Unit VI Case Study: Budget at ABC Manufacturing
Budgeting at ABC Manufacturing
ABC Manufacturing is a large manufacturing company, with a relatively large budget. This year, our budget projects $700,000 in sales, with $280,000 of that being profit after all supply costs and open for budgeting for use within the organization. The problem is that the manager who is creating the budget and submitting it for approval to the president has inflated the numbers in anticipation of the president cutting the numbers. This leads to many concerns, as will be discussed in this essay.
Overview of Budgeting
Budgeting is about deciding where to put a company’s money. But these decisions are about more than economics and distribution, they are also about ethics. As one author writes, “A business that is clear about its ethical direction will approach the budgeting process as a way to make choices that help the company realize its vision and its goals in ways that are also financially sustainable, balancing financial considerations with questions of what makes business activities meaningful and worthwhile” (Gartenstein, n.d.). This means that ethics and business goals need to come first, and the budget needs to follow.
Let’s look at ABC Manufacturing. A glance at this budget does not tell us anything about their vision or ethics. The budget shows that most money is spent on wages, taxes, rent, and utilities. These are all relatively unmovable numbers, other than perhaps wages, which can sometimes be adjusted by adjusting man hours. The main high value numbers that are flexible are advertising, supplies, training and education.
What are these flexible numbers about, as far as goals? If growing the business is a goal, then advertising might be a good place to put money. Is training and educating employees so they can be innovative and more effective part of the company vision? Knowing this would help the budget creator make more effective decisions.
Budgeting at ABC Manufacturing
At ABC Manufacturing, the budget system is flawed. Essentially, the process is for each main department (advertising, maintenance, production, and human resources) to go to the supervisor with their preliminary budgets. The supervisor discusses these numbers, adjusting them as he deems fit, and then takes the new budget to the president who will approve, deny, or demand changes.
In an effective system, the numbers from the previous year would be used to plan for the coming year. For instance, maintenance would report how much utilities cost that year, what changes they anticipate seeing (for example, a new addition was created that will cost more to heat and cool, or a new machine was bought that takes a lot of energy, or the power company has raised their rates), and then provide an anticipated budget for the coming year.
The above process is being followed in some departments. But in other areas, such as supplies, and training and education, the numbers are being simply guessed. What’s worse, they are being guessed high in anticipation of the president making cuts.
Ethics of Budgeting
A budget should be created by using the most quantitative numbers available, with as little guesswork or subjectivity as possible. One should not simply throw out numbers to see what sticks, or to try to get the most money that they can. Rather, a budget should be designed to meet the needs of the organization.
By the same token, a president should not just arbitrarily ask his people to cut money from a budget. Rather, he should see where money is being spent, compare that money to the company’s vision and mission, and then make logical decisions about what to improve and what to change.
This concept of padding the numbers by 20% is not entirely foreign. In construction, it is common to always plan for 20% above budget. This provides a cushion if things do not go well. the ethical dilemma is in why they are padding numbers. Adding 20% to account for problems is not exactly what is happening here. There are two issues at play.
First, it is not okay to lie to the president of the company in order to try to get what one wants. Padding numbers in one area in the hope that there will be extra money to take a work trip is not acceptable behavior, and it is not ethical. The ethical thing would be to write up a plan for why that trip is valuable and what it will cost and to put it, clearly, in the budget to seek approval.
Second, not only is lying to increase the budget not okay. But it’s not even the most effective way to do things. If one wants some budgetary wiggle room, creating a “rainy day” or “slush fund” is a better plan. This is a specific budget line item that is set aside as money to be saved for unexpected situations.
ABC Manufacturing needs to ensure that they have a well written, accurate mission and vision statement that details the goals of this organization. Then, they need training in how to create and approve budgets to support that vision. Finally, the culture of this company needs to change so that the behavior of both the president (arbitrarily cutting) and manager (lying about the budget) ends.
Gartenstein, D. (n.d.). Budgeting Ethics. Small Business Chronical. Retrieved from, https://smallbusiness.chron.com/budgeting-ethics-47002.html