Determining Expense Budgets

Budgets for each expense must be established, considering both external and internal factors, as in sales forecasting.

From the standpoint of expense budgeting, the following would be considered internal factors:

Corrective actions planned to bring excessive expenses in line.

Policy changes such as new commission plans.

Commitments such as equipment purchases, leases on new facilities, or professional service contracts.

Planned salary increases.

Planned changes in benefit programs.

Additional personnel.

Promotional plans.

External factors could include the following:

Inflation and its effect on price increases from suppliers.

Tax rate increases including payroll taxes, local property taxes, inventory taxes, and so on.

Utility rate increases.

Additionally, the interrelated effects of expense increases must be considered. For example, payroll increases will increase payroll taxes and, possibly, employee benefits. Rent on larger facilities can also involve additional utilities expense.

Initial Forecast

The table below shows Western Appliances' initial forecast for XXX3 operating expenses.

The owner's salary will be increased from $24,000 to $26,000.

The office manager's salary will be increased from $17,000 to $18,000.

Salesmen's salaries will remain unchanged.

The expected sales increase will cause salesmen's commissions, 2% of sales, to increase from $24,000 to $28,000.

Warehouse salaries will be increased about 5% from $22,000 to $23,000.

Clerical salaries will be increased about 17% from $12,000 to $14,000.

Payroll taxes, approximately 8% of total compensation, will increase to $10,000 as a result of the compensation increases

Employee benefits expense is expected to increase from the present $8,000 to $9,000. This increase is dictated by increased premium costs for employees' health insurance.

Rent expense will increase from $9,000 to $10,000 due to a tax escalator clause in the lease agreement and a proposed municipal tax increase.

Utilities expense is expected to remain unchanged at $4,000.

Telephone expense is expected to be reduced from $4,000 to $3,000 because of tighter controls introduced by management in response to the sharp increase in XXX2.

New controls on supplies should hold this expense at $2,000 despite price increases.

To increase sales, the advertising and promotion budget will be increased from $13,000 to $15,000, a 20% increase.

Through tighter control, the owner expects to restrict travel and entertainment expense to the XXX2 level of $13,000 despite the general increase in travel-related costs.

Freight expense will increase from $16,000 to $18,000 reflecting the increased sales volume and higher freight tariffs.

Professional fees are expected to remain at $5,000.

Depreciation expense will increase from $6,000 to $8,000 due to the addition of new receiving equipment being purchased at a cost of $10,000 and depreciated over 5 years.

Total operating expenses will increase from $200,000 to $218,000. Profit before interest and taxes will be $62,000, an increase from $40,000 in XXX2.

Evaluating Your Performance

Once an initial plan has been established, it is often useful to review it in order to identify areas of further improvement.

In the example of Western Appliances, the expected profit before income taxes, 3.2% of sales ($46,000 : $1,400,000), is well above the industry average of 2.5% and no extensive reevaluation appears needed.

Too often, the owners of small businesses rely upon their eyes and ears to tell them whether or not the performance of their business is up to par. Unfortunately, our eyes and ears often betray us. The sales representative with the glib tongue and quick wit may appear to be your star performer while the facts, actual sales and profit, may show that someone else is doing a far better job. The secretary who constantly appears busy may be far less efficient than another who works in a more organized fashion with fewer errors and less need for duplicate effort.

There are also many aspects of a business that our eyes and ears cannot always sense. Changes in the market, shifts in customers' economic fortunes, and gradual but seemingly irreversible increases in costs can develop into crises unless they are detected at an early stage and effective action is taken promptly.

Performance Evaluation

The establishment of a profit plan permits you to evaluate performance in your business based upon facts, not upon random observations. Certainly, there is no substitute for the "gut feel" of the small business owner in making these important decisions that affect the prosperity of the business. However, the effectiveness of the owner's gut feel, when combined with facts, can dramatically increase the accuracy of management decisions.

Profit Plan

With a well-considered profit plan, out-of-line conditions can be detected at the earliest possible date. Corrective action can be taken promptly, eliminating the erosive effect of continuing losses as well as the need to react in a time of crisis. The profit plan also permits the owner to agree upon specific responsibilities with all employees who are in a position to influence sales or costs. Their performance can be evaluated and any deficiencies brought to their attention so that they can participate in the development of corrective action plans. As a further plus, the disciplined thinking about the future will permit you to foresee many problems before they occur and assist you in anticipating opportunities in your market that will permit you to build your business for greater sales and profit.

As the owner of Your company you deal with problems on an almost daily basis. Getting comfortable with effective Problem Solving
Techniques can radically alter the development of your business.

Even though you Find answers to your issues, many businessmen and women are not really proficient in the methods of problem
solving, and when solutions fail, they mistake themselves for misjudgment. The problem is typically not misjudgment but instead a
lack of ability.

This manual Educates you in some problem solving techniques. Crucial to the success of a business faced with problems is the
understanding of just what the problems are, setting them, finding solutions, and selecting the best answers for your situations.

What's a problem. A problem is a situation that presents trouble or perplexity. Problems are available in many shapes and sizes.
For example, it can be:

Something did Not function as it should and you don't understand why or how. Something you will need is inaccessible, and
something has to be found to take its place. Employees are undermining a new app. The market isn't purchasing. What should you do
to live? Clients are complaining. How can you manage their complaints?

Where do Problems come from? Issues arise from every facet of human and mechanical purposes as well as from nature. Some problems
we cause ourselves (e.g., a hasty decision has been made and the wrong person was chosen for the job); other problems are brought
on by forces beyond our control (e.g., a warehouse is struck by lightning and burns down).

Issues are a Natural, regular occurrence of life, and in order to suffer less from the anxieties and frustrations they cause, we
need to learn to deal with them in a rational, logical manner.

If we accept The fact that issues will appear on a regular basis, for a variety of motives, and by a variety of resources, we can:
learn how to approach problems from an objective standpoint; learn how to expect some of these; and prevent a number of them from
getting larger issues.

To accomplish This, you have to learn the procedure for problem solving. Here, we will teach you in the fundamental methods of
difficulty. It's a step by step manual which you can easily follow and exercise. Since you follow this manual, you will eventually
develop some strategies of your own that function in concert with all the problem-solving process described in this guide.

Keep in mind, However, as you see that this is not a thorough analysis of the art of problem-solving but rather a sensible,
orderly, and simplified, yet powerful, method to approach problems considering the limited time and information most business
owners and managers possess. Additionally, some problems are so complex that they require the additional help of experts in the
area, so be prepared to accept that some issues are beyond one person's ability, ability, and desire to succeed.

To be able to Appropriately recognize the problem and its causes, you must do some research. To do so, simply list each of the
preceding questions in checklist form, and maintaining the checklist handy, go about gathering as much information as you possibly
can. Remember the relative importance and urgency of the issue, in addition to your own time limitations. Then interview the
people involved with the issue, asking them the questions on your own checklist.

When You've Gathered the information and assessed it, you'll have a pretty clear understanding of the problem and what the
significant reasons for the issue are. At this point, you can research the causes further through observation and additional
interviewing. At this time you should summarize the issue as briefly as possible, list all the causes you have identified, and
record all the areas the issue appears to be affecting.

Now, You're ready to check your comprehension of the issue. You have already identified the issue, broken it all down into all its
aspects, narrowed down it, done research on it, and you are avoiding typical roadblocks. On a large pad, write down the issue,
including all of the factors, the areas it affects, and what the consequences are. For a better visual understanding, you might
also want to diagram the issue showing cause and effect.

Study what you Have written down or diagrammed. Call in your workers and discuss your analysis with them. Based on their opinions,
you may decide to revise. Once you think you completely comprehend the causes and effects of the problem, outline the issue as
succinctly and as simply as possible.

Proceed through your Long list of alternatives and cross-out those who clearly will not work. Those notions aren't wasted because
they influence on these thoughts that stay. In other words, the best ideas you select may be revised depending on the thoughts
that would not work. With the rest of the solutions, use what is called the"Force Field Analysis Technique." This is basically an
analysis technique that breaks the solution down to its positive effects and negative effects. To do this, write each solution
you're contemplating on a different piece of paper. Beneath the solution, draw a line vertically down the middle of the paper.
Label one column benefits and one column disadvantages.

Now, some more Analytical thinking comes into play. Analyzing each facet of this solution and its effect on the issue, listing
every one of the advantages and disadvantages you can think of.

One way to help You think about the benefits and disadvantages would be to role-play every solution. Call in a few of your workers
and play out each alternative. Ask them to their own reactions. Based on what you see and on their opinions, you'll get a better
idea of the benefits and drawbacks of each alternative you're considering.

Once you Complete this process for every solution, select those solutions that have the Most advantages. Now, you should be
considering only two or three.

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