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Part 1

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Part 1

Elke has recently become manager of the shoe division of LifeSport, a sportswear manufacturing company.Today, she and LifeSport's other division managers are meeting with their boss, Ahmed, to begin planning next year's division budgets.

During the meeting, Ahmed states LifeSport's strategic goals for next year. "Our industry has been quite stable," he says."For this year, I'd like to see if all our divisions can boost their operating income by 10%,without increasing costs any more than they have to." Ahmed then encourages the managers to use the budget preparation experience to deepen their understanding of marketplace realities.

Elke returns to her office, thinking about what approach she should take to creating a budget that achieves Ahmed's strategic goals.

What approach might Elke take to creating a budget that meets the goals?

Explore all the choices.

  • Take last year's operating income for her division and project the desired 10% increase for the upcoming year

  • Not the best choice. Though many companies use historical figures to extrapolate subsequent budgets, this incremental budgeting approach doesn't encourage managers to evaluate the realities of the current and future marketplace—something Ahmed stressed during the meeting. With the incremental approach, managers simply use the past period's figures as a base and then increase them by a set percentage.

    Also, incremental budgeting encourages some managers to develop a "use it or lose it" point of view. They feel they must use all of their budgeted expenditures by the end of the period, so the next period's budget won't be reduced by the amount that would have been saved.

  • To be able to react to marketplace realities, create a plan that calls for monthly (rather than quarterly) reviews and updates to the budget outlook

  • Not the best choice. Though this rolling budget approach can be valuable in rapidly changing industries that must continually review their basic assumptions about the marketplace, it offers fewer advantages in stable industries, such as LifeSport's.

    With rolling budgets, you continually review and update the figures while keeping the budget's overall time frame (for example, one year) stable. To illustrate, you review the budget every month, then extend the budget by one month, so there's always a one-year budget in place. This approach does provide the most up-to-date information; however, the planning involved can consume more time than is feasible for an efficient operation.

  • Ask the finance manager, purchasing group, and other LifeSport managers what market trends they expect to see next year

  • The best choice

    Correct choice. It's valuable to begin the budget preparation process by making assumptions about the future. For example, estimate whether the market will grow next year, how customers will respond to new products or features, and what competitors will be doing. Then make projections about revenues and other budget figures based on your data.

    To establish these assumptions, gather information from the financial group (they have estimates of future economic trends), human resources (they understand labor market shifts), sales reps (they know consumer trends), and purchasing (they have news about suppliers).

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