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Budgeting
 

Budgeting

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Seminar held on Nov 14, 2008 in Hong Kong

Seminar held on Nov 14, 2008 in Hong Kong

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    Budgeting Budgeting Presentation Transcript

    • Budgeting – A Management Tool Nov 14, 2008 春有百花秋有月 Dick Lam 夏有涼風冬有雪 若無閒事掛心頭 便是人間好時節
    • Budget, Budget in a nutshell • Look at your chart of accounts or your monthly income statement y • Empty the cells by months • Fill i the fi Fill-in h figures you think that most hi k h likely reflect the following year situation • Tell the people to act on it next year • Fi i h!!! Finish!!!
    • Structure of the course Some underlying S d li concepts Changing Action Items Mind Strategy Persuasion Constraint Budgeting Budget Theory of Constraint C i Organiza- tion Theory of Exchange Kaizen Plan Manage- ment Consistency Culture
    • What am I doing here? • Exert my influence to persuade you to accept budgeting in your business p ggy activities – It is beneficial to the company and you – Align your internal budgeting process to company b d i 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 conscious Interact with the outside world super-eg preconscious ego go subconscious id
    • Changing Mind What is in our mind? • Id & C Idea Concept t • Theoryy • 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!
    • This is me… • BBA in Accountancy (HKBU) • Master of Arts in E-Business (CityU) ( y) • Associate of HKICPA • Fellow of ACCA • Worked in various enterprises and industries, mainly manufacturing in mainland China focus on management China, accounting, business strategy, tax planning, supply chain management and new business setup in PRC g p • Currently, working in a US company as Director of Administrative Services • Email: • Blog: • and more ….
    • 2007 Cohort
    • 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 Review • 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 budget 3. Budgeting Process 4. Application of Budget 5. 5 Paradox of Budget 6. Implementation of Budget 7. In-depth meaning of budgeting How little we know, how much to learn…
    • Why do Wh d you come to the class? hl? 道隐于小成,言隐于荣华。
    • Another Angle Angle…. • Who is keeping the check book in your family? • Do you plan for next year or the following months for your family? y y • Your spending is to: – f lfill need and want of you & your f il fulfill dd f family – generate income for the above purpose Family = Father and mother i love you
    • Social Exchange Theory • people will do things that are rewarding • the frequency of a person doing an action q y p g depends on the value of the outcome and p probability of ggetting it g • everything we do has costs (to be minimized) and rewards (to be maximized) associated ( ) • Maximization subject to constraint • W are all b We ll busy t k to keep our ledger balanced!! ld bl d!! 天下熙熙,皆为利来;天下攘攘,皆为利往。
    • Manageable Change/Calculated Risk • Change is exciting when it is done by us, threatening when it is done to us g • B d is the outline of any manageable Budget i h li f bl change for the coming year
    • 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 God 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
    • • Before doing battle, in the temple one calculates and will win because many calculations were win, made; • b f d i b l i the temple one calculates before doing battle, in h l ll and will not win, because few calculations were made; d • many calculations, victory, few calculations, no y y victory, then how much less so when no calculations? Calculation – The Art of War
    • Human H man beings is not rational but rationalizing!! g 曲則全,枉則直,窪則盈,敝則新,少則多,多則惑
    • Why rationalizing? y g • Deep need for consistency p y • When doing something, we need to have something consistency and alignment between our actions and our belief • Where there is inconsistency, either change y, g – what they are doing; or – What they believe • Worry about what people think about us if i it t inconsistent Excessive money reward is an excuse of wrong-doing
    • What is the need? • Bonus Determination – B t should the profit target be after the But h ld th pr fit t r t b ft r th bonus? • Resources Allocation – A battle for struggling resources gg g • Setting Expectation –U d Under-committed b over-performed; or, i d but f d – 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 Objectives Calculation o o Assumption A ti Walkforward / D f W lkf d Defense o o Strategy Contingency o o Constraint C i Execution Pl E i Plan o o Methodology Conclusion o o Budgeting – An iterative process
    • 2. 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 g g doing my budget? ? D you have th same perspective as Do h the ti previous slide towards budgeting?
    • Top Down vs Bottom Up vs. • Failure to link up the budget to daily operation Plan lags behind reality o Budget is a dream (lofty goals) o Who takes care of it? o System compatibility o • Failure to link up the budget to p p g performance No reward system linked to budget o Manipulation p o • No Budgeting basis Zero Base vs. Incremental Base vs o
    • Devil is hidden in the detail!! • Too many estimation without solid grounds Management assigned target o Inertia o Too many buffer o • Mixed up of new projects with old one Too detail will lead to blame inevitably y o
    • 3. 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 sta ? staff? • Exchange rate, Rent, Contract price • What else…
    • Your strategy to target… target There is no leader without at least a follower…
    • Constraint • Only project with payback period < 3 y years being considered g • Headcount Ratio – Di Direct vs. Indirect - 3 : 1 I di • Gross Margin > 15% g • Emerging market at least 10% • C R d i 5% on SG&A from 2007 Cost Reduction: f With scarcity, we have economics.
    • The Theory of Constraint y • 5 Focusing Steps 1. Identify the constraint 2. Decide how to exploit the constraint 3. Subordinate all other processes to above decision 4. Elevate the constraint 5. 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 g • Gain agreement that the solution solves the pb problem • Agree to overcome any potential negative ramifications • Agree to overcome any obstacles to implementation il t ti 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? • Wh the constraint i the past di Why h i in h 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 change g 1. Establish a sense of urgency gy 2. Create the guiding coalition 3. 3 Develop i i D l a vision and strategy d 4. Communicate the change vision g 5. Empower broad-based action 6. Generate short-term wins 7. Consolidate gains and produce more change 8. Anchor 8 A h new approach i the culture h in h l
    • What should be your focus? • Strategy – Internal vs. External – Expansion/Integration/Breakeven – Sales/Operation/People /p /p • Organization Structure – Resource re-allocation ll – Rightsizing / Business Process Re- engineering • Organization Culture Walk the Talk and then Talk the Walk
    • Methodology & Calculation gy
    • Sales: The Beginning of Budgeting • Everything starts from Sales • Everything must be related to Sales Cost o Direct Expenses E o Indirect Headcount o Capital Expenditure o • Focus on value-added cost & expenses value added • Critical: Who determine the sales target? Good news: the Africans do not wear shoes!!
    • Sales Bridge 2008  2009 • • Market/Customers Segmentation • Identify h i k Id if the risk & opportunities ii • Outline sales strategy & execution plan gy p • Tell the story of Sales – Truth T h to the T ll h Teller – Truth to the Audience (HBR Dec 2007) D – Truth to the Moment – Truth to the Mission Storytelling: a force for turning dreams into goals and then into results
    • What is your sales strategy in 2009? • Selling product or services (what services?) • Segmentation / Classification Market/Product • Existing Business vs. New Business – L l of confidence Level f fid • 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 2008 Gross 2008 2008 net Inc/(Dec) in New (Lost) X Y Z Net 2009 Customers Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget A B C D E F G H Total: Critical Elements: Surprise and Fulfillment
    • Projection > Prediction 2008 Gross 2008 2008 net Inc/(Dec) in New (Lost) X Y Z Net 2009 Products Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget A B C D E F G H Total: 只要信, 不要問; 我办事, 你放心!?
    • Questions to new program • Is there any measurable evidence of the y value of the program under review? • Are the goals and objectives of the program important enough to warrant the expenditure b i made? di being d ? • What would happen if the p g pp program were not provided at all? • A there other l costly and more Are h h less l d effective ways of achieving these objectives? Walk in stupid everyday
    • Last 2 Questions… Questions • Where would the program fit in if all pg programs were displayed in order of py importance? • Would the benefits be greater if a portion of the funds spent on the program under review were used instead of other pg programs? Keep it fun
    • Keep the sales • Why customers loyal to your company? • Have you ever got the satisfaction score from your customers? • H d your customers l k at you? How do look ? • Exploration vs. Exploitation p p – Sales & Marketing / Customer Service – P d t Engineering (PE) Product E i i Make your people happy so that they can make your customer happier
    • Income Statement • Putting Sales, Cost & Expenses altogether • But how do you work out the cost & expenses d il? detail? • Product PNL / Customer PNL CQ + PQ > IQ
    • 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'000 HK$'000 Sales 35,000 C/M Budget F/(U) % Sales 30,000 30 000 32,000 32 000 (2,000) (2 000) -6 3% 6.3% Cost 28,000 Cost of Sales 24,000 26,500 2,500 9.4% Commission 1,000 1,100 100 9.1% Gross Margin 7,000 25,000 27,600 2,600 9.4% % 20.0% 20 0% Gross Margin 5,000 4,400 600 13.6% 16.7% 13.8% -30.0% Selling Expenses 2,500 Selling Expenses General Admin 1,800 A&P 1,300 , 1,500 , 200 13.3% Staff Salary 1,000 977 (23) -2.4% Staff Welfare 100 98 (2) -2.0% EBITDA 2,700 Entertainment 30 25 (5) -20.0% 7.7% Traveling 60 55 (5) -9.1% Others Oth 10 11 1 9.1% 9 1% • Do you know your business? 2,500 2,666 166 6.2% General Admin. • If yes, do you know the Staff salary 800 810 10 1.2% expenses pattern or Staff welfare 80 75 (5) -6.7% Rent & Rates 100 100 - 0.0% relationship with sales? Communication 30 25 (5) -20.0% Others 20 19 (1) -5.3% • If yes, can you tell i the ll in h 1,030 1 030 1,029 1 029 (1) -0.1% 0 1% budget? EBITDA 1,470 705 435 61.7% 4.9% 2.2% -21.8%
    • The detail worksheet Name Position Sep-07 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Existing Fin Fi Dick 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 Salary Jan 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 Nov-07 Dec-07 Total 2007 Department RMB USD RMB USD RMB USD Customer 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 900.00 120.00 945.00 Manufacturing 126.00 Operations 950.00 950 00 126.67 126 67 PMC - - Production 2,020.00 269.33 Program 2,195.00 292.67 Project - - QA 1,915.00 1 915 00 255.33 255 33 Security 2,350.00 313.33 Supply Chain Management 300.00 40.00 --------------------- ------------- ------------- ------------- ------------- ------------- 20,445.10 2,726.01 20 445 10 2 726 01 0 0 0 0 Total =========== ======= ======= ======= ======= ======= 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 Finance Dick 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?
    • 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 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 E Ui i l Errors • Overlook • Misunderstanding • Judgment • Inexperience • Frequency • No Benchmarking Standard • Accident A id t • Intentional
    • Poka Yoke in action - Reasonableness • Trend by month • Benchmarking • Comparison – Compare with previous years – Compare with current year forecast –CCompare with i d i l standard i h industrial dd • Check figure g • Encourage Q & A •Id Index
    • Walkforward / Defense • EBITDA bridge • Quantify all identified risk & opportunities • Gi detail of cost reduction and others Give d il f di dh • Defense your budget y g • 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 Company 2009 Budget Cost 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 How 1. Material Saving Connector - - - - - - - - - - - - - Housing - - - - - - - - - - - - - Wire - - - - - - - - - - - - - Packing - - - - - - - - - - - - - IC - - - - - - - - - - - - - - - - - - - - - - - - - - 2. Utitlity - - - - - - - - - - - - - 3. Re-structure 3R t t Department IT - - - - - - - - - - - - - Finance - - - - - - - - - - - - - Production - - - - - - - - - - - - - Material - - - - - - - - - - - - - - - - - - - - - - - - - -
    • Any productivity improvement plan? yp yp p • How do you measure operator productivity? • How to improve it? • What is the financial impact? • 7 Waste Excessive Production Rework Excessive Conveyance Waiting Excessive Action Inappropriate task Excessive Inventory • 8th Waste ….. • What is the target Hourly Rate? – Labor cost & Overhead
    • 2008 Income Statement Walkforward (in 000's) 2007 Actual/ Price/ Exchange New Transfers Cost Lost 2008 Inc / (Dec) Forecast Contract Inflation Rate Programs In Reductions Programs Other Budget $ % Back to Back 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 S l % M tI t 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!
    • More on Walkforward template • Projects profitability highlight (new/lost) • Cost reduction/increase highlight • Variable Budget
    • New Project Evaluation ….. j REQUESTED CAPITAL: 1,547,151 REQUESTED EXPENSE: 62,286 Capacity Expansion: 2008 2009 2010 Total 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 % Sales Direct 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 I t D ti 2.5% 2 5% 78,616 78 616 78,616 78 616 78,616 78 616 2.0% 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 723,869 723 869 723,869 723 869 723,869 723 869 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 502,781 502 781 502,781 502 781 502,781 502 781 Tax 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 y ( (Enter AP Days) -----> y) 75 582,751 , 582,751 , 582,751 , Total Working Capital (85,680.0) (85,680.0) (85,680.0) EBITDA 723,869.0 723,869.0 723,869.0 Tax Payments 0.0 (62,848.0) (62,848.0) Working Capital Change (85,680.0) 0.0 0.0 NET 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
    • Zero Base PNL • Identify the cost nature so as to determine the breakeven point p • Then, is it possible to reduce the fixed cost? – What minimum capacity should be maintained?
    • A simple example ….. Selling Price 10 Material 5 Labor 1 6 Variable Margin 4 40% Fixed Cost Rents 100,000 100 000 Salaried Labor 300,000 Office Expenses 70,000 Depreciation p 50,000 , 520,000 Break-even Unit f S l U it of Sales 130,000 130 000 Sales 1,300,000
    • Overhead Variance 6001 Cos - Overhead 411,229 What is the fixed cost? 6004 Sample Charges (8,000) 6006 Freight-In For Pp&E 6009 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) -72% Standard Cost of Sales 6101 Canteen (21,978) Material (3,671,172) 6120 Indirect Labor-Basic(Poh) (26,430) Labor (222,581) 6121 Indirect Labor-Ot(Poh) (11,812) 6138 Indirect Labour-Employee Benef (2,000) (2 000) Overhead (411,229) (411 229) 6139 Indirect Labour-Insurance (5,112) ---------------- 6153 Indirect Labour-Housing Total Standard Cost (4,304,983) 6156 Indirect Labour-Bonus (2,202) 83.9% 6166 Office Supplies (12,000) 6167 TOOLING CHAREGS (1,200) Material Variance 6168 EXPENDABLE MACHINERY & (5,000) 4510 Purchasr Price Variance - Non 6169 Expendable Mould & Tools (25,000) 4511 Purchasr Price Variance - Copp 6170 Maintenance (1,000) 4512 Invoice Matching Variance - Non 6172 Maintenance-Machinery & Equip (2,000) 6175 Maintenance-All Other (1,000) 4513 Invoice Matching Variance - Copp 6177 Heat & Utilities (15,000) 4514 Purchase Price Variance - Internal 6179 Utilities - Water (2,000) 4523 Std Spoilage 41,639 6180 Quality Ass. Expenses (1,000) 4532 Obsolete 6181 Rental Expense-Misc (38,296) 6185 Lease/Rental - Machinery (8,000) 4527 Scrap (24,289) 6186 Travel & Meeting Expenses (3,000) 4525 Std Packing Expense 31,229 6188 Entertainment (3,000) 6109 Packing Material (31,229) 6189 Miscellaneous (Engineering) (5,000) 6176 Non Refundable Vat - 6190 Motor Vehicles (2,500) 6191 Legal & Audit Fee L l A dit F (6,500) (6 500) 4530 Std Cost Revaluation 6192 Expense Supplies-Janitorial (1,500) 4534 Rework Material Expense (17,350) 6196 Expense Credits-Tool Room (5,000) 4535 Inventory Adjustments 6197 Misc. Gov'T Fee/Stamp Duty (5,261) 4552 Import Duty 6199 Telephone Expense (5,000) 6204 Dormitory Expense 4522 Standard Freight-in 69,398 6205 Overhead - Others (, (2,500) ) 4553 Frieight-In Frieight In Charges (69,398) (69 398) 6220 Indirect Labor-Basic(Oh) (70,555) Others 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) - Labor Variance 6225 INVENTORIZED VARIANCE 5000 5% 71.5% 71 COS - DIRECT LABOR 6184 EDUCATION & TRAINING (5,000) (5 000) 222,581 222 581 Provision for Long Service Pay (8,000) 5001 Inventorized variance Recreation Centre 5120 OT (92,581) Others (10,000) 5121 Basic (130,000) Others ------------- 0
    • Profit Map $ Sales Profit Total Cost Fixed Cost Loss Variable C t V i bl Cost Qty Breakeven point 65
    • Balance Sheet Items • Inventory • A/R • A/P • Fixed Asset
    • Working Capital Stock Days 45 days Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04 Cost 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-04 Inventory 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-04 Purchase 3,000 2,897 3,044 4,024 4,750 5,575 5,825 5,100 Opening + Purchase - Cost of Goods Sold = Closing p g g =====> Purchase = Closing + Cost of Goods Sold - Opening 75 days Creditors Day Jan-04 Feb-04 Mar-04 Apr-04 May-04 p y Jun-04 Accounts Payable 7,441 8,516 10,296 12,337 13,775 13,713
    • Cash Cycle Stock Days Debtors Days Cash Cycle Cash Creditors Days Days Actual Trends Inventory DSO 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 Rainy days • Profit without cash inflow is fictitious profit fi • Usage of cashflow statement in budgeting g gg – 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 – d h di depreciation & ii amortization • Receivable is cash held by customers – A/R  Cash  , • Payable is cash hoarded from suppliers – A/P , Cash  •C Capex i spending ahead is di hd • Your cash position is reflected by the p y bank statement/cash ledger
    • Cashflow template Cashflow 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-08 Net 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 WC g A/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 55 Actual 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 items VAT Payments Tax Payments Other P Oth Payments t 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 It t - - - - - - - - - - - - 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) ( g) • How to measure? • Key Performance Indicators (KPI) – The higher the better – Return on equity • Key Risk Indicators (KRI) – The lower the better T e owe t e bette – Overdue Debt to A/R • L k at your IS at different dimension Look diff di i – Customer P&L – Product P&L Go fast, Walk alone; Go far, Walk together
    • A picture worths more than 100 words p
    • • 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 •CCompliance may result i similar li l in i il behavior, but rarely generates initiative. Compliance strategies rely on external e o ce e t enforcement 夫禮者,忠信之薄而亂之首 !
    • HK$'000 Review C/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% • Link the budget to g 25,000 27,600 2,600 9.4% performance Gross Margin 5,000 4,400 600 13.6% 16.7% 13.8% -30.0% appraisal Selling Expenses A&P 1,300 1,500 200 13.3% Staff Salary 1,000 977 (23) -2.4% • Bridge the gap Staff Welfare 100 98 (2) -2.0% Entertainment 30 25 (5) -20.0% Traveling 60 55 (5) -9.1% • Evaluate the degree Others 10 11 1 9.1% 9 1% 2,500 2,666 166 6.2% of achievement General Admin. every month Staff salary 800 810 10 1.2% Staff welfare 80 75 (5) -6.7% Rent & Rates 100 100 - 0.0% • Any remedy or Communication 30 25 (5) -20.0% Others 20 19 (1) -5.3% compensating 1,030 1,029 (1) -0.1% 0.1% control? 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 f o Lags behind the budget, over-commit but under-perform d f 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
    • In-depth In depth meaning of budget • A break for management to think about next year • To determine the corrective actions required equ ed • To determine the yardstick of next year performance f • To allocate resources based on certain conditions • To bring(force) e er bod to the strategy strateg everybody Think Ahead
    • Revisit: Sales & Cost Customers & Suppliers l Assets & 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? • I the new program profitable and cash- Is h fi bl dh collectible? • Do we have sufficient/correct segmentation? Don’t expect our employees can make customers happy if they are not happy
    • R-W-W RWW • 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? y p p Is there a way to totally remove this expense? • Replace – If not possible to remove this expense, can we replace the f l h function with a cheaper one? i ih h ? One to say Yes, Two to say No.
    • • Reduce – If not possible to remove it, is there a way to p , y reduce the spending? – We should think about request for price reduction from supplier or source alternative supplier. 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. rp 沒有最好 只有更好
    • • Redistribute – If not possible to redesign the process, can p g p , 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 gy • http://www.webpronews.com/topnews/2004/0 7/13/the-principles-of-business-integrity / /h l fb • The company need to have the framework to run the business • This is the basis for building trust g • 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 di i d d discussion i A small step today, A big step tomorrow
    • Organization Culture “It i “I is a collective of ll i f –the Values – ideas about what in life seems important – the C f h Conformed N d Norms – expectations of behavior in different situations –the Artifacts – derived things or materials that abet a culture, the 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, generation through learning and imitation…” Tough Empathy
    • Culture Shaping Moment: • Every breathe you take, every move you make, they are watching you ,y gy • 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 dd h if mindset, be bold to raise questions • Further enhance the conviction I learn from 5 Minds for the Future: Disciplinary Mind Respectful Mind o o Synthesizing Mind Ethical Mind o o Creative Mind o 百川異趣, 必會於海; 萬國殊途, 必通諸夏
    • Johari Window A B hers Kno wn to oth D C Known to oneself Joe and Harry suggested, be a better functioning p rs n if you could m k p n D as l r as p ssibl ld make pane s large s possible person Nobody is as smart as everybody
    • Acculturation ees A B nown to employe D C Kn Known to the organization 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。
    • What am I talking about till now? • Financial Statements & its construction • Management by applying the financial model • W lk through the b i Walk h h h business cycle of a lf financial year • Raise questions to elicit intelligence • N thi more… Nothing • But we call it BUDGETING Early to bed and early to rise, make a man healthy, wealthy and wise
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