Practical Accounting 3
By Peter Robertson
This is the single most neglected feature in any organisation.
Yet without setting budgets we have no goal posts through which to kick the ball!
As in sport, we should always strive to stretch our limits. Thus Sales Budgets provide the impetus that drives the whole venture.
We all need some yard stick by which to determine what pricing to put on to a product or service that we sell.
It is often easy to determine the price that we pay for an item that we purchase – just look at the invoice!
However, not even this is always so easy. Do we buy it from Supplier “A” or Supplier “B”. Which gives the best price, then do either offer better pricing for bulk buys? Again, once we have set a realistic Sales Budget, then we can determine our quantity requirements in order to meet those sales. Possibly, on that basis we can negotiate better buying prices.
If we are buying multiple components to manufacture something then the number of questions begin to increase.
The next questions that then arise are quality of components, and suitability of combining one with another. What about wastage – can we afford to either scrap or re-work components?
What effect does re-work have on labour costs?
In a previous Practical Accounting Article we touched on Costing Theory. This also discussed the need to allocate indirect costs against the provision of a manufacturing process, or the provision of a service.
Probably, by now you begin to see the need for budgets as they can be used to assist in the costing exercise.
Where the volume of sales is somewhat consistent between one year and another then the historical figures can be adjusted to allow for the anticipated sales next period. These then become the budget for the that period.
Most of the SME accounting packages have some provision for comparing actual performance against budget. One program in the market place has a button you press that takes the actual figures into a popular spreadsheet so that changes can be made on the basis of “what if”. Unfortunately, it is not so easy to take the figures back into the program – they have to all be manually keyed!
The accounting program that I promote allows selection of figures by copy and paste either way. This does require discipline. The order of the figures being pasted back into the budget column must not be changed in order to achieve synchronisation with the “Actual” figures. Fortunately, the “Actual” figures can not be corrupted.
Now when a budget has been set-up in an accounting program, it is easy to compare Actual against Budget in the reports that can be generated.
Sometimes you will note that there are seasonal fluctuations in both Actual and in Budget figures. When they diverge there can sometimes be explanations such as unseasonal weather patterns. This was very obvious with one grocery chain I was involved with, and at Board meetings the financial reports were often supplemented with weather bureau reports explaining the deviations from anticipated results. Similarly, changed Public Holiday dates could also affect sales and were reported on when applicable.
Changes in operations can also affect the performance. That is, if a business is expanding then economies of scale can assist in reducing purchase prices.
Conversely, if additional capital outlays are required in order to provide capacity for the increased throughput, then there would be borrowing costs (either actual or implied). In addition, neglecting tax scheduled depreciation we should provide for the ultimate replacement of assets at “tomorrows dollars” rather than historical purchase prices.
Obviously, lending authorities need to see projected figures (sometimes years ahead) as well as reports on past performance before they will risk lending for any proposed expansion.
Government funded bodies such as the nine South Australian Business Enterprise Centres (bec), and fourteen South Australian Regional Centres conduct courses in which one of the final products is a Business Plan for each participant.
Even the operators of established businesses should re-visit their Business Plan from time to time, and make changes in response to perceived public demand for product or service.
Peter Robertson ACIS, CPA, PNA is not a Registered Tax Agent, however, he has had forty years of practical experience covering both industrial and government accounting, and including efficiency and effectiveness audits. He has decided to pass on some proven costing and general accounting theories in the hopes that it may assist prospective entrepreneurs.
Peter can be contacted through http://www.money-works.com.au