Date: Sat, 20 Jun 1998 14:49:36 -0500 
Subject: Crouser Report #194; June 21, 1998, Part 1
To: martin @ lata.net


Crouser Report OnLine Copyright 1998 Thomas P. Crouser, Sunday, June 21, 1998
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*****
Crouser Report #194; June 21, 1998
Budgets
Transmitted from Minneapolis, Minnesota
*****
INDEX: Budgets! We welcome the members of the National Association of Quick
Printers to our snail mail readership this month. NAQP has chosen to
distribute our monthly newsletter along with their other material. So, there's
no better place to start with a new group of printer-readers than with the
single biggest problem facing all print shops. What's that? A budget. Yes,
budget. And, not one budget but two: the operating budget and the capital
budget. Here's the budget scoop we first brought to you in January 1996 with
some updating. All this and more in the Lake Woebegon edition of the Crouser
Report Online.
***
Not making enough money but don't have time to do anything about it?
And you're too small to afford our on-site assistance programs?
Then you need to know about TeleConsult, a new program from America's largest
print shop consulting firm, Crouser & Associates.

What is it? It provides a comprehensive business analysis and improvement
program designed with you by our experts without the cost of an on-site
visitation. It's primarily suited to companies with less than 5 workers and/or
less than $400,000 in sales. Will it help you? Who knows unless you call now
for a no-cost or obligation initial consultation? Of course, our regular in-
your-shop visitations always are available. For more information call (304)
342-5100 or message tomcrouser@aol.com with your name, company and telephone.
We'll be glad to call you back. Crouser & Associates, Helping Printers Prosper
Since 1985, www.crouser.com, 235 Dutch Road, Charleston, WV 25302. Fax (304)
342-5187.
*****
Travelog: Signal Graphics convention in Vail, Colorado on June 27th; the NAQP
Print Image meeting and show, Chicago July 23rd to 25th; and then our 1998
Print Shop Sales Conference for clients, August 5th - 8th in Pittsburgh. We
will also be visiting Minnesota this coming week. Hope to see you soon.
*****
June 1998

Dear Friends . . .

We welcome the members of the National Association of Quick Printers to our
readership this month. NAQP has chosen to distribute this newsletter along
with their other material on a monthly basis. Welcome to our work!

There's no better place to start with a new group of printer-readers than
with the single biggest problem facing all print shops. What's that? A budget.
Budget! Yes, budget. And, not one budget but two: the operating budget and the
capital budget. Here's the budget scoop we first brought to you in January
1996 with some updating.

We all generally are familiar with an operating budget, although most of us
rarely prepare one. An operating budget essentially projects your income and
cash flow for the year. Most of us strive valiantly to just get this far. The
capital budget is where you decide what you are going to do with the cash that
you do build up such as build working capital; buy equipment; increase the
amount you take out of the business; or put some away for retirement.

Why Not To Budget

I use to work at the Westinghouse plant and we budgeted each year, but it
was just a farce. We just told them what they wanted to hear. Okay. But
that's the fault of the budgeteers, not the budget process.

How in the world can you predict what is going to happen in the future. It's
a waste of time. It is tough. US military spent a lot of time on the European
scenario for war, only to have it break out in the Persian Gulf. Now, were we
better prepared because we planned, prepared and predicted a scenario that
didn't happened? Or, should we have just waited to see what was going to
happen, then prepare? We did that prior to World War II and it almost cost us
a nation. So, planned things happen best, even though they aren't planned
exactly the way they happen.

The Operating Budget

        We begin with the Operating Budget that follows the income statement:

                        Projected Sales

                        Minus Direct Materials (%)

                        Minus Labor

                        Minus Overhead

                        Equals Net Income

                        Add Depreciation/Amortization

                                From Overhead, above

                        Add Interest Expense

                                From Overhead, above

                        Deduct Payments on notes not

                                Reflected in Overhead, above.

                        Equals Projected Cash Increase/Decrease

Within this process, there are two areas where many get into trouble
budgeting: projecting sales and not considering payments on debt.

Projecting Sales: How do I know what sales are going to be? Or, worse than
that, I predict sales will increase 20% next year. (The following does not
apply to a start-up.) My advice is don't project sales. Look at your sales
over the last three years. If you have an average positive increase in sales
without a significant downward trend, then project your sales to be equal to
what they actually were in the last year. In short, project your sales where
they are now. If you can't make money where you are, increasing sales by 20%
rarely will do anything for you. I can give you many horror stories on this
and many folks guff galled at this advice while times were good. Then we hit
the recession wall and lost many of our fellow printers because they could not
count on next year's sales increase to cover what was being spent this year.
If your sales are decreasing, then budget for decreased sales.

Projecting for sales increases is the first mistake most people make in
budgeting. This is not to say one can not have a sales budget. You should
have. You just shouldn't confuse sales goals with the sales you use in an
operating budget. One is a desire; the other is life and death.

Direct Materials: What is a direct material? Paper, inks, copier meter clicks
and shop supplies. I always say, if you printed nothing, then you would have
no direct material cost. If your item still costs you even if you do not
print or copy anything, then you have an overhead or labor expense. I also
add, Of course, I know printers who could print nothing but still have waste
and spoilage. Usually, printing management students don't get the meaning of
that. Industry audiences always do.

Direct materials are best budgeted as a percentage of sales. If you have
historically spent 27% of sales on direct materials, then I predict you will
in the future. If you institute a price increase to decrease your cost of
direct materials, do not consider the decreased direct material percentage in
your budget until it shows up in your year-to-date income statement. Second
mistake budgeteers make is to decrease their budgeted direct material
percentage in anticipation of a price increase. Use what you've got until it
goes down. Then use the lower amount.

Labor: Manufacturing accounting theory holds that direct labor (such as press
operators working directly on the product) is a variable expense and should be
considered outside of indirect labor (such as the bookkeeper who labor is
indirectly related to the product). For budgeting purposes (not budget hour
rate purposes), it really doesn't matter. Your press operator is going to be
in the shop 40 hours a week. If you start sending them home when you don't
have work, then you will find the press operator working for someone who does.

So, multiply the hourly rate by the hours per week. Do not calculate overtime
hours which are not planned (such as overtime to get out all of the work).
Regular overtime, such as being open on Saturday or other such self inflicted
silly punishment, should be counted. If you pay any kind of bonus or anyone
has a great deal of overtime, calculate their effective hourly rate by taking
their year-to-date total pay divided by a normal 40 hour work week to obtain
an effective amount of pay per hour and use that for your budget. Allow
yourself room for periodic raises by budgeting workers at a higher rate than
they are earning now. Estimate future payroll taxes and benefits as a
percentage of payroll. If payroll taxes and employee benefits amounted to 20%
of total pay in the previous period, projected 20% of future pay to cover the
expense. Do not budget just for the absolute historic dollar amount of health
insurance, for instance.

Owner's Pay: Yes, budget a salary for the owner assuming the owner is
actually doing work (no free lunches, bucko). Assume a salary that would allow
one to hire someone to do what the owner is doing, if desired. Any owner
income above this should come from net income earned and the capital budget.

Overhead: Rent, utilities, professional fees, advertising, trade association
dues. These are period expenses and are pretty well known to you. Equipment
expenses such as the base cost of the Kodarox 9999 are overhead expenses
because if you made no copies then you would still be paying this base amount.
Project what these costs will be.

Net Income: Projected sales - direct materials - labor - overhead = projected
net income. Third biggest mistake with budgeting is that many stop here. Don't
stop. Go to the next step.

Add Depreciation/Amortization: Add your budget cost of depreciation, and any
amortization, to net income for these are non-cash expenditures.

Add Interest Expense: Add your budget cost of interest from your overhead
section of the budget above. We will be deducting payments in the next step,
so we add back interest so we don't count it twice.

Deduct Payments: Deduct your projected payments for items that are not
included (expensed) in your overhead budget above. These are notes that are
listed on the balance sheet. So, if it's listed on the balance sheet, deduct
the full amount of the payment here (principal and interest). If no payment is
being made or you don't intend for it to be made, then account for it anyway.
Just figure out what you should be paying over five years with 9% interest for
instance. You see, ALL notes should be paid off for budgeting purposes even if
they are owed to you. Even notes that aren't performing should be budgeted so
you will force yourself to create the cash to actually pay them off at some
point.

Note: Kodarox 9999's and other equipment are sometimes on the balance sheet
and sometimes not depending upon the specific contract. Add the payment in
here IF it is listed on the balance sheet. Account for the payment in overhead
(equipment rental) if it is not on the balance sheet.

Projected Cash Increase/Decrease: From Net Income, add
Depreciation/Amortization, add Interest Expense and deduct Payments. This
estimates a cash increase or decrease. If it estimates a decrease, then go
back to the budget and fix it without increasing your sales. If it estimates
an increase, then you may proceed to the Capital Budgeting process.

Capital Budgeting

It is from the increase of cash flung off of the operating budget, that we
find money to do with what we want. However, there are still some basic
considerations here. First consideration is all stakeholders should decide on
the following including the founder, spouse, and other stakeholders whether or
not they work in the business on a day by day basis.

Taxes: Income taxes will have to be considered on the earrings if they were
not considered in the capital budget. Sometimes we have to consider special
tax situations with some sub S corporations, for instance. So, from the cash
that is being spun off, calculate how much to set aside for taxes.

Working Capital: If you don't have a 2 to 1 current ratio (current assets /
current liabilities), then calculate how much money it will take to give you
that ratio. (Example: company has $75,000 of current assets and $100,000 of
current liabilities therefore it has a .75 current ratio. What does it need? A
2 to 1 current ratio would be $100,000 x 2 or $200,000 of current assets.
Well, we have $75,000 now, so we need an additional $200,000 - $75,000 or
$125,000.) If you do not have a 2 to 1 current ratio, stop here and put all of
your money into your current ratio until you do. How? Pay down your accounts
payable, taxes payable, etc. and/or accumulate cash in the bank, accounts
receivable, etc. Do not take current assets and withdraw them for your
personal use nor take current assets and convert them to non-current assets by
buying equipment. Let it happen.

Education: How much money will you need and when will you need it to put
junior through college? Most of us entrepreneurs count on the lotto
scholarship typified by the Who, me worry? attitude. Maybe we'll have it
maybe we won't. We usually end up taking heavy money out of the business at a
time the business can least afford it and possibly bringing down the house of
cards.

Retirement: Calculate how much money you would need to have in the bank
earning 6% interest to create the same gross pay you receive now. Now,
calculate how much you would have to put in the bank every month in order to
have that retirement amount waiting for you. Then do it. Those relying on the
pot of gold at the end of the printing rainbow are disappointed.

Current Living: Do you need or want to take more money out of the business
than the wages considered in the overhead section of the operating budget?
Notttt sooo fast. Get the family to agree.

Equipment: Yes, equipment is put into play with retirement, current living,
education and all the rest. Is the equipment more important than something
else is? Many times it is. The capital budget has to allow for the replacement
of equipment, for instance. When the one press in the shop dies, someone had
better planned to have the cash to buy another one.

Or, the stakeholders can decide to expand the business by buying equipment
not now possessed in exchange for later having more income to divide. Either
way, we can decide how much money we can spend on equipment purchases in the
future based on our current operating budget. Now, we can choose among
equipment investments in a planned manner. And that's budgeting.

TRAVELOG: Tom and Pamela will be at the Signal Graphics convention in Vail,
Colorado on June 27th; the NAQP Print Image meeting and show, Chicago July
23rd to 25th (stop by our booth); and then our 1998 Print Shop Sales
Conference for clients, August 5th - 8th in Pittsburgh. Hope to see you soon.
We were also pleased to have been with the Bay Area Chapter of NAQP and the
Gulf Coast Chapter this spring as well as with the Mid-Atlantic Sir Speedy
Owners Association in Lancaster, Pennsylvania. Hope to see you soon.

Happy Trails,
Tom Crouser