The MHEDA Journal - Third Quarter, 2012 - (Page 49)

MONEY BUDGETING MATTERS Help Stamp Out BY DR. ALBERT D. BATES Budgeting F or at least 30 years I’ve been extolling the virtues of budgeting in improving company performance. I have been wrong all of this time. It is not that budgeting itself is wrong. It is simply that budgeting alone does not seem to improve profitability. Budgeting must be augmented with a Managerial Profit Plan. Fully implemented, this plan has the potential to help firms dramatically alter their financial results. This article will examine the nature of traditional budgeting versus using a Managerial Profit Plan. It will do so by looking at two different issues. • The Problems with Traditional Budgeting – An explanation of how the budgeting process too often leaves the firm in virtually the same financial position as before. • Developing a Managerial Profit Plan – An examination of how the firm can develop an improved process to actually improve profitability. The Problem with Traditional Budgeting The problem with traditional budgeting is twofold. First, it is top down in nature; second, it involves a lot of trees and not much forest. Top Down Approach – Typically a budget is prepared by starting with sales and working down through the line items in the income statement. Nothing could be more logical. The firm plans sales, then cost of goods sold. Subtraction produces gross margin. Next, expenses are planned. Finally, profit is whatever is left over when expenses are subtracted from gross margin. The problem is that profit becomes a residual factor. It is, in fact, whatever number is produced after all of the subtractions are completed. There is no real focus on improving profitability. Trees, Not Forest – Budgets tend to be extremely detail oriented. Almost every budget has at least 20 expense categories. Budgets with 50 items are not all that unusual. At some point such detail is essential; however, in the real planning part of the financial improvement process such detail gets in the way. It is essential to understand the nature of the forest before reviewing the individual trees. Developing a Managerial Profit Plan The function of a Managerial Profit Plan (MPP) is to determine where the company is going regarding profitability and how it will get there. Within that structure The MHEDA Journal | Third Quar ter 2 012 49

Table of Contents for the Digital Edition of The MHEDA Journal - Third Quarter, 2012

President’s Perspective
From the Desk of Liz Richards
Ask Your Board
MHEDA Member Profile
At Work
Best of the Best Distributors
Training and Engaging Technical Talent
For a Successful Onboarding Experience… Be Prepared and Make Time for New Hires
Analyzing the DiSC Results
Help Stamp Out Budgeting
Distributor Salespeople Reveal Their Greatest Challenges
When Sales People Become Bread Men
The Why and How of Twitter
Managing Interruptions: Be Polite, Be Honest and Get to It
MHEDA Convention 2012
New Members
Spotlight on Association News
MHEDA University Calendar
MHEDA Milestones
New Products
Index of Advertisers by Product Category

The MHEDA Journal - Third Quarter, 2012