How to Set Business Goals

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A budget may be defined as a statement of anticipated income and/ or expenditures for a set period prepared in advance but based upon past experience, present conditions, and estimated trends of the future. The estimate of the income and its apportionment to various expenditures is a prime responsibility of top management. The amount of money allocated to any function definitely delimits the activity of that function. Failure to provide funds for an activity effectively stops any action, regardless of any executive pronouncements in its favor. This result is often exemplified in the action of the Congress in failing to provide sufficient funds for a governmental department.

Budgets are commonly prepared for the following functions and activities:

– Sales

– Production

– Materials

– Plant and equipment

– Manufacturing expense

– Labor

– Financial and capital requirements

1 – Sales budget. The sales budget is of course the logical one to prepare first for the amount of expected sales will determine the company’s income and also its production goals, and hence the materials, the plant, and equipment that are required. It will also determine to a great extent the manufacturing expense, labor, and, finally, the financial budget. Sales for the past few years must be examined, present conditions evaluated, and the plans for the future made clear. It is possible to expand sales by the use of more sales-men, greater advertising campaigns, sales promotion techniques, and exploitation of additional territories.

2 – Production budget. After the sales budget has been determined and set, it is possible to plan for production. It does not necessarily follow that production will exactly match sales. It may be desired to build up an inventory or to use present inventory.

3 – Materials budget. The production budget will make it possible to determine the purchasing or materials budget. Once again, this need not exactly follow production but will be governed by the existing inventory and economic lot considerations.

4 – Plant and equipment budget. The plant and equipment budget is perhaps the hardest to determine. Basically it is a long-time and not an immediate budget. It may be necessary, because of an anticipated increase in sales, to enlarge immediately the plant and equipment although a business is often more inclined to use multiple shift operations before investing money in additional equipment. Over a period of years it is essential that there be planned expenditures for replacing older equipment, for increasing the plant and equipment, and for changing methods or processes. There is no other place in a business, unfortunately, where emotion plays such an important part in making expenditures as it does in plant and equipment. Many a staid, common-sense businessman has exactly the same reaction to new equipment as a child to his first toy electric railroad train. The equipment is often purchased because it has a lot of shiny gadgets, instruments, and red and green flashing lights, rather than any solid value to the business.

5 – Manufacturing expense budget. Manufacturing expense is the catch-all of the little items connected with the manufacturing operation. It involves such things as janitor service, miscellaneous supplies such as lubricating oil, and brooms. It is not of tremendous moment, but nevertheless it must be budgeted.

6 – Labor budget. Labor is budgeted for several reasons. First, it is necessary to know how much money is going to be required to pay for labor. Second, much more attention is being given to continuous even employment. Various terms have been used, such as a guaranteed annual wage, but every one of them relates to one thing; namely, labor is expecting management to guarantee an annual income. Much of the inability to guarantee an annual income in the past has been the fault of management through an improper budgeting of labor. This is not to say that this dream can or should be completely realized. Scheduling production and arranging working hours in shifts so as to guarantee as even a use of labor as can be obtained is desirable from every point of view. The trend toward guaranteed annual wage, or an approach to it, is growing.

7 – Financial budget. The financial budget, the sum total of all the preceding budgets, gives a picture, perhaps monthly, perhaps weekly, of what is needed in working capital by the finn. This is very important because it will determine to what extent the firm must borrow money in order to run the business.

Source by Artur Victoria

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