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Budgets

Copyright January 1, 1996 To download any Crouser Report open your browser File SAVE AS
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Tom s management books are now available via the PrintUSA bookstore.

Transmitted from Jacksonville, Florida

Dear Friends. . .

It s that time of year again. New Year s resolutions; compile payroll tax information; and finalize the budget. Budget? Budget! Yes, budget. And, not one budget but two: the operating budget and the capital budget. Here s the budget scoop.

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. I was a Logistical Programs and Plans Staff Officer in the reserves at the time of the Persian Gulf war. A doomsdayist of the first degree. We spent a lot of time creating scenarios and preparing for war. The most popular was the European scenario. Well, the war which came along was with Iraq. Now, were we better prepared because we planned, prepared and predicted a scenario which didn t happened? Or, should we have just waited to see what was going to happen, then prepare? Obviously, planned things happen best, even though they aren t planned exactly that way.

Budgeting is predicting what is going to happen in the future, that is true.
Many of us don t.

The Operating Budget
We begin with the Operating Budget which follows the income statement:

Within this process, there are two areas where many get into trouble: 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 completely apply to a start-up shop.) 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.

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 which would allow one to hire someone to do what the owner is doing if desired. Any owner income above this should comes from net income earned and the capital budget.

Overhead
Rent, utilities, professional fees, advertising, professional fees. Ooops. Did I have professional fees in there twice? Well, whatever. 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. Second biggest problem 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.

Deduct Payments
Deduct your projected payments for items which are not included in your overhead budget above. For instance, deduct the cost of the Porsche Delivery Truck if it is not leased and accounted for above. Deduct the press payments and any other note payments which have been capitalized (put on the balance sheet as an asset). And, yes, I know these payments include interest. Well, if it is really material, you can back out the interest. But, for 90% of us, just deduct the payments which do not show up on the income statement as expenses. (Kodarox 9999 s are sometimes on the balance sheet and sometimes not depending upon the specific contract.)

Projected Cash Increase/Decrease
From Net Income, add Depreciation/Amortization and deduct Payments. This estimates a cash increase or decrease. If it estimates a cash decrease, then go back to the budget and fix it without increasing your sales. If it estimates a cash 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 which 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? 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
Will be presenting Power Pricing in Dallas on February 3rd sponsored by the Printing Industries Association of Texas. We ll also present the session for the NAQP chapter in New Orleans on March 23rd. We ll be doing on-site visitations in Florida and Texas in January and February as well as having Performance Group meetings in Pittsburgh. Hope to see you there. And,

Happy New Year to everyone.

Happy Trails... Tom Crouser

P.S... Planned things happen best. Old time management bromide.

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Crouser & Associates Performance Group program includes two on-site evaluations by Tom Crouser each year along with two group meetings. Management training is held during the group meetings along with participation in a meeting with non-competing printers. Join others who have decided to run their business instead of the business running them. Reply to by Email to Tom Crouser for more detailed information or call Clark Workman at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.


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Date inserted: Wednesday, January 31, 1996 7:34:55 PM

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