Creating a Budget with Volume Changes
Non-Financial Planning if Business Varies Substantially
Non-financial leaders need to provide finance with reasonable and justifiable budgets each year. Managers in established companies have an advantage since prior years can provide a baseline.
One of the most important but difficult tasks in creating a budget occurs when there is a substantial change in volume from one year to the next. Managers need to forecast the impact the change will have on revenue and expenses.
Budgeting in the Sales Department
Consider the impact of changes in volume on a ticket sales department. The manager needs to forecast a budget for salaries, supplies and other expenses. For example, if a local theater company is performing The Phantom of the Opera, and management is forecasting doubling ticket sales for the year, what impact does that have on the budget?
Salaries can be further broken down into administrative, sales agents and clerical salaries.
Variances in Salaries based on Volume
The change in sales will have a different impacts based on the type of salary.
- Administrative salaries may not change. It would be reasonable to forecast that the sales director would not need to increase his hours, or add another manager to accommodate the increase.
- If there were five sales agents in the prior year, it may require additional agents to handle the increased calls coming in, but it may not require a doubling of staff. The director needs to estimate how many are required.
- Clerical staff also may need to increase. If there is only one administrative assistant, the director may determine that two are needed. If there is the ability to add a part-time person, the budget may be able to reflect that.
Supply and Other Cost Increases
Some supplies will vary proportionally with volume. Consider the actual ticket stock, which would double if sales double. Other supplies, such as office supplies like pens and paper, might increase, but not at the same rate as tickets.
The cost of telephone calls for sales, if directly charged to the department, would likely increase, but not at double the prior year’s rate. Travel expenses may increase for outside sales, but each sales call might generate more business, so doubling the travel cost may be overstating the expense budget.
Changes in Operations Impacting Expense Budgets
Managers need to be aware of how outside influences can effect the budget. In the case of ticket stock expense, cost may actually decline if many tickets are sold via the internet, since the cost of the ticket stock will be passed to the customer if the customer prints the tickets.
Managers may determine that for one year, it is not feasible to hire extra sales staff and that contracted outside employees will be used. In that case, the item should be budgeted as a contract service, at the appropriate rate for that.
A major issue with finance is when the manager is unsure how the expense should be charged, and therefore budgets in both categories. This substantially distorts the total expense picture and will be rejected by accounting if discovered.
Submitting an accurate first draft of a budget goes a long way in establishing credibility for the non-financial manager, and that leads to greater likelihood of an approved plan, and the manager receiving the resources he needs.
Sales Volume
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