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E XPR ESS_17600 | B udgetin g_V id eo

T he fo llo w in g p re se nta tio n is a bout p re parin g y o ur fin ancia l c o m mit m ents , e sse ntia lly a g uid e to d eve lo pin g a

b udget a s th e le ader o f H IS C O . T he p it c h c a n a ls o b e fo und in th e H elp s e ctio n o f th e S upple m enta ry R evie w

M ate ria ls . W hat tim e o f th e y e ar d o th e m ajo rit y o f m anagers d re ad? B udget tim e. W e'r e g oin g to tr y to m ake

s o m e c o m mon s e nse o f p re parin g a b udget fo r y o u a s th e le aders o f th e H IS C O o rg aniz a tio n.

W hat is a b udget a nd w hy is it c rit ic a l? L ik e s tr a te gy, th ere a re a w id e r a nge o f d efin it io ns o f a b udget. F ro m o ur

e xp erie nce , a b udget is a s yste m atic p ro ce ss o f th e a llo ca tio n o f c o rp ora te r e so urc e s w it h a ty p ic a l d ura tio n o f o ne

y e ar. O ve r tim e, o fte n 3 to 5 y e ars , th e a nnual b udgetin g p ro ce ss is d esig ned to a ch ie ve y o ur s tr a te gy.

T here 's a n o ngoin g p ro ce ss o f c ro ss-fu nctio nal p artn erin g, to p ro perly b ala nce , a nd s u cce ed a cro ss y o ur v a lu e

c h ain fr o m s u pplie r to e nd c u sto m er. T his in ner lin ka ge b eco m es th e b asis o f y o ur fin ancia l c o m mit m ents fo r th e

u pco m in g y e ar. T he fin ancia l b udget w ill lin k y o ur p ro -fo rm a in co m e s ta te m ent, b ala nce s h eet, a nd s ta te m ent o f

c a sh flo w s, in vo lv in g o pera tio ns, in ve stm ent, a nd fin ancia l c o m ponents .

N atu ra lly , b udgets w ill in vo lv e a b ala nce o f n on-fin ancia l m easu re s. B udgets n eed in here nt fle xib ilit y a nd c o ntr o l.

T here a re m any ty p es o f b udgetin g p ro ce sse s y o u w ould w ant to le arn a bout fr o m r ig id to z e ro b ase d. A nd th e

d ebate is n onsto p o n to pic s s u ch a s s a ndbaggin g, s tr e tc h ta rg ets , a nd r e w ard s yste m s tie d to m eetin g o r

e xce edin g b udgeta ry m easu re s.

W hy is th e b udgetin g p ro ce ss c rit ic a l? W ell, it 's c rit ic a lit y s te m s fr o m th e fid ucia ry r e sp onsib ilit y to a ll o f y o ur

s ta ke hold ers w it h th e u lt im ate g oal o f c re atin g s h are hold er v a lu e. W e c a n m easu re o ur p ro gre ss w it h v a ria nce

a naly sis a nd c o urs e c o rre ct w hen m ark e t c o ndit io ns w arra nt. A s a n in div id ual, r e gard le ss o f le ve l, a b udget

d rilld ow n w ill a llo w y o u to fin d y o urs e lf a nd y o ur p ote ntia l c o ntr ib utio n to o ve ra ll s yste m s p ro fit a bilit y .

I t's a fo rc in g fu nctio n to u nders ta nd th e d riv e rs o f y o ur b usin ess a nd c o nstr a in ts y o u w ill fa ce a nd c re ate s

a lig nm ent a cro ss y o ur o rg aniz a tio n. It m ake s e ve ry o ne a r is k m anager. A nd th e r is k o f r u nnin g w it h out a b udget is

t h e e quiv a le nt o f a llo w in g p eople to r u n w ild .

P la nnin g, b udgetin g, a nd fo re ca stin g a re th re e in te rre la te d a nd o fte n m is u se d te rm s y o u w ill e xp erie nce in

m anagin g a nd le adin g H IS C O . In p ra ctic e , th ese te rm s a re fr e quently u se d in te rc h angeably . A ll r e quir e o ptio nalit y

a nd a r is k m anagem ent p ers p ectiv e .

P la nnin g is a t th e s tr a te gic le ve l w it h a lo ng-te rm p ers p ectiv e in vo lv in g s e nio r b usin ess le aders . B udgetin g, th e

c u rre nt a ctiv it y th at y o u w ill b e e xp erie ncin g a t H IS C O , is a t th e o pera tin g le ve l, ty p ic a lly w it h a o ne-y e ar d ura tio n

i n vo lv in g a n e ntir e o rg aniz a tio n p rim arily a ro und y o ur fin ancia l c o m mit m ents . F ore ca stin g is a ls o a t th e o pera tin g le ve l th at r e ca sts o r u pdate s y o ur b udget, ty p ic a lly o ccu rrin g m onth ly o r

q uarte rly o r w heneve r m ark e t c o ndit io ns w arra nt. T his r e vis e d fo re ca st is o fte n r e fe rre d to a s y o ur s h ort r a nge

o utlo ok.

Y our o w ner's n et in co m e e xp ecta tio n fo r th e y e ar w as w ell d ocu m ente d in o ne o f th e e arly in te rn al e -m ails . Y ou'll

r e ca ll th at S ta nle y S lo ane w as n ot h appy w it h th e p rio r m anagem ent's c o m mit m ent o f r o ughly $ 230,0 00. A nd h e's

e xp ectin g a n et in co m e c o m mit m ent fr o m y o u o f b etw een $ 300,0 00 to $ 400,0 00. Y ou c a n fin d th e o rig in al p rio r

m anagem ent's c o m mit m ent in th e F in ancia l M etr ic s s e ctio n o f th e C urre nt D ecis io ns th at w e'll ta lk a lit tle d eeper

a bout a s w e g o th ro ugh th is p re se nta tio n.

S ubse quent to th is v id eo, y o u'll b e s e ein g s u ggestio ns fo r Q 1 a nd y o u'r e p re parin g y o ur b udget c o m mit m ent.

P le ase r e ad th ese v e ry , v e ry c a re fu lly . Y ou c a n c lo se a t th e b otto m . Y ou c a n a lw ays r e open in C urre nt D ecis io ns

u nder th e g uid elin es.

A s p art o f p la nnin g, y o u w ill r e ca ll th at w e h ave a lr e ady a ske d y o u to b e th in kin g a bout y o ur s tr a te gy a nd S W OT

a naly sis . T his is a bso lu te ly c rit ic a l b eca use th is w ill b e d riv in g a ll o f y o ur o pera tin g d ecis io ns w it h in y o ur b udget

a nd it is e sse ntia l th at th ese d ecis io ns a lw ays b e a lig ned to w hat y o ur s tr a te gic d ir e ctio n in H IS C O is g oin g to b e.

T o b egin p re parin g y o ur b udget, y o u w ould g o to th e C urre nt D ecis io ns a re a o f Q uarte rly D ecis io ns. P le ase n ote

t h at b udget a nd p la n a re u se d s yn onym ously w it h in . T he fir s t a sp ect is th ey'll s e e w here th e d riv e rs o f y o ur p la n

a ctu ally a re , th e d ecis io ns. Y ou w ill a ls o s e e th e a ctu als fo r th e fo urth q uarte r o f th e p rio r y e ar.

Y our in put a re a, th e fo ur q uarte rs o f th e y e ar y o u w ill b e p la yin g, h as th e d ata th at r e fle cte d th e r o llu p o f th e p rio r

m anagem ent, w hic h y o u k n ow y o ur o w ner is n ot s a tis fie d w it h . W e w ill n ow b e g oin g in to a lit tle d eeper e ach o f

t h ese a re as.

A u se fu l a re a to a lw ays r e vie w a re th e in te rn al e -m ails . Y ou h ad la st s e en th ese w hen y o u w ere p re parin g fo r th e

s e lf - te st.

A s p art o f th e b udgetin g p ro ce ss, a lw ays g o b ack w hen n ece ssa ry a nd lo ok h ow y o ur v a rio us d ecis io n c a te gorie s

i m pact r e su lt s . T here a re n um ero us la g r e la tio nsh ip s ju st a s th ere a re in th e r e al w orld .

A s y o u lo ok a t th e to p h alf o f C urre nt D ecis io ns, y o u w ill s e e a v a rie ty o f g ra phic s, w hic h w ill b eco m e in cre asin gly

i m porta nt a s y o u p ro ce ed th ro ugh th e y e ar. T he m ost im porta nt r ig ht n ow is th e m ark e t fo re ca st. A nd y o u c a n s e e

i n th e u pper le ft a 9 0% c o nfid ence in te rv a l a ro und th e m ean v a lu e.

T he v a lu es th at th e p rio r m anagem ent h ad in p la ce w ere r o ughly a ppro xim ate to th e m ean v a lu e. A nd o f c o urs e ,

t h ese c a n c h ange. A nd a s y o u a pply y o ur s h are a ssu m ptio ns, y o u s h ould b e g ettin g y o ur u nit s s o ld . T hese a re c rit ic a l d riv e rs fo r e ve ry th in g th at fo llo w s w it h in th e b udget.

T he b otto m h alf o f C urre nt D ecis io ns is w here a ll o f y o ur in puts w ill a ctu ally b e m ade w it h in th e fo ur c o lu m ns.

A gain , th e c u rre nt n um bers r e fle ct th e p rio r m anagem ent's d ecis io ns. A nd a ny o f th ese c a n b e c h anged.

A s y o u c h ange in puts , a lw ays m odel y o ur p la n to fin d o ut w hat th e im pact is w it h in y o ur b udget. U nders ta nd th at

t h ere is th at o ne q uarte r la g u nder n orm al c o ndit io ns. F or e xa m ple , o n r a w m ate ria l o rd ers , a s w ell a s lin es

c o m in g in w it h a la g o f o ne q uarte r.

I t is c rit ic a l in p re parin g y o ur b udget to u nders ta nd th e lin ka ge o f y o ur fin ancia ls fr o m th e p ast to th e fu tu re o r p ro -

f o rm a. W it h in F in ancia l S ta te m ents y o u w ill fin d th e ta b c a lle d F in ancia l M etr ic s. T his is o ne o f m any ta bs w it h in

F in ancia l S ta te m ents , b ut a c rit ic a l o ne. A nd y o u w ill fin d th e h is to ric a l r u n r a te s in v a rio us fin ancia l m etr ic s, w hic h

y o u s h ould s tu dy, a s w ell a s th e p ro je cte d r a tio s b ase d o n y o ur c u rre nt b udgeta ry in puts .

T here a re s o m e im porta nt a sp ects h ere . A lw ays b e w atc h in g th e tr e nds in th e d ata . T oo m uch v o la tilit y c a n b e

v e ry s e lf - d efe atin g in a ny p ro ce ss.

A nd a lw ays a vo id th e s lip pery s lo pe. A nd w hat th at m eans is o nce y o u g et o n a d ow n tr e nd it c a n b e v e ry h ard to

g et o ff it . It c o uld ta ke a fe w q uarte rs to s ta rt r e co ve rin g.

B ala ncin g y o ur s u pply c h ain is c rit ic a l in th e b udgetin g p ro ce ss, b oth fr o m a h is to ric a l a nd p ro -fo rm a p ers p ectiv e .

W it h in th e S upply C hain M anagem ent ta b, y o u w ill fin d th e p ro ductio n s e gm ent w here a ll o f th e c o nstr a in ts fr o m a

h is to ric a l b asis a nd th e r u n r a te s to th e p ro -fo rm a b asis b ase d o n y o ur c u rre nt b udgeta ry p ro je ctio ns c a n b e

f o und. T his s h ould b e e xa m in ed v e ry , v e ry c a re fu lly . W atc h th e tr e nds, b ala nce to y o ur m ark e t fo re ca st a nd y o ur

s h are a ssu m ptio ns, a nd le ave s o m e b uffe rs fo r th e u nkn ow ns. F or e xa m ple , a lit tle e xtr a in ve nto ry is O K b eca use

i f y o u h ave lo st s a le s w here y o u c a nnot m eet c u sto m er d em and w hat y o u'r e tr a din g o ff is th e e xtr a c o st o f

c a rry in g th at in ve nto ry fo r th e r e ally u nkn ow n o pportu nit y c o st o f th e lo st s a le s a nd w hat it m eans fo r th e

c u sto m er.

R &D is c rit ic a l in th e b udgetin g p ro ce ss to b ala nce th e s h ort a nd lo ng te rm a nd c e rta in ly to le ave o ur b usin ess a s

a g oin g c o nce rn . T he p rio r m anagem ent h ad s ta rte d in ve stin g in P ro je ct 2 , a nd w e c e rta in ly h ope th at y o u w ill

c o ntin ue th at fu ndin g in q uarte r o ne. T here a re tw o o th er p ro je cts , P ro je cts 1 a nd 3 , w hic h y o u c a n r e ad a bout.

A nd in p artic u la r, o n P ro je ct 3 th is is th e e xp anded m ark e t o pportu nit y . A nd th e k e y h ere is to e nsu re th at y o u

h ave c a pacit y p la nnin g in p la ce a t th e tim e th at y o u a ctu ally im ple m ent p ro je ct n um ber 3 . W e s u ggest y o u g o b ack

a nd r e ad in th e in box in th e in te rn al e -m ail th e im pact o n th e to ta l d em and fr o m th e im ple m enta tio n o f P ro je ct 3 .

R ole p la y is o ne o f th e u niq ue o pportu nit ie s w it h in y o ur b udget p re para tio n to g ain c o m petit iv e a dva nta ge. It is a bso lu te ly e sse ntia l th at y o u r e ad th e d ir e ctio ns a nd g uid elin es v e ry c a re fu lly . A ny u nuse d c a lls w ill h ave a la rg e

o pportu nit y c o st. In th e fir s t q uarte r, q uarte r o ne, y o u w ill h ave th re e c a lls . A nd th ey c a n a bso lu te ly p osit iv e ly

i m pact y o ur b udget c o m mit m ent a nd th e p ro babilit y o f m eetin g a nd / o r e xce edin g it .

A s y o u a re c re atin g y o ur b udget a nd c o ntin ually m odelin g y o ur p la n y o u w ill fin d th at a v a rie ty o f c o nstr a in ts w ill

p op u p. In th is s e ctio n, fo r e xa m ple , y o u c a n s e e th at b ase d o n y o ur in puts fo r Q 2 th ere is a v a rie ty o f p ro ductio n

p ro ble m s, a s w ell a s a c a sh p ro ble m . T hese is su es a ls o o ccu r in th e o th er q uarte rs a ls o h ave to b e a ddre sse d.

I t's a ls o v e ry im porta nt to r e co gniz e th at y o u c a nnot s u bm it a p la n th at e xce eds y o ur c re dit lin e. S o p le ase b e a le rt

t o a ll th e b udgeta ry c o nstr a in ts .

I n s u m mary , e ve ry th in g d riv e s y o ur b udget c o m mit m ent fr o m y o ur fin ancia l m etr ic s, to y o ur p ro ductio n a nd s u pply

c h ain , to y o ur R &D , to y o ur r o le p la y, to y o ur in box, to a ll o f th e c o nstr a in ts a nd n um ero us o th er it e m s th at y o u

c a n fin d in y o ur Q uarte rly D ash board . T here is o ne tr u th . E ve n th ough in p ra ctic e b udgetin g in vo lv e s q uantif ia ble

p ro je ctio ns a nd a w ork in g k n ow le dge o f in te gra te d fin ancia l s ta te m ents , it is to o im porta nt to ju st le ave to fin ance .

I t n eeds to b e a v e ry c ro ss-fu nctio nal a ctiv it y lin ke d b ack to y o ur s tr a te gy.

A s w e a ppro ach th e fin al c o untd ow n to c re atin g y o ur b udget th ere a re a fe w im porta nt th in gs to r e it e ra te . E nsu re

t h at y o ur n et in co m e c o m mit m ent is in th e r a nge o f $ 300,0 00 to $ 400,0 00 e xp ecte d b y y o ur o w ner. A lw ays lin k

b ack to y o ur s tr a te gy, b ala ncin g th e s h ort a nd lo ng te rm , th in kin g c ro ss-fu nctio nally a bout y o ur v a lu e c h ain fr o m

s u pplie r to c u sto m er. U nders ta nd th e h is to ry o f H IS C O a nd w hat it m eans fo r th e fu tu re . B e a m in im um o f 7 0% to

8 0% c o nfid ent th at y o u c a n d eliv e r.

B udget in q uarte r o ne fo r th e M ark e t R eport a nd B usin ess In te llig ence D ash board to r e m ain k n ow le dgeable a bout

y o ur c o m petit o rs . T his c a n b e fo und a t th e b otto m o f y o ur in put a re a. A nd fin ally , b udget th e w ay y o u d esir e to r u n

t h e b usin ess, n ot n ece ssa rily th e w ay it 's a cco unte d fo r. W e w is h y o u lu ck in c re atin g y o ur b udget.

T he b udgetin g v id eo c a n b e fo und w it h in th e H elp s e ctio n o f S upple m enta ry R evie w M ate ria ls . G ood lu ck o n y o ur

b udgets .