• How to measure?• Key Performance Indicators
(KPI)– The higher the better– Return on equity
• Key Risk Indicators (KRI)– The lower the better– Overdue Debt to A/R
• Look at your IS at different dimension– Customer P&L– Product P&L
Go fast, Walk alone; Go far, Walk together
A picture worths more than 100 words
• Rolling forecast– e.g. 3 Actual + 9 Forecast– Monitor month by month
• 5-Why– Why the entertainment rise up so
significantly?• Why the entertainment not link to
sales?o Why do we spend so much to future
customers? Why …..
We do budget every month
Application of Budget
• Commitment vs. Compliance• Commitment generates
productive behavior without the need for monitoring
• Compliance may result in similar behavior, but rarely generates initiative. Compliance strategies rely on external enforcement
夫禮者，忠信之薄而亂之首 ！
Review• Link the
budget to performance appraisal
• Bridge the gap• Evaluate the
degree of achievement every month
• Any remedy or compensating control?
HK$'000C/M Budget F/(U) %
Sales 30,000 32,000 (2,000) -6.3%
Cost of Sales 24,000 26,500 2,500 9.4%Commission 1,000 1,100 100 9.1%
25,000 27,600 2,600 9.4%
Gross Margin 5,000 4,400 600 13.6%16.7% 13.8% -30.0%
Selling ExpensesA & P 1,300 1,500 200 13.3%Staff Salary 1,000 977 (23) -2.4%Staff Welfare 100 98 (2) -2.0%Entertainment 30 25 (5) -20.0%Traveling 60 55 (5) -9.1%Others 10 11 1 9.1%
2,500 2,666 166 6.2%
General Admin.Staff salary 800 810 10 1.2%Staff welfare 80 75 (5) -6.7%Rent & Rates 100 100 - 0.0%Communication 30 25 (5) -20.0%Others 20 19 (1) -5.3%
1,030 1,029 (1) -0.1%
EBITDA 1,470 705 435 61.7%4.9% 2.2% -21.8%
交數交人交自己
Paradox of Budget
o Meet the budget, no significant deviation
o Exceeds the budget, under-commit but over-perform
o Lags behind the budget, over-commit but under-perform
Be careful! When you start the game, it will continue for good
How detail do we need?
Detail (Logic)
Flexibility
People need to prove they are trustable
Back to Basic
天下难事，必作于易
天下大事，必作于细
Socrates: the great inquisitor
In-depth meaning of budget• A break for management to
think about next year• To determine the corrective
actions required• To determine the yardstick of
next year performance• To allocate resources based on
certain conditions• To bring(force) everybody to the
strategyThink Ahead
Revisit:Sales & Cost
Customers & SuppliersAssets & Liabilities
Let the figure talk on solid ground
Sales – the source of budget
• How to retain the existing customer?
• How to uncover the intrusion of low cost competitor?
• Is the new program profitable and cash-collectible?
• Do we have sufficient/correct segmentation?
Don’t expect our employees can make customers happy if they are not happy
R-W-W
• Is it Real?
• Can we Win?
• Is it Worth doing?
知可以戰與不可以戰者勝
5 R – Cost saving strategy
• Remove– Why does a particular expense
need to incur? Is there a way to totally remove this expense?
• Replace– If not possible to remove this
expense, can we replace the function with a cheaper one?
One to say Yes, Two to say No.
• Reduce– If not possible to remove it, is
there a way to reduce the spending?
– We should think about request for price reduction from supplier or source alternative supplier.
There is no repeated fluke!
• Redesign– If not possible to reduce, can we re-
design the process to utilize the scarce resources?
– Kaizen should be a continuous process. – There should be a regular review of
existing process by freshman. – The old process creator should only act
as a information provider but not member of new Kaizen group.
沒有最好 只有更好
• Redistribute– If not possible to redesign the
process, can we have the function to share its value to different functional area as well as the cost?
– Maximization subject to constraint is maxim not only in economics but also in cost saving perspective.
Great intelligence comes from heart, not mind
Step forwards to your Suppliers & Customers
Suppliers Customers
Suppliers Customers
Stand still or fly?
Budgeting is a practice for making decision
千里之行 , 始於足下 . 民之從事 , 常於幾成而敗之 . 慎終如始 , 則無敗事
Business Integrity• http://www.webpronews.com/
topnews/2004/07/13/the-principles-of-business-integrity
• The company need to have the framework to run the business
• This is the basis for building trust• The way applied in budgeting is part
of the foundation• The leader of an organization must
be willing to open up to ideas for betterment
• Use budgeting as the 1st step – A foreground for open-minded discussion
A small step today, A big step tomorrow
Organization Culture“It is a collective of
–the Values – ideas about what in life seems important
– the Conformed Norms – expectations of behavior in
different situations
–the Artifacts – derived things or materials that abet a culture, that influence the behavior of the members of the society and helps them to cope with their world and with one another; these are transmitted from generation to generation, through learning and imitation…”
Tough Empathy
Culture Shaping Moment:• Every breathe you take, every
move you make, they are watching you
• The daily words, behavior, events, and decisions that reinforce who you want to be
• Create experienced meaningfulness!
A learning organization
My experience in budgeting cycle• A chance for me to practice and
discuss the whole business• I need to demonstrate the
capacity of my mindset, be bold to raise questions
• Further enhance the conviction I learn from 5 Minds for the Future:o Disciplinary
Mindo Synthesizing
Mindo Creative Mind
o Respectful Mindo Ethical Mind
百川異趣 , 必會於海 ; 萬國殊途 , 必通諸夏
Johari Window
Kno
wn
to o
ther
s
Known to oneself
A B
CD
Joe and Harry suggested, be a better functioning person if you could make pane D as large as possible
Nobody is as smart as everybody
Kno
wn
to e
mpl
oyee
s
Known to the organization
A B
CD
Acculturation
德有所长而形有所忘，人不忘其所忘，而忘其所不忘，此谓诚忘。
Peripheral Thinking….
• Do you budget for the following?– Order Lead Time– Policy & Procedure(SOP)– Innovation– Leadership– Staff Turnover Rate– Employee satisfaction– Trust– Social Capital
But, why should I believe you?
Some sidetrackingTrust:• I cannot ask for it• I can accept being trusted or
give trust• When I trust, I expect
something happen• When I trust, I take the risk• It liberates and mobilizes
human agency, release creative, uninhibited, innovative, entrepreneurial activism toward other people
To be trustworthy
• I need to be financially healthy– proved by the Balance Sheet &
PNL• I need to meet the expectation
of the creditors, suppliers, customers & employees
• I need to be consistent with what I said and intended to do
墨子 – 修身編• 志不强者智不达；言不信者行不果
• 行不信者，名必耗。名不徒生，而誉不自长
• 务言而缓行，虽辩必不听
• 言无务多而务为智，无务为文而务为察
• 善无主于心者不留，行莫辩于身者不立
• 名不可简而成也，誉不可巧而立也
Plant your own garden,decorate your own soul,
instead of waiting for someone to bring you
flowers.
Veronica A Shoffstall
What am I talking about till now?• Financial Statements & its
construction• Management by applying the
financial model• Walk through the business
cycle of a financial year• Raise questions to elicit
intelligence• Nothing more…• But we call it BUDGETING Early to bed and early to rise, make a man healthy, wealthy and wise
