Zero-based budgeting – start fresh, achieve more!

Every year, good business executives develop a budget. Peek into the planning sessions and operating mode of any well-run company and you will find a strong budgetary process at work.

Simply put, a budget is a financial tool -- sort of a "spending-guide'. But, it can also be a healthy discipline forcing the company to think and constructively debate the investments and priorities for the coming year. As such, senior executives should demand a tight alignment of corporate goals to the annual budget. A well-developed budget puts into place the necessary structure to measure, manage and control the variety of spending within the enterprise. Savvy company leaders also utilize the budget process to communicate to the rest of the company the priority of various projects as well as the amount and timing of the funds allocated. The annual budget and its monthly review and quarterly updates memorialize and documents the companies financial intentions for the coming year. This fulfills a requirement demanded by most banks and lending institutions.

However, there is an inherent trap that most companies fall into when developing yearly budgets. And it is so insidious and subtle, that most senior executives unwittingly become part of this annual charade without realizing it. Global Marketing calls it the ‘creep-factor'.

What is the creep-factor? Some clients of Global Marketing have guessed it is an apt description of their firm's newly hired CFO. Some have indicated that, as in the likes of ENRON, WorldCom and etc., it must be a new method that defines profit. And others thought it might be a ratio of lost customer revenue to the firm's competitor. All reasonable guesses, but none correct!

Global Marketing Inc. has many clients and sooner or later the topic turns to ideas on cost-cutting measures. At this point the Global Marketing team asks to review the summary budget schedule for the past 3 years. All key expense items are analyzed with budgeted increases from previous years highlighted. With few exceptions, we find that budgets grow (creep) by 5-12% per year usually without an increase in the revenue (shipments) line. And even if the top line does increase, this only temporarily masks the expense increase and the inevitable cost-cutting sessions to come.

This insidious budgetary creep-factor is routinely accepted in many companies, but it can be effectively neutralized through a simple business technique called zero-based budgeting.

Here's how it works. The CEO or senior department head demands that everything...that's right everything (including his own expense) in the budget be open for healthy debate and defended logically if it is to get back into the newly created budget. These managers and senior leaders should ask their people to start with a clean sheet of paper. Then, and only then begin to put together the expenses (people, projects, supplies, etc.) that gain the organization the best return. Sadly, many firms begin or start with a budgetary baseline made from last year's expense run-rate. This is a fundamental budgeting mistake and the root cause of creep-factor.

New and more innovative thinking occurs when zero-based budgeting is inserted into the annual budget process. Instead of automatically increasing the travel expense by x%, new ideas begin to emerge. If you tie certain bonus considerations to the budget process and pay on achievement of reaching this budget - you may be surprised at the outcome. Now the thinking becomes more non-linear (out-of-the-box) and interesting results usually happen.

Global Marketing has always found that good people like (demand) to be challenged. The courage to act and insist on this type of annual budget process will challenge your good people and ensure that your firm receives a fresh, annual start and perhaps you'll achieve more!

Simply put, a budget is a financial tool -- sort of a "spending-guide'. But, it can also be a healthy discipline forcing the company to think and constructively debate the investments and priorities for the coming year. As such, senior executives should demand a tight alignment of corporate goals to the annual budget. A well-developed budget puts into place the necessary structure to measure, manage and control the variety of spending within the enterprise. Savvy company leaders also utilize the budget process to communicate to the rest of the company the priority of various projects as well as the amount and timing of the funds allocated. The annual budget and its monthly review and quarterly updates memorialize and documents the companies financial intentions for the coming year. This fulfills a requirement demanded by most banks and lending institutions.

However, there is an inherent trap that most companies fall into when developing yearly budgets. And it is so insidious and subtle, that most senior executives unwittingly become part of this annual charade without realizing it. Global Marketing calls it the ‘creep-factor'.

What is the creep-factor? Some clients of Global Marketing have guessed it is an apt description of their firm's newly hired CFO. Some have indicated that, as in the likes of ENRON, WorldCom and etc., it must be a new method that defines profit. And others thought it might be a ratio of lost customer revenue to the firm's competitor. All reasonable guesses, but none correct!

Global Marketing Inc. has many clients and sooner or later the topic turns to ideas on cost-cutting measures. At this point the Global Marketing team asks to review the summary budget schedule for the past 3 years. All key expense items are analyzed with budgeted increases from previous years highlighted. With few exceptions, we find that budgets grow (creep) by 5-12% per year usually without an increase in the revenue (shipments) line. And even if the top line does increase, this only temporarily masks the expense increase and the inevitable cost-cutting sessions to come.

This insidious budgetary creep-factor is routinely accepted in many companies, but it can be effectively neutralized through a simple business technique called zero-based budgeting.

Here's how it works. The CEO or senior department head demands that everything...that's right everything (including his own expense) in the budget be open for healthy debate and defended logically if it is to get back into the newly created budget. These managers and senior leaders should ask their people to start with a clean sheet of paper. Then, and only then begin to put together the expenses (people, projects, supplies, etc.) that gain the organization the best return. Sadly, many firms begin or start with a budgetary baseline made from last year's expense run-rate. This is a fundamental budgeting mistake and the root cause of creep-factor.

New and more innovative thinking occurs when zero-based budgeting is inserted into the annual budget process. Instead of automatically increasing the travel expense by x%, new ideas begin to emerge. If you tie certain bonus considerations to the budget process and pay on achievement of reaching this budget - you may be surprised at the outcome. Now the thinking becomes more non-linear (out-of-the-box) and interesting results usually happen.

Global Marketing has always found that good people like (demand) to be challenged. The courage to act and insist on this type of annual budget process will challenge your good people and ensure that your firm receives a fresh, annual start and perhaps you'll achieve more!

Frank Williams is a marketer. With many post graduate courses in management, leadership, marketing and technology to his credit, Williams is a widely respected speaker, author and technologist. He has significant knowledge in marketing strategies and is the founder and CEO of Global Marketing, Inc. - a leader in business, marketing and sales consulting
Other valuable articles can be found at:
http://members.cox.net/glmarketing/glmarketing/index.htm

Realistic Time Budgeting

Im sure weve all had the experience of having a certain block of time available, and our to-do list tasks or goals that we want to accomplish in that time frame, only to turn around at the end of that period of time to have the frustrating experience of not getting nearly enough done that we thought we could. What happened? Where did all the time go? This can be in our personal / family lives, our jobs or our businesses.

Im sure weve all had the experience of having a certain block of time available, and our to-do list tasks or goals that we want to accomplish in that time frame, only to turn around at the end of that period of time to have the frustrating experience of not getting nearly enough done that we thought we could. What happened? Where did all the time go? This can be in our personal / family lives, our jobs or our businesses.

Many of the frustrations of this are due to our expectations of what we can accomplish in that amount of time too high, and unrealistic. When we can look at it more objectively, it can reduce stress in our lives, and give more of a sense of accomplishment when we do reach our goals.

Say you have 6 hours available to do a certain project. Prioritize the tasks you want to tackle, with number one being the top priority. Now figure in your typical day, what percentage of that time is typically going to putting out fires If approximately 1/3 of your time is this type of work / situation, deduct that amount of time and your original 6 hours minus 2 hours of putting out fires, will give you 4 working hours.

Now, consider the average interruption will take about 8 minutes to deal with before mentally youre back where you were before the interruption. How many interruptions are typical in your day? Lets say you get 10 interruptions, 80 minutes. Now subtract those 80 minutes from your 4 hours, now youve got a little over 2 hours left to try to accomplish what you thought you actually had 6 hours to do. Is it any wonder why we didnt get as much done as we had hoped? I believe this will reduce frustration just knowing this, and will allow us to plan our day with much more realistic goals. If something is added to our to-do list, then something else must give to make room.

There are some things that can be done to help however. Just looking at this may help you pin point sources of time wasters. Is there anything that can be done to minimize the need to put out the fires? Are there any types of preventative actions that can be taken to at least reduce it?

What about interruptions? Can a phone voice mail be used instead of answering the phone? Then when you do need to return calls, do them as a group, one right after another. What about email? Do you have to respond to emails during this time frame? Again, try to lump like tasks together, when you do need to email, handle it all at once instead of the second they hit your inbox.

Then realize, what you thought was your 6 hours, in reality were perhaps a little over 2. Attack your to-do list with your highest priority, then give yourself a pat on the back for working your best with those 2 hours you had, and that in reality, you did fill 6 hours, and perhaps have a better understanding of where it went. Knowing this will help reduce the stress and frustration of trying to accomplish what may not be possible, and give your planning a more realistic approach.

By Valerie Garner, mother, grandmother and candlemaker / owner of Joyful Designs in Soy.
http://www.joyfuldesignsinsoy.com

Knees Deep in Dept - Consider Realistic Budgeting

Thousands of people have trouble paying their bills, are getting dunning notices from creditors or have their accounts being turned over to debt collectors.

Many people face a financial crisis some time in their lives. Whether the crisis is caused by personal or family illness, the loss of a job, or overspending, it can seem overwhelming. But often, it can be overcome. Your financial situation doesnt have to go from bad to worse.

In this situation the following options can be considered: realistic budgeting, credit counseling from a reputable organization, debt consolidation, or bankruptcy. Debt negotiation is yet another option. How does one know which will work best? It depends on the level of debt, the level of discipline, and one's prospects for the future.

This covers the first option, Realistic Budgeting (Self Help)

Self-Help

Developing a Budget: The first step toward taking control of a financial situation is to do a realistic assessment of how much money one takes in and how much money is spend. A good start is to list income from all sources. Then, one should list the fixed expenses those that are the same each month like mortgage payments or rent, car payments, and insurance premiums. Next, list the expenses that vary like entertainment, recreation, and clothing. Writing down all expenses, even those that seem insignificant, is a helpful way to track spending patterns, identify necessary expenses, and prioritize the rest. The goal is to make sure one can make ends meet on the basics: housing, food, health care, insurance, and education.

Public libraries and bookstores have information about budgeting and money management techniques. In addition, computer software programs can be useful tools for developing and maintaining a budget, balancing a checkbook, and creating plans to save money and pay down debt.

Contacting Creditors: Contact creditors immediately if having trouble making ends meet. Tell them why its difficult for you, and try to work out a modified payment plan that reduces your payments to a more manageable level. One should never wait until accounts have been turned over to a debt collector. At that point, creditors have given up on you.

Dealing with Debt Collectors: The Fair Debt Collection Practices Act is the federal law that dictates how and when a debt collector may contact a person. A debt collector may not call anyone before 8 a.m., after 9 p.m., or while one's at work if the collector knows that an employer doesnt approve of the calls. Collectors may not harass people, lie, or use unfair practices when they try to collect a debt. And they must honor a written request from an individual to stop further contact.

Managing Auto and Home Loans: Debts can be unsecured or secured. Secured debts usually are tied to an asset, like a car for a car loan, or a house for a mortgage. If one stops making payments, lenders can repossess a car or foreclose on a house. Unsecured debts are not tied to any asset, and include most credit card debt, bills for medical care, signature loans, and debts for other types of services.

Most automobile financing agreements allow a creditor to repossess a car any time one's in default. No notice is required. If a car is repossessed, one may have to pay the balance due on the loan, as well as towing and storage costs, to get it back. If one cant do this, the creditor may sell the car. If one sees default approaching, one may be better off selling the car personaly and paying off the debt: This avoids the added costs of repossession and a negative entry on a credit report.

If one falls behind on a mortgage, contact the lender immediately to avoid foreclosure. Most lenders are willing to collaborate if they believe one's acting in good faith and the situation is temporary. Some lenders may reduce or suspend payments for a short time. When one resumes regular payments, though, one may have to pay an additional amount toward the past due total. Other lenders may agree to change the terms of the mortgage by extending the repayment period to reduce the monthly debt. Ask whether additional fees would be assessed for these changes, and calculate how much they total in the long term.

If a person and a lender cannot work out a plan, contacting a housing counseling agency could be wise. Some agencies limit their counseling services to homeowners with FHA mortgages, but many offer free help to any homeowner whos having trouble making mortgage payments. One can call the local office of the Department of Housing and Urban Development or the housing authority in a state, city, or county for help in finding a legitimate housing counseling agency.

People thinking about getting help to stabilize their financial situation, need to do some homework first. They should find out what services a business provides and what it costs, and dont rely on verbal promises. Get everything in writing, and read contracts carefully.

Good Luck!

Bruno P. Scott is the editor of Emergency Debt Relief Online where you can get the information and resources you need about debt relief, consolidation, credit counseling and more.


Publication is permitted as long as the resource information at the end of the article remains intact, and links are live..

Copyright 2005 Emergency Debt Relief Online, all rights reserved.

 

Budgeting for Baby

If you are expecting an addition to your family, or just planning on having a baby in the future, you need to start thinking about how you are going to budget for your little one.
Many first-time parents are shocked when they realize how much having a baby can cost. And I am not just talking about the doctor bills. It's all the little things, such as diapers, clothes, formula, baby food, and toys, that add up to cost big bucks!

When my wife and I had our first child, we learned a lot about what we really needed and what was a waste of money. So now that we are seasoned veterans and expecting our second baby, we feel confident that we can avoid the same wasteful mistakes we made the first time around.

Here is a list of 6 things that your baby can live without, followed by 4 things that we could not have lived without:

Baby Wipe Warmer - An unnecessary waste. My daughter never fussed when we used baby wipes that were room temperature. Baby wipe warmers are just an attempt to get parents to spend more money on something they really do not need.

Expensive Clothes - You are going to find that your little one will grow out of his or her clothes incredibly fast. It's one thing to spend a little extra for a nice dress or outfit for a holiday or special occasion. But it doesn't make sense to spend a fortune on clothes that will be worn only once or twice. Instead, choose the lower priced items (as long as the quality is satisfactory), especially for little onesies and sleepers.

Another tip: don't remove the tags from babys clothes until they are ready to be worn. We have outfits that my daughter grew out of before she even had a chance to wear them. Since we had already removed the tags we were not able to exchange them for a bigger size.

Brand Name Goods - Using generic items instead of brand names can save you hundreds of dollars per month. We used the brand name baby formulas for the first few months and then switched to the generic brand after we realized it cost 60% less. Not only did our little girl not mind the change, she actually seemed to prefer it. The generic brand seemed to give her less gas.

Toddler Foods - When our baby was first learning to eat solid foods, we tried dozens of different flavors of baby food. We thought it was important for her to adjust to the new foods and to try a variety of flavors.

But as soon as she got used to the new texture, we started making our own baby food. Carrots and sweet potatoes worked especially well when mixed in the food processor.

And we never even bothered with the 'toddler foods'. They are an expensive waste. Look on the supermarket shelf and you will see the jars of diced fruits and vegetables 'just for baby'. But you know what? You can cut up a pear or a green bean yourself. It will save you money and you will know that the food is fresh.

Large and Expensive Toys - When my daughter was born we spent several hundred dollars on toys for her to play with, plus we received many more as gifts. We got her all sorts of giant stuffed animals and high tech toys that danced or played music.

Do you know what her favorite toy is? A squeaky bath toy shaped like a crab. It cost $1.49. She regularly pushes aside all of the fantastic toys we bought her for that inexpensive little crab.

Now I'm certainly not telling you not to buy your little one anything expensive or fancy. Just keep in mind that she may just push it out of her way so she can play with the box.

Baby Walkers - You hardly see these in stores anymore, but they can be found. Skip it. They are dangerous. Stick a baby in one of these and they can wheel themselves into trouble before you know it. There have been horrible incidents of children rolling down a flight of stairs or running into a table and knocking something down on top of themselves.

The 4 BEST purchases we made...

An ExerSaucer - An exersaucer looks very similar to a walker with one major difference...it doesn't move. The exersaucer stays firmly planted on the ground and allows the baby to 'stand' and play with all sorts of toys that are attached to it, plus any other toys you give to him.

My daughter absolutely loved being in her exersaucer and it gave us a chance to get something done around the house while she was occupied. We knew she couldn't get into any trouble and we constantly changed the toys so she would not get bored.

But be warned. Once baby becomes mobile he likely won't want to use it anymore. He can have a lot more fun crawling around getting into all sorts of trouble!

The Best Car Seat You Can Afford - Keeping your baby safe is no joke. Having a quality car seat is vital in case you get into an accident. Be sure you read the manual and secure baby tightly each time you take her out.

Also, contact your local police station and ask them if they offer free car seat installations and inspections. Most towns have a few officers who have received special training on installing car seats. If your town doesn't offer this service they can get you in touch with a neighboring town that does. Even the best car seat is useless if it is not installed correctly.

Bundle Me - Unless you live in a climate that is warm all year-round, a Bundle Me is a great timesaver. It is basically a cozy blanket that fits into a car seat or stroller. Rather than bundling baby up in a snowsuit and blankets, just place her in the car seat and zip it up. You'll be surprised how warm she stays.

It is especially handy when you have the type of car seat in which the base stays in the car and the seat pops out so you can carry it around. You can have baby all snuggled up inside rather than struggling to do it in the cold.

Shopping Cart Cover - You've probably seen them in the supermarket. It's just a cloth or vinyl cover that goes over the top section of a shopping cart. The baby sits in it and it prevents her from touching the shopping cart with her hands or mouth.

Many people will argue that this is unnecessary, but I see it as a valuable safety device. Countless numbers of hands have touched those shopping carts and who knows what kinds of germs they left behind. Keeping my little girl healthy is more than worth the $20 expense.

written by Mike Collins of
http://www.saving-money-and-living-debt-free.com

 

Small Business Budgeting Tips

A budget is part of your financial roadmap. How do you know where you are going if you dont have a destination selected and the road that you are going to take mapped out? Just throw the dart and see where it lands? If so, you make up the majority of small business owners. However, that trend is changing. With changes in the economy we are faced with even more outside pressures on our business to be profitable. Lenders are more selective about giving money to those who dont have enough security to ensure their return on the loan. Yeah, its the same old story that they always want to give money to those who have money. What about those of us who dont? You better have a solid set of financial statements to show that your business is viable and going to be a wise investment for the lender.

Lenders want to get a return on their investment (i.e. loan to you) so they will want to see how youve been doing. In addition, they want to see what your predictions for the future are. A budget or financial projection is going to be sought by the lender. They want to see how you are mapping your future of success.

Breaking your budget into monthly increments will ease the process and it wont seem so overwhelming. Prepare some general goals for your financial budget for the year and then see how you can achieve that goal, one month at a time through a monthly budget.

Questions a budget will help you explore include:

What do I anticipate for my:

Income? Expenses? Capital Expenditures? Savings?

Often times well use the excuse that we dont know how to do a budget because our income and/or expenses are too hard to predict. Dont you want to have an idea of where you are going? The challenge for the New Year is for you to be more proactive with your finances. Whether you are running a service or product-based business! Reactive financial management often leads to the demise of our finances and our businesses.

Budgeting doesnt have to be an overwhelming task. Follow these easy steps and youll be amazed at how easy it is to achieve your goals! Its not too late. This is a great time to start the budgeting process so you can work on the budgeting project in small increments.

Where should you start?

1. Analyze your current and prior year(s) budget. Its always a good idea to know where your starting point is! What areas did you do well on? What areas do you need to work on? If you dont have a budget, and most dont, then you will need to look at your actual financial statements including:
a. Profit/Loss
b. Balance Sheet
c. Cash Flow Statement

2. Utilize a simple format for your budget based on the Profit/Loss format:
Income
- Cost of Goods Sold
- Overhead Expenses
= Net Income/Profit

Dont get confused though! Cash and Income are two different concepts, so you need to ensure that you set clear goals for the budget you are putting together.

3. Use the budgeting features in your bookkeeping software to assist you with the development of your budget, if available. QuickBooks has a great budget format ready for you based upon your Profit/Loss and you can input the budgeted figures into the appropriate line item.

4. Assess your budget realistically. Its always a good idea to have an objective third party review your information. We tend to overestimate our income and underestimate our expenses so that we show a positive flow for our budget. That isnt good if its not realistic. We need to be aware of where our money is coming from and going to so that we can be proactive in our financial lives. It will be amazing how much less stressful your world can be when you effectively manage your finances.

Make sure to document how you are coming up with your estimate. For example, if you predict $10,000 in sales, you need to document that it is based on the following equation (# of sales multiplied by $ amount per average sale). This will give your predictions substance and allow better variance analysis when your actual figures vary from your budgeted figures.

5. Compare your actual activities to your budgeted activities on a monthly basis. This comparison is what creates the REAL value for you. Comparing helps you to assess what parts of your finances are excelling and what parts need attention. Without comparison, there is no value in budgeting.

When you use QuickBooks, youll have preformatted reports available that will calculate the variance between actual and budgeted income and expense items. This will be a great tool for you to assess which aspects of your business are on target and which areas you need to reassess.

6. Keep your budget as a living document as you may need to adjust it for aspects not previously included. This doesnt mean to change it because you want your actual to equal your budgeted numbers. Changes in budgeted amounts should be for those times when unforeseen events have occurred or arisen.

We all have many demands on our time, but managing the financial aspects of our businesses is a responsibility that we need to take seriously. If this is not one of your strengths, then find someone to assist you with this process. Its like any other skill, it takes time to understand the various aspects but it will happen. Theres no better time to take control of your business path than today!

Contact: Pam is the author of Out of the Red , a book that covers budgeting and many more important aspects for small business owners. To order your copy, call 816.304.4398. For more information, you can visit her website at www.rppc.net.Pam Newman is a Certified Management Accountant, Author, and Certified QuickBooks ProAdvisor for Financial and Point-of-Sale software. QuickBooks is a registered trademark of Intuit.