The document provides an overview of budgeting as a management tool and the budgeting process. It discusses identifying constraints, developing sales and production budgets, determining material, labor and overhead costs, and putting the pieces together in an income statement. The key aspects covered are determining assumptions, setting sales targets, projecting material and labor needs, and ensuring budgets are detailed enough while not overly complex. The overall message is that budgets should align with company strategy and operations to be effective management tools.

1. Budgeting – A Management Tool Oct 23, 2009 Dick Lam 春有百花秋有月 夏有涼風冬有雪 若無閒事掛心頭 便是人間好時節

2. Budget, in a nutshell Look at your chart of accounts or your monthly income statement Empty the cells by months Fill-in the figures you think that most likely reflect the following year situation Tell the people to act on it next year Finish!!!

3. Structure of the course Some underlying concepts Changing Mind Action Items Strategy Persuasion Constraint Budgeting Budget Theory of Constraint Organization Theory of Exchange Kaizen Plan Management Consistency Culture 志不强者智不达;言不信者行不果

4. What am I doing here? Exert my influence to persuade you to accept budgeting in your business activities It is beneficial to the company and you Align your internal budgeting process to company budgeting

5. 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

6. Sigmund Freud conscious Interact with the outside world preconscious ego super-ego subconscious id

7. Changing Mind What is in our mind? Idea & Concept Theory Stories Skill

8. 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!

9. THE CAN DOATTITUDE You CAN DO everything, but not all at once. You CAN DO everything, if it’s important enough for you to do. You CAN DO everything, but you may not be the best at everything. You CAN DO everything, but there will be limitations. You CAN DO everything, but you’ll need help.

10. This is me… BBA in Accountancy (HKBU) Master of Arts in E-Business (CityU) Fellow of ACCA Worked in various enterprises and industries, mainly manufacturing in mainland China, focus on management accounting, business strategy, tax planning, supply chain management and new business setup in PRC Before 2009 working in a US company as Director of Administrative Services Now, Operation Controller in a Fortune 500 company Email: dicklam128@hotmail.com Blog: http://dicklam128.wordpress.com and more ….

11. 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 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

12. Content The need for budget & budgeting Reasons for ineffective budget Budgeting Process Application of Budget Paradox of Budget Implementation of Budget In-depth meaning of budgeting How little we know, how much to learn…

13. Why do you come to the class? 道隐于小成，言隐于荣华。

14. Another Angle…. Who is keeping the check book in your family? Do you plan for next year or the following months for your family? Your spending is to: fulfill need and want of you & your family generate income for the above purpose Family = Father and mother i love you

16. What do we exchange? Reward Social Respect Social Support Social Recognition Praise Where there is unequal inter-dependence (reliance upon one side), power emerges as one owes to the other Not to be served but to serve

17. Servant Leadership vs. Superleadership Servant Leadership represents a philosophy in which leaders focus on increased service to others rather than to oneself. A superleader is someone who leads others to lead themselves by developing employees’ self-management skills. Superleaders attempt to increase employees’ feelings of personal control and intrinsic motivation. 非以役人, 乃役于人

18. Servant Leadership – 10 Characteristics Listening Empathy Healing Awareness Persuasion Conceptualization Foresight Stewardship Commitment to the growth of people Building community Robert Greenleaf

19. SERVE S…See the Future E…Engage and Develop People R…Reinvent Continuously V…Value Results and Relationships E…Embody the Values Source: “Leading at a Higher Level”, Ken Blanchard

20. Manageable Change/Calculated Risk Change is exciting when it is done by us, threatening when it is done to us Budget is the outline of any manageable change for the coming year

21. Do not ask the Lord to guide your footsteps if you are not willing to move your feet. Author Unknown

22. 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

23. In God, we trust; all others bring data Profit = Sales - Cost Everything happens in a company will finally go to PNL

24. 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 Say goodbye to all your Tacit Knowledge

25. Before doing battle, in the temple one calculates and will win, because many calculations were made; before doing battle, in the temple one calculates and will not win, because few calculations were made; many calculations, victory, few calculations, no victory, then how much less so when no calculations? Calculation – The Art of War

26. Human beings is not rational but rationalizing!! 曲則全，枉則直，窪則盈，敝則新，少則多，多則惑

27. Why rationalizing? Deep need for consistency When doing something, we need to have consistency and alignment between our actions and our belief Where there is inconsistency, either change What they are doing; or What they believe Worry about what people think about us if inconsistent Excessive money reward is an excuse of wrong-doing

28. What is the need? Bonus Determination But should the profit target be after the bonus? Resources Allocation A battle for struggling resources Setting Expectation Under-committed but over-performed; or, 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。

30. Assumption

31. Strategy

32. Constraint

33. Methodology

34. Calculation

35. Walkforward / Defense

36. Contingency

37. Execution Plan

38. ConclusionBudgeting – An iterative process

40. It is of no value to real practice

41. Nobody monitor the departure of budget if any

42. Who is doing the budget? Or who is doing my budget?

44. Plan lags behind reality

45. Budget is a dream (lofty goals)

46. Who takes care of it?

47. System compatibility

48. Failure to link up the budget to performance

49. No reward system linked to budget

50. Manipulation

51. No Budgeting basis

53. Management assigned target

54. Inertia

55. Too many buffer / pretext

56. Mixed up of new projects with old one

58. 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 staff? Exchange rate, Rent, Contract price What else…

59. Your strategy to target… There is no leader without at least a follower…

60. Constraint Only project with payback period < 3 years being considered Headcount Ratio Direct vs. Indirect - 3 : 1 Gross Margin > 15% Emerging market at least 10% Cost Reduction: 5% on SG&A from 2007 With scarcity, we have economics.

61. The Theory of Constraint 5 Focusing Steps Identify the constraint Decide how to exploit the constraint Subordinate all other processes to above decision Elevate the constraint If, as a result of these steps, the constraint has moved, return to Step 1. Don't let inertia become the constraint

62. TOC Thinking Process Gain agreement on the problem Gain agreement on the direction for a solution Gain agreement that the solution solves the problem Agree to overcome any potential negative ramifications Agree to overcome any obstacles to implementation 上下同欲者勝

63. What is your constraint? Any way to broaden it? Can you pinpoint the constraint year by year over the past 5 years? Why the constraint in the past disappear? And how? Balance the cost & benefit of doing it… Are you the constraint of the budget?

64. 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..

65. How to change Establish a sense of urgency Create the guiding coalition Develop a vision and strategy Communicate the change vision Empower broad-based action Generate short-term wins Consolidate gains and produce more change Anchor new approach in the culture

66. What should be your focus? Strategy Internal vs. External Expansion/Integration/Breakeven Sales/Operation/People Organization Structure Resource re-allocation Rightsizing / Business Process Re-engineering Organization Culture Walk the Talk and then Talk the Walk

67. Methodology & Calculation

68. Simple Formula

69. Sales

71. Expenses

72. Headcount

73. Capital ExpenditureFocus on value-added cost & expenses Critical: Who determine the sales target? Direct Indirect Good news: the Africans do not wear shoes!!

74. Sales Bridge 2009  2010 Market/Customers Segmentation Identify the risk & opportunities Outline sales strategy & execution plan Tell the story of Sales Truth to the Teller Truth to the Audience Truth to the Moment Truth to the Mission (HBR Dec 2007) Storytelling: a force for turning dreams into goals and then into results

75. What is your sales strategy in 2010? Selling product or services (what services?) Segmentation / Classification Market/Product Existing Business vs. New Business Level of confidence 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

76. Projection > Prediction Critical Elements: Surprise and Fulfillment

77. Projection > Prediction 只要信, 不要問; 我办事, 你放心!?

78. Questions to new program Is there any measurable evidence of the value of the program under review? Are the goals and objectives of the program important enough to warrant the expenditure being made? What would happen if the program were not provided at all? Are there other less costly and more effective ways of achieving these objectives? Walk in stupid everyday

79. Last 2 Questions… Where would the program fit in if all programs were displayed in order of importance? Would the benefits be greater if a portion of the funds spent on the program under review were used instead of other programs? Keep it fun

80. Keep the sales Why customers loyal to your company? Have you ever got the satisfaction score from your customers? How do your customers look at you? Exploration vs. Exploitation Sales & Marketing / Customer Service Product Engineering (PE) Make your people happy so that they can make your customer happier

81. Customer Loyalty

82. “ Brand is the psychological contractbetween a company and its employees and between those employees and their customers We have to keep doing more than our customers expect us to; we can’t worry about what other companies might do. ” Mavericks at Work

83. But our PRC Competitors defeat us by … offering good enough products lower price massage & rebate Dragon at your door!

84. Re-define your own standard the GiveAway % the Quality standard the Brand the cost structure …… Pre-moterm Analysis!!!

85. Keep the people and their heart… Why people loyal to your company? Have you ever got the satisfaction score from your people? How do your people look at you? Exploration vs. Exploitation Find the right people within and without the organization Elicit the intelligence from the incumbents Keep the likeables, dump the Assholes.

86. Low-cost ways to please ….. Personal thank – an employee for a specific job well-done Specific praise– in a letter or thank-you note Provide information– as possible about the company Include in decision– in the decisions you make Give Opportunity – to learn as many new skills Celebrate successes– with passion Provide free time & flexibility– at their convenience People quit people, not companies

87. Materials

88. Bills of Material Convert the sales budget to production budget Is there any time lag between sales & production? In other words, any inventory days for finished goods?

89. Revisit the assumption in BOM In house vs. Outsourcing Scrap Rate List of scrap rules Too low or too high? Zero defect rate? Target DPPM Any buffer? Simple scrap vs. Compound scrap Wastage is allowed (not aware of) when time is good

90. Do you have the detail? Budget in Store Keeping Unit (SKU) Determine the cost of goods sold Identify what volume of raw materials required So as to set out the following works: Purchasing strategy about pricing / vendor selection / order allocation / replacement Measurement: Purchase Price Variance (PPV) Budgeted Inventory Level Obsolete Inventory in the warehouse Anything else?

91. NOW Know the Present, Know what you “really” have

92. Past Purchasing Activities!!!! Any new suppliers introduced? Any suppliers disqualified? What PPV generated? Order allocation on the right track? (i.e. according to suppliers score card) Any sourcing changed and the effect? Any replacement and the effect? To whom do you review first and how? 前事不忘, 後事之師

93. Non-refundable VAT Any implication?

94. Illustration of PPV PPV = Standard Cost – Purchase Price

95. Material Requirement Planning How do you measure it? What is your target inventory days? Pull In / Push Out

96. How much do you know your purchasing? Order placement & delivery arrangement SPQ / MOQ Lead time CAR Customers composition of your major vendors …….. Passion attracts Passion!!

97. Labor

98. Routing Process by process for completion of the production of a product Labor hours required for each process of a particular labor type In principles, it is the labor hours for each work station Then, no. of laborer is determined for a particular volume of production

99. Takt time…. The routing hours should be the actual working hours, i.e. hours under perfect state of motion, no waiting As a result, efficiency factor can be measured

100. Efficiency & Low Season Factor

101. How to deal with fluctuation? Pre-build, but cost of holding inventory No pay leave, annual leave in low season Alliance with other factories ………

102. 4 unexpected leadership qualities Selectively reveal your weaknesses Rely heavily on your intuition to gauge the appropriate timing and course of actions Manage employee with tough empathy Capitalize on differences Rob Goffee, Gareth Jones Internalization vs. Understanding

103. Overhead

104. The detail worksheet Simple is beauty!

105. From macro to micro… 2 levels are enough Working is even more important Thanks to Comparison: We found beauty!

106. Another example: Traveling Is it too detail?

107. Income Statement Putting Sales, Cost & Expenses altogether But how do you work out the cost & expenses detail? Product PNL / Customer PNL CQ + PQ > IQ

108. Zero Base PNL Identify the cost nature so as to determine the breakeven point Then, is it possible to reduce the fixed cost? What minimum capacity should be maintained?

109. A simple example …..

110. What is the fixed cost?

111. Profit Map 84 Sales $ Profit Total Cost Fixed Cost Loss Variable Cost Qty Breakeven point

112. A Paradox of Pricing Formula Price = Unit Cost + Mark-up % Cost: Variable Cost, Fixed cost Variable Cost: more output, fixed unit cost Fixed Cost: Lump Sum / Output more output, less unit cost less output, more unit cost Suggestion: Convert fixed cost to variable cost as far as possible

113. 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

115. If yes, do you know the expenses patternor relationship with sales?

117. Poka Yoke (Avoid any inadvertent Errors) Unintentional Errors Overlook Misunderstanding Judgment Inexperience Frequency No Benchmarking Standard Accident Intentional

118. Poka Yoke in action - Reasonableness Trend by month Benchmarking Comparison Compare with previous years Compare with current year forecast Compare with industrial standard Check figure Encourage Q & A Index

119. Walkforward / Defense EBITDA bridge Quantify all identified risk & opportunities Give detail of cost reduction and others Defense your budget Prepare the detail for challenge Identify the focus area of Income Statement 實踐是檢驗真理的唯一標準

120. What is cost saving plan?

121. Any productivity improvement plan? How do you measure operator productivity? How to improve it? What is the financial impact? 7 Waste 8th Waste ….. What is the target Hourly Rate? Labor cost & Overhead

123. More on Walkforward template Projects profitability highlight (new/lost) Cost reduction/increase highlight Variable Budget

124. New Project Evaluation …..

125. Balance Sheet Items Inventory A/R A/P Fixed Asset

126. Working Capital

127. Cash Cycle

128. Cashflow Fund for investment opportunity Rainy-days fund Profit without cash inflow is fictitious profit Usage of cashflow statement in budgeting 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

129. Cashflow working Net Income is not cash which include non-cash spending – depreciation & amortization Receivable is cash held by customers A/R , Cash  Payable is cash hoarded from suppliers A/P, Cash  Capex is spending ahead Your cash position is reflected by the bank statement/cash ledger

130. Cashflow template Sweet lemon; Sour grape!?

131. Weekly cashflow forecast

132. 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

133. Execution Plan (Monitoring) How to measure? Key Performance Indicators (KPI) The higher the better Return on equity Key Risk Indicators (KRI) The lower the better Overdue Debt to A/R Look at your IS at different dimension Customer P&L Product P&L Go fast, Walk alone; Go far, Walk together

134. A picture worths more than 100 words

136. Why …..We do budget every month

137. Application of Budget Commitment vs. Compliance Commitment generates productive behavior without the need for monitoring Compliance may result in similar behavior, but rarely generates initiative. Compliance strategies rely on external enforcement 夫禮者，忠信之薄而亂之首 ！

138. Review Link the budget to performance appraisal Bridge the gap Evaluate the degree of achievement every month Any remedy or compensating control? 交數交人交自己

140. Exceeds the budget, under-commit but over-perform

141. Lags behind the budget, over-commit but under-performBe careful! When you start the game, it will continue for good

142. How detail do we need? Detail (Logic) Flexibility People need to prove they are trustable

143. Back to Basic 天下难事，必作于易 天下大事，必作于细 Socrates: the great inquisitor

144. In-depth meaning of budget A break for management to think about next year To determine the corrective actions required To determine the yardstick of next year performance To allocate resources based on certain conditions To bring(force) everybody to the strategy Think Ahead

145. Revisit:Sales & CostCustomers & SuppliersAssets & Liabilities Let the figure talk on solid ground

146. Sales – the source of budget How to retain the existing customer? How to uncover the intrusion of low cost competitor? Is the new program profitable and cash-collectible? Do we have sufficient/correct segmentation? Don’t expect our employees can make customers happy if they are not happy

147. R-W-W Is it Real? Can we Win? Is it Worth doing? 知可以戰與不可以戰者勝

148. 5 R – Cost saving strategy Remove Why does a particular expense need to incur? Is there a way to totally remove this expense? Replace If not possible to remove this expense, can we replace the function with a cheaper one? One to say Yes, Two to say No.

149. Reduce If not possible to remove it, is there a way to reduce the spending? We should think about request for price reduction from supplier or source alternative supplier. There is no repeated fluke!

150. 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. 沒有最好 只有更好

151. Redistribute If not possible to redesign the process, can 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

152. Step forwards to your Suppliers & Customers Suppliers Customers Suppliers Customers Stand still or fly?

153. 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

154. Business Integrity http://www.webpronews.com/topnews/2004/07/13/the-principles-of-business-integrity The company need to have the framework to run the business This is the basis for building trust 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 discussion A small step today, A big step tomorrow

155. Organization Culture “It is a collective of the Values – ideas about what in life seems important the Conformed Norms – expectations of behavior in different situations the Artifacts – derivedthings or materials that abet a 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, through learning and imitation…” Tough Empathy

156. Culture Shaping Moment: Every breathe you take, every move you make, they are watching you The daily words, behavior, events, and decisions that reinforce who you want to be Create experienced meaningfulness! A learning organization

158. Synthesizing Mind

159. Creative Mind

160. Respectful Mind

161. Ethical Mind百川異趣, 必會於海; 萬國殊途, 必通諸夏

162. Johari Window Joe and Harry suggested, be a better functioning person if you could make pane D as large as possible Nobody is as smart as everybody

163. Acculturation 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。

164. Peripheral Thinking…. Do you budget for the following? Order Lead Time Policy & Procedure(SOP) Innovation Leadership Staff Turnover Rate Employee satisfaction Trust Social Capital But, why should I believe you?

165. Some sidetracking Trust: I cannot ask for it I can accept being trusted or give trust When I trust, I expect something happen When I trust, I take the risk It liberates and mobilizes human agency, release creative, uninhibited, innovative, entrepreneurial activism toward other people

166. To be trustworthy I need to be financially healthy proved by the Balance Sheet & PNL I need to meet the expectation of the creditors, suppliers, customers & employees I need to be consistent with what I said and intended to do

167. 墨子 – 修身編 志不强者智不达；言不信者行不果 行不信者，名必耗。名不徒生，而誉不自长 务言而缓行，虽辩必不听 言无务多而务为智，无务为文而务为察 善无主于心者不留，行莫辩于身者不立 名不可简而成也，誉不可巧而立也

168. Plant your own garden, decorate your own soul, instead of waiting for someone to bring you flowers. Veronica A Shoffstall

169. What am I talking about till now? Financial Statements & its construction Management by applying the financial model Walk through the business cycle of a financial year Raise questions to elicit intelligence Nothing more… But we call it BUDGETING Early to bed and early to rise, make a man healthy, wealthy and wise

170. dicklam128@hotmail.com 886!!