Tag Archives | budget

Zero-Based Budget (ZBB)

What is a Zero Based Budget?

A zero-based budget (ZBB) requires all expenses to be justified each period. Essentially, a zero based budget is when you create a budget from scratch each period. Each period, reevaluate and justify all expenses in terms of the company’s overall strategic objectives. Distinguish the zero-based budget from the traditional budget. Do not build a ZBB upon the previous period’s budget.

Traditional Budget

Often times, when creating a budget, the manager will simply start with the previous period’s budget and add to it. The previous period’s costs and expenses are considered inevitable for the current period. Based on proposed plans and projects the manager then adds costs to the budget for the upcoming period. Over time, when using this method, budgets can just grow period after period. By starting with the old budget and adding costs, the company does not justify or reexamine the previous period’s costs.

Zero-Based Budget

A zero-based budget basically requires starting from scratch each period. When preparing a ZBB, the previous period’s budget is all but ignored. At the beginning of the period, all cost-incurring activities must be examined and justified in terms of the company’s strategic objectives. Cut activities that aren’t necessary. Scrutinize necessary activities for opportunities to reduce expenses. Then continue essential activities as needed. Then build the budget around the remaining necessary activities.

Zero-Based Budget – Advantages

There are several advantages to using a zero-based budget. By severing the link with the previous period’s budget, you can avoid the gradual incremental increases that can accumulate period after period when budgets are prepared using the traditional method. You can also reevaluate and fund business activities according to merit and according to alignment with the organization’s strategic objectives. Preparing a budget with the zero-based budget method is an effective way to plan and an effective way to contain and control costs in an organization.

Zero-Based Budget – Disadvantages

Preparing a budget using the ZBB method can be costly. It requires a lot of time, effort, and commitment from employees. Preparing a zero-based budget requires much more time than preparing a traditional budget. Because of this, it may be optimal to prepare a ZBB every few fiscal periods as opposed to every fiscal period. Preparing a zero-based budget requires much more effort than preparing a traditional budget. It requires deeper analysis and scrutiny of all budget items.

zero-based budget, Zero Based Budget

See Also:
How to Estimate Expenses for and Annual Budget
Capital Budgeting Methods
LIFO vs FIFO
Chart of Accounts (COA)
Administration Expenses

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Variance Analysis

See Also:
Direct Labor Variance Formulas
Direct Material Variance Formulas
Asset Market Value versus Asset Book Value
Accounting Income vs Economic Income
ProForma Financial Statements

Variance Analysis

Variance analysis measures the differences between expected results and actual results of a production process or other business activity. Measuring and examining variances can help management contain and control costs and improve operational efficiency.

Prior to an accounting period, a budget is made using estimates of material and labor costs and amounts that will be required for the period. After the accounting period, compare the actual material and labor costs and amounts to the estimates to see how accurate the estimates were. The differences between the estimates and the actual results observed at the end of the period are called the variances.

Commonly measured variances include direct labor rate variance, direct labor efficiency variance, direct material price variance, and direct material quantity variance. These variance analyses compare expected results to actual results. The purpose is to see if budget targets were met. Or they see if the operations ended up being more expensive or less costly than originally planned.


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Variance Interpretation

Variance analysis will let managers and cost analysts see if the budgeted costs and requirements for an operation accurately forecasted the actual costs and requirements of the operation.

Often, you will find variance between the budgeted requirements and the actual requirements. It is then up to managers and cost analysts to determine if that variance was favorable or unfavorable.

When a variance is favorable, that means that the actual costs and requirements of the operations were less than the expected costs and requirements for the operations. In other words, they expected the production process to cost a certain amount and it ended up costing less. Hence, this is a favorable variance.

When a variance is unfavorable, that means that the actual costs and requirements of the operations were more than the expected costs and requirements for the operations. In other words, they expected the production process to cost a certain amount and it ended up costing more. In conclusion, this is an unfavorable variance.

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variance analysis

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Standard Costing System

See Also:
Standard Costing Example
Process Costing
Activity Based Costing vs Traditional Costing
Absorption vs Variable Costing
Implementing Activity Based Costing
Cost Driver
Budgeting 101: Creating Successful Budgets
Analyzing Your Return on Investment (ROI)
Product Pricing Strategies

Standard Costing System

In accounting, a standard costing system is a tool for planning budgets, managing and controlling costs, and evaluating cost management performance.

A standard costing system involves estimating the required costs of a production process. But before the start of the accounting period, determine the standards and set regarding the amount and cost of direct materials required for the production process and the amount and pay rate of direct labor required for the production process. In addition, these standards are used to plan a budget for the production process.

At the end of the accounting period, use the actual amounts and costs of direct material. Then utilize the actual amounts and pay rates of direct labor to compare it to the previously set standards. When you compare the actual costs to the standard costs and examine the variances between them, it allows managers to look for ways to improve cost control, cost management, and operational efficiency.

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Advantages and Disadvantages of Standard Costing

There are both advantages and disadvantages to using a standard costing system. The primary advantages to using a standard costing system are that it can be used for product costing, for controlling costs, and for decision-making purposes.

Whereas the disadvantages include that implementing a standard costing system can be time consuming, labor intensive, and expensive. If the cost structure of the production process changes, then update the standards.

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standard costing system

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standard costing system

Source:

Hilton, Ronald W., Michael W. Maher, Frank H. Selto. “Cost Management Strategies for Business Decision”, Mcgraw-Hill Irwin, New York, NY, 2008.

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Standard Cost

Standard Costs Definition

Standard cost accounting is a goal or budget costs that is associated with variable costs. They are also used to measure the cost that management believes that it will incur over a period.

Standard Costing Explained

In short, standard costing takes the direct labor, direct materials, and manufacturing overhead, and estimates the cost over a quarter, year, or whatever the period may be. This is similar to budget costing, but is different in that budget costs account for a total cost while a standard cost estimate is on a per unit basis. Therefore, if a standard cost estimate turns out to be correct, then the total cost would turn out to be equal to the budget cost. But, this sort of thing never happens.

Standard Cost Formula

The standard cost method can be broken down using the following formula:

Standard Costs = Direct Labor * Direct Materials * Manufacturing Overhead

Where:
Direct Labor = Hours Worked * Hourly Rate

Direct Materials = amount of materials * market price

Manufacturing Overhead = Fixed Salary + (Machine hours * Machine rate)

Note: All but the fixed salary component of overhead must be predicted given the market conditions on demand and cost of the materials. It should also be noted that this is the same formula for the manufacturing costs, but the difference lies in the fact that Standard costs accounting is done on a predictive basis.

Standard Cost Example

For example, Jenny is an accountant. Her boss, Craig the CFO, gave her a task to calculate the standard cost of the company for the upcoming year 2010. She was given the following past information for Wawadoo Co. to try and calculate the standard cost for Wawadoo’s product (widget).

Direct Labor-2009
AVg. Labor Hours= 1,960 hours per employee
Avg. Hourly Wage – $10
Number of employees = 47
Total Costs= $92,120

Direct Materials-2009
Material Units=20,000
Avg. Market Price= $20
Total Cost= $400,000

Overhead-2009
Fixed Salary per Manager= $80,000
Number of Managers= 5
Number of Machine hours= 1,000
Hourly Machine rate= $2
Total Cost=$410,000

Jenny’s Boss, Craig, believes that the overall demand for widgets will increase by 5% and the price and number of units needed will increase by the same amount. He also believes that there will be a need for 8 new employees as well as a new manager.

Jenny finds the following:

Direct Labor= 1,960 hrs.* $10/hr* 55 employees= $1,078,000
Direct Material = $21 mkt price* 21,000 units= $441,000
Overhead= ($80,000* 6) + (1,000 hrs.* $2/hr* 6) = $492,000

Total Standard Cost= $2,011,000 cost for the year

standard cost

See Also:
Manufacturing Cost
Cost of Goods Sold (COGS)
Overhead Definition
Direct Cost vs. Indirect Cost
Variable Cost

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Marketing Plan

See Also:
Marketing Mix (4 P’s of Marketing)
Marketing Your Company using WikiCFO
Compensation Plan
Strategic Planning Process
Action Plan

Marketing Plan Definition

The marketing plan definition is the plan to cultivate and harvest demand for the products of a business, and it is part of the business plan. A marketing plan outlines answers to the question who, what, where, how, and why will the company market and eventually sell products.

Oftentimes, the CEO comes from a marketing and sales background. It’s your role as a financial leader to be the trusted advisor to your CEO and help them take the marketing plan to an action plan. Click here to read our How to be a Wingman guide.

Marketing Plan Explanation

A marketing plan, explained as the plan which leads to sales in a business, holds a depth of knowledge. Marketing plan assumptions involve 6 parts: establishing a target market, marketing tools used to communicate with this group, the price of the product in respect to the expectations of the customer, where it will be sold, and any incentives applied to the product. Though this is a simplification, actual plans at least answer these questions. Additionally, they establish a marketing plan budget and schedule for execution.

Marketing Plan Format

The marketing plan format is not the same across businesses. Each business will have to create a marketing plan which suits their time, skill, and budgetary constraints. For example, an e-commerce store will use marketing tools specific to the internet. Pay-per-click advertising, search engine optimization, sponsored product reviews, perhaps free webinars, social media websites, and a slew of more traditional tools will fit this business well.

In contrast, a CPA firm will use quite different methods. Informational seminars, direct sales, networking, event sponsorships, print media in specific publications, broadcast media, and a variety of other tools will expand the customer base of this business.

While neither example will probably use billboard advertising, smaller differences are also present. For example, an e-commerce store could be quite successful in offering coupons and other price promotions. On the other hand, how would you feel if your CPA offered discounted services? In comparison, how would you feel if you received a discount on your fees for referring another business owner to your accountant? Even in a single marketing tool, minor differences make a major effect.

Hire Trained Marketers

When thinking about marketing, it is best to hire a trained professional. While many can not afford this, trained professionals know how the industry works far better than an outsider looking in. One will make sure to find a marketing consultant or firm who has an expertise in their industry. With a little research, great success can come from the investment of time and money.


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Marketing Plan Example

For example, Eduardo is the owner of a nail salon. Having experienced some growth, Eduardo wants to take his business to the next level. He sees the first step of this to be writing a business plan. He is now on to writing the marketing plan.

Eduardo knows that customers like his products. Now, he needs to answer other questions. Eduardo arranges for a survey to be done in order to find out what customers are willing to pay for his services. Once he has done this, he considers marketing tools. Eduardo comes up with many ideas, the most valuable being to offer his location for networking events. During this, professional women will talk while getting their nails done. Eduardo answers other questions. Am I in the best location? What other tools will I use? Am I currently targeting the correct market? What service expectations does the customer have?

Situational Analysis

Eduardo is able to finish his marketing plan with situational analysis. Months later, Eduardo is experiencing great success. It seems a little planning has gone a long way. Eduardo can not believe that he did not create a marketing plan sooner. Still, he understands that it takes time to achieve greatness. As long as he continues to put in the time, the sky is the limit for his business.


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marketing plan definition, marketing plan

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marketing plan definition, marketing plan

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How to Hire New Employees

How to Hire New Employees

Hiring new employees is one of the most challenging tasks business owners face. You can take the fear and anxiety out of the process – and ensure you get the best prospect for the job – by developing an incremental, systematic approach and staying focused on the process. There are four simple steps that cover how to hire new employees.

Remember this: if you don’t change the system or process of hiring that you’ve been using thus far, then you’ll simply get more of what you’ve already got. Here’s a proven four step recruiting system that if followed carefully will ensure you hire the best candidate for the job every time.

Define What You Are Looking For

Define what you’re looking for carefully. Before you even begin looking or telling people you have a position you’re looking to fill – assess your present situation and define your ideal organization chart. Is your current staff in the best positions? And then, for this new / open position – have you fully defined the job and documented its responsibilities and requirements in a job description? What will the ideal candidate look like? Draw this picture before you even begin looking.

Attract a Large Pool of Applicants

Attract the largest pool of applicants your time and budget will allow. Be prepared ahead of the need arising with an up to date database of all your contacts. Research a wide variety of job posting resources that make sense for your business – develop a list and keep it updated. These would range from newspapers and industry newsletters, community organizations and churches, to temp agencies to web sites. Spread the word and share the job description with all your current employees, customers, vendors and other personal contacts.

Compare Applicanta

Compare each of the applicants who contact you two ways: compare each to your requirements, and then compare the qualified applicants to each other and rank them from most to least suitable. Implement multiple levels of screening and you’ll waste less time in lengthy interviews with under-qualified candidates. After you have developed a short list of applicants – invite them in for a structured test situation where they perform the essentials of the position in real time while you observe the results. Also assess your short list with one or more of the variety of assessment tools available to make sure you’re making an appropriate selection.

Sell Your Ideal Candidate

Sell your ideal candidate on the job. Remember the hiring process is a two way street. You’re interviewing them – and they’re assessing you. The stronger more desirable candidates will always have more opportunities. Do you have a strong vision and mission for your business that you can effectively communicate with enthusiasm and sincerity? You need to enroll and inspire in your vision to get a strong team member to join you. Another common mistake in hiring is ‘selling’ too soon. Be sure you haven’t skipped any of the previous steps so you don’t wind up selling the wrong candidate.

The hiring process is critical to the growth of a strong healthy business. Turning it into a systematic, incremental process can take the fear and anxiety out of the process. Having a system in place for making hiring a routine process will ensure you are not trapped with retaining poor performing staff because you fear having to hire replacements.

In order to determine which candidates are the right fit for your company, download and access your free white paper, 5 Guiding Principles For Recruiting a Star-Quality Team.

how to hire new employees

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how to hire new employees

See Also:

How to Run an Effective Meeting
How To Train People For Success
Future of the Accounting Workforce
Recruiting a Winning Team
How to form an Advisory Board
How to Hire a CFO Controller

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Estimate Expenses for Annual Budget

See Also:
Capital Budgeting Methods
Zero-Based Budget
Cash Flow Projections
ProForma Financial Statements
Proforma Earnings

Estimate Expenses for Annual Budget

How do you estimate expenses for annual budget in your company? Estimating expenditures for your business can be much more than just a guess. You can use data and previous experience to make an educated estimate, therefore, creating a much more realistic budget.

A budget is only successful if the expense and income estimates are feasible. This means that whatever you put on paper can only work, if it is possible. This is where making educated estimates is going to be much more useful than a simple guess.

Make Educated Estimates for Annual Budget

The steps you will need to take in order to make an educated estimate are as follows:

1. Start with what you know. If you know that the rent on the building will always be $1,000 this becomes an expenditure that you know. If you know that every month for the last three months you have spend $300 on supplies for productivity, then estimate that you will be doing the same.

2. If you anticipate increased/decreased expenses due to external economic factors, increased sales resulting from added expenses (ex: marketing), or other changes in expenses due to market/business factors (ex: insurance premium rate changes), it is recommended to use percentage changes if dollar figures are unknown.

3. Be sure to look at any previous data you have gathered where your expenditures are concerned. The more data you have, the better your educated estimate will be. This is because patterns are bound to repeat themselves.

4. Do not be afraid to over estimate. It is better to have a little extra ready for expenses, than to be short of it. For instance if know your communication expenses have been averaging $545.00 per month then up your expense to $600 per month.

5. Also do research of other business that are similar to yours. Ask other professionals who work in your business, or other businesses what they would estimate for their expenses.

Conclusion

Overall the best way to make educated estimates on your expenses is to know as much as you possibly can about what you need to pay out. Expenses are not always precise. They may be something that you will need to at least be prepared for. So if possible always allow a little extra for the unexpected. Because expecting the unexpected will help you to be prepared for those expenses you do not plan on.

These ideas should help you to be prepared for estimating for your expenses for your business when writing an annual budget. Keep in mind that the best budget allows for some flexibility.

Estimate Expenses for annual budget

 

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