#9: Operating Budgeting

Scenario

Don Flowers, CEO of Burbage Manufacturing looked around the conference room as his management team chatted and settled in for the monthly meeting.

Lets get started, Don said, we have a lot to cover today, and frankly its not all good news. The room fell quiet. Don continued, As you know we recently experienced a cash shortage despite last quarters record sales. We cant keep going back to the bank to borrow money to support operations. I am counting on each of you to figure out a way to keep this from happening in the future.

Brian Mitchell, the newest member of the team raised his hand somewhat sheepishly. Sir, perhaps if we looked at the Master Budget for last month we could begin to identify areas for improvement.

Don looked to Alex, his CFO. Well, Alex thats your area of expertise and Brians suggestion makes sense. Lets have a look at that Master Budget.

Alex looked down at the desk and began shuffling through his paperwork. Well Don, we dont exactly have a Master Budget per se. I mean we have budgets for different areas within the company, but I really rely on the managers to know what they need to do in their areas.

Terri, the production manager spoke up, Hey, wait a minute Alex. Youre the CFO. Im doing everything I can just to keep up with demand down there on the floor. I dont have time to worry about that kind of thing. We had a press go down last week and I had an entire shift of down time. Besides, thats your job, Alex.

You know she has a point there Alex. You are the CFO. I need Terri to put all of her time towards keeping the production line running smoothly, Don said.

Look, Don, Alex replied, In January I asked everyone to send me their budgets for the year and the only thing I got was a sales budget from Peter with a note attached that asked for a pay increase for his account managers.

Brian raised his hand to speak. Well, I know Im new here, but at my last company we had budgets for sales, finished goods, cash pretty much everything was budgeted. It seemed to work pretty well, and everyone had a good grasp of where we were financially.

Alex, the CFO gave Brian an icy stare.

Don turned to Alex. Alex, I think this young man has a point. Is there some reason why we arent budgeting like he described?

Well, Alex began, Its really complicated, Don. Marjorie in materials is short two people and shes paying overtime to her remaining people just to meet supply requisitions from the shop floor. And then theres the problem with the corporate office. Every time I turn around I am getting an invoice from them for some piece of office equipment or another. Last week I got a bill from some company that Jessica hired to water the plants. How am I supposed to keep track of all of this? And then .

Don raised his hand to cut Alex off. Look, I know we are a complex organization but the fact of the matter is that I cant keep going to the bank every month, borrowing money to pay the suppliers. For heavens sake we are a multi-million-dollar company. By this time Don was red in the face and everyone around the table was showing an intense interest in the conference table. He continued, What am I going to tell the shareholders at the annual meeting when we dont have enough cash to pay a dividend that Jessica spent their money on potted plants?

This is going to end, today. Brian, you seem like a smart young man. You are going to work with Alex and anyone else in this company to get us on board with establishing and using budgets to correct this situation, Don explained. Further, as for the rest of you -when Brian comes and asks you for information treat him as if it was me making the request. Understood?

Everyone nodded their heads in agreement.

Meeting adjourned, Don declared.

Questions

1. Identify the problems that appear to exist in Burbages budgetary control system and explain how these problems are contributing to the companys poor cash position.
2. Identify the budgets that Brian and Alex will need to create to resolve these issues, including the information that is needed to construct each budget.
3. Once you have identified the problems and necessary budgets, prepare a report for Don and the rest of the management team outlining your plan for establishing a budgetary control system, making certain to include how each component of the system will benefit the overall financial health of the company.