HARVARD ManageMentor

HARVARD ManageMentor

1. Business Essentials 1.1. BUDGETING

1.1.1. What Would You Do?

Mei Po runs a small artisan shop that makes decorations and gifts for the Chinese New Year. Unique hand-crafted touches and a great word-of-mouth reputation keep her products in high demand.

Recently, Mei Po learned that the space next door was available to lease. The timing was right as she was looking to expand her business. But as she reviewed the loan application, she noticed that in addition to a business plan, she needed to prepare a one-year budget. Mei Po was taken aback. She planned her cash-flow month to month. How could she predict what would happen over the period of a year? It seemed impossible. What would you do?

The first step in developing a budget is to establish a set of assumptions about the future. Questions Mei Po might ask include: Will the demand for her gifts grow over the next year? If yes, by how much?

The next step is for Mei Po to calculate expected revenues and expenses based on past performance and future expectations. The difference between revenues and expenses is net income. If Mei Po is satisfied with the numbers, she can finalize her budget. If she wants higher net income, she needs to identify new strategies that will support different assumptions.

In this topic, you'll learn how to identify and create a budget that will most effectively help you meet your business goals and how to use communication skills to develop realistic, accurate budgets that keep your organization on track. WORDS： artisan 工匠，技工 touches 绝技 word-of-mouth 口头的 learn 得知 lease 租约；出租，租得 cash-flow 现金流 EXPRESSIONS： loan application 贷款申请 be taken aback 惊讶 develop a budget expected revenues and expenses 预期收益与支出 net income 净收益 1.1.2. Budgeting Overview 1.1.2.1. What is budgeting

A budget is the financial blueprint or action plan for an organization. It translates strategic plans into measurable expenditures and anticipated returns over a certain period of time.

Budgeting is the process of creating and fine-tuning budgets. Budgeting activities include:

Forecasting future business results, such as sales volume, revenues, capital investments, and expenses

? Reconciling those forecasts to organizational goals and financial constraints

? Obtaining organizational support for the proposed budget

? Managing subsequent business activities to achieve budgeted results

If you have profit and loss responsibility, the financial results of your division or business unit versus the budget may be a key factor in evaluating your job performance, and may also be tied to your compensation.

An understanding of the basics of budgeting and the budget process is, therefore, essential to creating realistic budgets that will later serve as

performance benchmarks. Moreover, if you are skilled at \within your organization and negotiating compromises during the budgeting process, you will be more likely to see your budget requests met. WORDS: EXPRESSIONS: anticipated 预期的 sales volume 销售量 fine-tune 调整 capital investments 资本投资 compensation 报酬，赔偿金 performance benchmarks 绩效基准 benchmarks 基准 see your budget requests met negotiating 谈判 ?

1.1.2.2. Key Idea: The budgeting process

The budgeting process involves establishing goals, evaluating different ways of achieving these goals, and assessing the financial impacts of these strategies.

There are typically four components in the budget process.

1. Setting goals. Some organizations mandate company wide goals such as \net profits by 10% during the next year.\Individual departments then translate these directives into financial goals that are relevant for their particular activities. For example, the sales department might set a goal of increasing revenues, while the purchasing department will look for ways to reduce costs.

2. Evaluating and choosing options. Several tactics may be used to meet a specific goal. You will need to consider which tactics are likely to be most effective in your particular situation and will also be supported across the organization.

3. Identifying budget impacts. Decisions about strategic goals and tactics are used to develop assumptions about future costs and revenues.

For example, upgrading your advertising to reach more markets might mean that you need to hire professional marketing consultants.

4. Coordinating departmental budgets. Individual unit and division budgets are combined into a single master budget that expresses the organization's overall financial objectives and strategic goals. Typically, budgeting is an iterative process in which different groups prepare preliminary budgets, and then come together to identify and resolve differences.

WORDS: Mandate 授权；托管；命令 Overall 全部的 Iterative 反复的 Preliminary 初步的

EXPRESSIONS: The budgeting process 制定预算 Coordinating departmental budgets 1.1.2.3. Evaluating management's performance

Budgets can provide essential tools for measuring management performance. By comparing the actual results to the budget over a period of time, an evaluator can determine a manager's overall success in achieving his or her department's strategic goals.

Because actual results may differ from budgeted results due to reasons beyond an individual manager's control—such as an overall downturn in the economic cycle or an unexpected spike in prices of raw materials—performance evaluations should be matched to appropriate measures of results. Some financial measures of performance include:

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Gross margin measures profitability after direct production costs but before other costs that are not specifically tied to production, such as marketing, administrative, and interest expenses. Gross margin = $40,000/$120,000 = 33%

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SG&A (selling, general, and administrative costs) as a percentage of sales is a measure of an organization's effectiveness in controlling costs.

SG&A as a percentage of sales = $20,000/$120,000 = 16.7%

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Revenue per employee is a measure of the operational efficiency of an organization, relative to other companies in the same industry. Revenue per employee = $120,000,000/225 = $533,333

WORDS: EXPRESSIONS: Profitability 收益率 Administrative 行政的 management's performance 管理绩效 an unexpected spike in prices 意想不到的价格上涨 Gross margin 毛利 interest expenses 利息费用 1.1.2.4. Budget Impacts

The budget is the glue that holds together the different parts of the organization. You might have individual pockets of excellence in different parts of the organization, but they’re not going to be coordinated with each other.

So I liken this to each department being a pearl, but you will need the string to make a necklace, and the budget is the string that creates the necklace for you. So you want your sales and your production departments to be coordinated with each other. Well, they’ll be coordinated only if they’re working off the same budget.

The second rule for the budget is resource allocation. You’re going to determine how much capital budgets I’m going to have, how much I’m going to spend on operating expenses, and those decisions involve tough priorities and tough choices. And if you do not have a budget, those tough choices would never get made and there would be a lot of inefficiency in the organization.

The third reason why you should pay a lot of attention to an effective budget is that that’s what sets you up for a very effective performance evaluation at the end of the period. If you have some targets, which is what budgets are, then you have something to compare actual performance against, and you know whether someone did a good job, whether they should be promoted, whether they need to be given a bonus, whether they need to be sacked.

So lots of personnel decisions, whether you have the right person for the right job, get decided around a budget. So getting the budget right is very important for resource allocation decisions, for personnel decisions, and coordination of the whole organization.

WORDS： Glue 胶；粘合 Liken 比拟；把…比作 Sacked 解雇；洗劫；把…装进袋里；

1.1.3. Types of budgets 1.1.3.1. Budget categories

EXPRESSIONS： resource allocation 资源分配 capital budgets 资本预算 operating expenses 营业费用 personnel decisions 人事决策 There are different types of budgets for different purposes. Some of the main types of budgets include:

Operating budgets reflect day-to-day expenses and depreciation (the current portion of capitalized expenses). They typically cover a one-year period. Capital budgets outline planned outlays for investments in plant, equipment, and product development. Capital budgets may cover periods of three, five, or ten years. Cash budgets plot the expected cash balances the organization will experience during the forecast period, based on information provided in operating and capital budgets. Cash budgets are prepared by the finance department and are critical to ensuring that the company has sufficient liquidity (cash and credit) available to meet expected cash disbursements.

WORDS: Depreciation 折旧；贬值 Outlays 花费 Plot 情节；阴谋；绘图；划分；策划 Liquidity 流动性；流动资产；[金融] 偿债能力 Disbursement 支付；付出款 1.1.3.2. Rolling up the budgets

Department or unit managers are most frequently asked to develop operating budgets and capital budgets for their departments. You can also create subsets of the operating and capital budgets for individual projects,

EXPRESSIONS:

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