Preparing an Actual Budget

Thursday, January 21, 2016

Of course you want to prepare an "accurate" budget...Why wouldn't you? Back in my other "life" as a Wickes Center Manager, one of the most important things we did near the end of the year was prepare our own budgets... Now, when I did my first three or four, they were good, and a great learning experience. First, Wickes would send us all the data broken down for our total expenses for the year... separated by "Labor," and “Labor Costs” (Social Security, Retirement Fund (yes, they had one back then), all Operational costs (trucks, gas, insurance). They even included an "Administrative Allocation." This allocation was five percent against gross sales given back to the home office in Saginaw that paid the cost of Payables, Receivables, Management, etc. And of course Year-to-Date sales broken down for each month.

So at Wickes we got plenty of data…And they gave us "Guidelines" too...Anticipated margin percent, labor percent, anticipated bottom line, etc. We didn't get worksheets…As I remember, for the most part we did this all manually…but, initially, it was a great process. Good input. We did our own homework, re: what the upcoming year and economy looked like, etc. So, roughly two months after we started the process, we'd be sitting in front of the Regional Manager, with our Plan for the coming year. This was our own "Budget" live and die by. The meeting with my boss was pretty much tough but fair. His comments would be, "Come on Al, you can cut half a percent on delivery." "You can do a little better on sales." (We learned to "Sand Bag" a little so we had some room to play.) Anyway, at the end of our meeting, we had a "Draft" of a pretty good budget. And it didn't change much from that point out.

But, a few years later, two layers of Wickes Corporate “Doodle-Dust” was added to the process. I call it that because my boss would pass the "Draft" we’d agreed on to the Regional V.P. He would then "add and subtract" at will, changing our Budget to the point that it was now almost unworkable…But it got worse from there…He'd pass it on to the home office (Saginaw, Michigan) and they would add and subtract numbers that were now totally unrealistic—truly a "Pie in the Sky." It wound up making the budgets a total Joke…and I lost faith in the process.

It wasn’t until l left Wickes and we started KIMAL that I regained my faith in the budget process. So, here's how we go about it. Our Fiscal Year ends October 31st. So around August we begin to work with our Profit Center Managers in the preparation of budgets for the coming year. We have good, accurate data up to that point…And always have the actual number in front of us, as well as our "budgeted" number, so we can quickly see differences…We have a lot of input with the Managers which is necessary and invaluable. The Sales teams talk to our customers to get a feel as to how the next year looks, and we pay a lot of attention to "Trends." Of course trends can be tricky to nail down, but during some years you know it's going to be strong, or getting even stronger; other years are portending a slowing economy and you have to be realistic on that side. If everything points to sales being, for example, a flat one to five percent down--better plan that way. Don't just arbitrarily add, say, 10 percent, “Because you think you can do it!!” Another important aspect of Kimal’s budgeting method is the fact that a lot of dialog goes back and forth during the whole process…with all involved.

When we're close to settling on a budget, the C.F.O. (our Comptroller) works on it. He's pretty sure what the insurance, taxes, etc. will be for the year ahead of us. So, truly everyone is involved. And something that is very important for the coming year: A Capital Expense Allocation. If we're pretty sure we'll need a truck, forklift, whatever, we plug that anticipated expense in--complete with depreciation schedule. Even though we work on the "Draft to Final" for about two months, it isn’t surprising that it takes that long…until we reach the point where we feel we have a "Road Map" that is accurate. As accurate as budgets in our "Chaotic" industry can be…and I’ll be talking more on that in the next issue.

A quick story….”On the Lighter Side”

Protocol in hiring, firing, etc., was a lot different 50 years ago. I had a short stint with a Lumber/Concrete company, "Modern Builders.” My boss, C. Stockstill, was a true "shoot from the hip" character. One of our best drivers was long-haired guy that looked about seventy...He was actually about forty five or fifty...But could put a cement mixer where no one else could. I asked J.C. one day, about how he found and hired such a great driver... True story. There were active railroad tracks behind the operation. J.C. was in the back of the yard one day, inspecting a gravel hopper car… J.C.'s story…This bum was walking down the tracks eating a head of cabbage…J.C. said, "Hey bum what are you doing?" The bum said, "None of your business." J.C.: "Can your drive a truck"? Bum: "Of course I can." J.C. decided the bum looked "fit" and hired him on the spot, found him a place to stay, and he turned out to be the best driver we had. Never knew his real name...We all called him "Sparky" or "'Spark Plug"...He could make "Sugar Sand" look like the best paved road...Those were the days!

Al E. Bavry, CEO, Kimal Lumber & Hardware 1/21/2016

Add your comments:

Items in bold indicate required information.