Assignment 2, Step 5 – Chapter 7 KCQ’s

When I first read the title “Budget for the Short Term”, I found myself pondering what this chapter may be about. In economics, we have learnt the difference between the “short run” and the “long run”, and the way that decisions may need to be made differently for each. I wondered if we would be looking at similar concepts in accounting.

I also thought about the personal budget that I use in my own life. I have an extremely anal thorough and well-planned out spreadsheet where I list out all of our family’s income and expenses. I have a section for regular living expenses which are either paid weekly/fortnightly/monthly, and then calculate the fortnightly equivalent of each to match with my pay cycle.  An amount equivalent to the fortnightly total of these expenses is automatically transferred to the bills account as soon as my pay goes in, with all of the direct debits coming out of the bills account. I have another section for annual bills, where I total my yearly expenses and divide this by 26. This amount goes into my “annual bills” account each fortnight, where my money can earn interest while waiting for bills to be paid. I then allocate an amount to grocery shopping, petrol, other spending and saving.

I felt like this would be a fairly easy chapter for me to understand and write about… after all, I know budgets! However, I have to say that I found this chapter to be a lot less about budgets and accounting, and a lot more about people and management. These are topics that I had never really considered having a lot to do with eachother before.

I also feel the need to preface the rest of this discussion, by saying that other than the daily hurdle of making my 5 year old put his shoes on, I have absolutely zero management experience. I do have a sales background, so am quite familiar with having to work to budgets and targets; however I have never had the responsibility of planning or implementing a budget in the workplace. Therefore, my only relatable experience of this is in my personal life.

Reasons for budgeting… well that’s quite simple isn’t it? (Or is it?)

My own reasons for budgeting are to work out my total expenses and make sure that they are less than my income, as well as making sure I have enough put aside for emergencies. Having everything in a spreadsheet helps me measure how I am spending my money to make sure I am sticking to the plan, and then make adjustments if I am finding the plan is not realistic.

When reading the reasons for budgeting listed in the study guide, I found that some of the reasons were quite similar to my own personal reasons for budgeting, however there were other reasons as well that I had not even considered! What surprised me the most though, was how most of these were still actually very relevant to me even though I had not consciously thought about them before!

The first reason for budgeting listed by the study guide was for short-term planning, or basically, making sure that there is money available when it is needed. This made a lot of sense to me because it is exactly what I do now with my own personal budgeting. It is all about planning ahead, knowing what money I am going to need and when, and making sure that it’s available at the right time.

The next reason given was “co-ordinating”. Co-ordinating is all about ensuring that different parts of a firm are working together, looking at how their activities affect one another and ensuring they are working towards the same objectives. I once worked in an insurance call centre where this was done very poorly. Marketing would run ads on TV, but would often forget to tell call centre management when they were scheduled to be run. As a result, we would be inundated with calls and customers would end up waiting on hold for over 30 minutes just to get a quote. Customers would end up getting frustrated and just hang up, which meant that the money spent on marketing was wasted. Co-ordinating (working together) is essential for a business to run smoothly, and is important for all aspects of business planning, not just budgeting!

The next reason for budgeting is communication –  it is not enough for managers to just come up with a plan. They also need to be able to effectively communicate their plans to others in a way that convinces their staff to “jump on board”. I know that it is not enough for me to plan out a fantastic budget. If I don’t take the time to share it with my husband, it will be impossible for us to work towards the same goals. He is very lucky that I am the one who pays all the bills (we are a great team, he earns the money and I spend it!) However, there are still some things that he needs to take personal responsibility for. He needs to fill up his car with petrol each week, and we each get a spending “allowance” each week that we can spend on whatever we like outside of the household bills.

Some weeks if we have a large unexpected bill or have just spent a lot on the kid’s birthdays, we need to reduce our individual allowances for that week to make up the difference. This is where co-ordinating, communication and delegating all intertwine. If we did not have a strict budget that we stick to, this may not work so well, and we would end up having to use our credit cards that fortnight. However, by co-ordinating (reducing one expense because another increased), communicating (telling Daniel what has changed and what we each need to do) and delegating to him we are able to continue to achieve our goals. Delegating is important because it means that we have mutually agreed boundaries and trust eachother.

The final reason for budgeting is to motivate others – to make them want to stick to the plan. If I just told my husband, “You have to spend $50 less this week”, without telling him why, he may not necessarily be happy to go along with this. But if I said, “I’d love to take the kids to the monster trucks this weekend – it will cost $100 for the family, but if we each spend $50 less this week we can afford to do it”, this would be a lot more likely to get him on board. I’ve told him the reason, I’ve given him a clear objective, and I’ve given him an incentive – a fun outing with the family.

I can see how budgets can assist with achieving all of the above goals – planning, co-ordinating, communicating, delegating and motivating. However, I think it really depends on the kind of person that you are dealing with, as to whether or not budgets will help achieve these goals. I am someone who likes numbers, likes black and white and likes absolutes… so using a budget to explain and convince me of something is very useful. However, something I learnt when I worked in sales is that not everyone thinks the same and you need to tailor your presentation based on your audience.

This was very evident to me when selling life insurance. Some customers would respond very well to the emotive sales approach – with these customers we would talk about how hard it can be for family member’s to cope financially when the main breadwinner passes away – we would sell them on the peace of mind and security that life insurance brings, knowing that their family would be taken care of.

Whereas other customers were a lot more “facts and figures” people. If we were too emotional with them, they would see straight through it and be turned off. With these customers, we would talk more about their mortgage balances, their other outstanding debts, and how much they would need from a practical sense.

Picking up what kind of customer I was dealing with early on in the call, and tailoring my presentation accordingly, was often a key factor in gaining their trust and influencing whether or not I got that sale.

I feel that managers need to apply similar principles when communicating their budgets. If managers want to get their staff on board, they need to know their staff, know what drives them, and communicate their budgets in a way that matters to them.

They also need to ensure that budgets and incentives do not motivate people in the wrong way.

Just as Martin discussed the example of the baggage handlers, I have seen similar things happen in my own workplaces.

For example, when we had already hit our sales target for one month, I have had managers tell me to wait until the next month before putting the rest of my sales through. They had two reasons for doing this – one was to give us a buffer for the next month. And the other was that if our results were too high, senior management would increase our budgets for the following month. This is very much like the “game playing” that the study guide referred to.

In another general insurance company I worked for, we had a very high incentive for cross selling, that is selling a new policy to an existing customer. However our system had a bit of a glitch, where if we just did a quote for one product (without actually selling the policy), and then did a second quote (and did sell the policy), the system would recognise this as a cross sell as well. This led to some very unethical behaviour from staff who would receive a call for an insurance quote. They would place the customer on hold, quickly do up a fake quote without telling the customer, and then do the real quote afterward. That way if the customer purchased, it would be treated as a cross sell for the staff member, which paid much more commission than just a normal sale.

Once the glitch was identified by upper management, it was corrected, however this was not before some of the more dishonest staff had earnt some very high commissions for the month.

I really liked reading about the concept that budgets should be set by the people who are actually involved in the achieving of the targets and results. I can see two key reasons why this is important. One is because the “ground level” management and staff actually have a much better idea of what is going on in their department and day to day operations than what senior management often do. Another reason is because if staff feel like they have been involved in the setting of the budget, it becomes a shared goal, rather than a dictated goal; and they are a lot more likely to be committed to it.

Funnily enough, this is something I learnt early on in my parenting. Children (like most adults) don’t want to be told what to do. If I simply said to my son, “eat your veges” this would often be met with a resounding “NO”. However, if I gave him a choice such as “would you like to eat your peas or carrots first?” he would often choose something and eat it because he would feel like he was in control.

Now obviously, adults would see through something like this, which is why the study guide highlighted the importance of not “faking it”.

In a workplace situation, it is better to just be honest and say how it is, rather than to pretend to consult them.

I worked in one workplace where a representative from each team were chosen to be “culture champions”. It was a real honour to be chosen – we were told that we would be having regular social functions where we get to interact with senior management, and we would be involved in organising all the fun workplace activities such as Friday night drinks, awards nights and sales incentive trips. More importantly, in order to find time to organise these activities, we would get to have time off the phones! In addition to the fun we would get to have, we would also represent the staff at management meetings. The management wanted to consult with us about what staff really wanted, so that they could try and make it a better place to work.

Now, I don’t know if this was the original intention, or just what it disintegrated to, but we quickly realised that we were actually being used by management. Whenever they decided to introduce a new policy that they knew the staff would dislike (such as no more facebook access at work, or changes in the commission structure), they would announce it to the culture team first and expect us to pretend to be excited about the changes when they told other staff, hoping that our “attitude” would rub off on them. Instead of consulting with us about what the staff wanted, which was the original (supposed) intention, it was more about convincing the staff of management objectives instead.

And like the study guide said, we definitely saw through it and, no, we did not like it. It did not take long before many of us started coming up with excuses to no longer be a part of this committee.  

It was interesting to see how the different budgeted financial statements can show the activities of a company in very different lights. Especially seeing that the cash flow was a negative amount, but the  income statement showed a profit. I noticed that in Purple Chocolates’ budgeted cash flow statement they purchased equipment in January, which led to a large reduction in their net cash flow. However, only a small proportion of this was actually depreciated on their income statement. The balance sheet then also accordingly shows the increase in assets (machinery) and would show either a decrease in cash, increase in outstanding loans, or both. This emphasised to me how important it is to view all the financial statements together if you want to get an accurate picture of a company, as if you viewed just one of them on their own, you could arrive at very different conclusions, depending on which one you looked at.

I could see how having a budget can help to both prevent future problems and also respond to problems more efficiently when they do occur. The study guide gave the example of having an overdraft facility in place to help cover costs – as sometimes the costs need to be paid before the income from customers is received. A lot of individuals will do a similar thing using their credit card. I am a big fan of my credit card – I will often spend on my credit card when I am out at the shops, but I am also always mindful of how much I expect to be paid in the next fortnight or month – I will only ever spend what I know I can pay off – credit card interest charges are the enemy!

I also liked how it talks about using the budget as a tool to assess your ongoing performance and adapting plans if needed. Scott Pape, the “Barefoot Investor”, recommends re-assessing your personal budget monthly, just to make sure that you are on track with everything, and I try to follow this guideline as well. Once a month, I go through my spreadsheet. If any of my expenses have changed, I adjust these on the spreadsheet, and the formulas will automatically recalculate my totals, and the difference between my income and expenses. I then have a look through and see if there is anything I can try and reduce, eg. Shopping around for insurances. It also provides a good check for me to see if I am spending the allocated amount on petrol, food, etc…

Some weeks I am a very frugal grocery shopper. I will spend half the day at the shops, getting some food from Aldi, some from Coles and some from a local fruit shop. Other weeks if I’m feeling snowed under with work, I will do an online Coles order and have it delivered. The weeks I do this I definitely spend more money. After a few weeks of this, I start noticing that we are not sticking to our budgets very well, and I try to make the time to go back to shopping frugally.

Just as breaking down my budget into chunks allows me to see where I am going over (usually grocery shopping), a firm also can break their budget down into smaller chunks and monitor each individually. They can either do this by departments, or by time periods such as months, weeks or days. This makes it easier to identify where any leakage (if any) is occurring, makes people accountable for their own results, and allows problems to be fixed more quickly if they do occur.

It really resonated with me towards the end of the study guide, where Martin discussed the importance of a “balanced scorecard”. That is, that we should not only assess a business from it’s financial perspective. There are other equally important measures, such as customer satisfaction, employee satisfaction, and achievement of objectives such as on-time deliveries.

I have a very similar outlook in my personal life. I know that there are many more areas where I could be saving money if I chose to. Things such as private school fees, swimming lessons, netflix, dining out and house cleaners are not essential living expenses (though I would definitely not be willing to give up my cleaner without a fight!) However, I also strongly believe that saving money is not the most important thing and to me, having an enjoyable lifestyle is a lot more important than having nice possessions. I will gladly continue to drive my 12 year old car and buy second hand furniture, if it means a better education for my kids, and getting to go out to dinner with friends more often. However, I also know that not everyone has the same values as me and would see some of these expenses as a total waste of money. What I’m trying to say is that in their personal life, everyone measures satisfaction differently and it’s not always about a bank account balance. The same principle applies in business. It’s really important that if managers want their business to be sustainable in the long term, that they figure out what really matters to their customers and their staff, and make sure that they are achieving those objectives too, not just their financial ones.

I didn’t find that I had a lot of questions from this reading, mainly because I find the concept of budgeting pretty straightforward.

It has given me a bit of a nudge to re-assess my own budget again though, as I haven’t done this as recently as I should have (I blame uni for this)! Reading Martin’s statement about how our credit card statements can tell us a lot about someone also prompted me to take a look at mine, and I was horrified to see that I have been purchasing at the “Golden Arches” restaurant lately, a lot more than I realised or should have been. That explains both my increased credit card balance and increased waist line!

There you go, a perfect example of how budgeting has helped me to identify a problem! Now the next step is to make sure that I do something about it!