Seminar held on Nov 14, 2008 in Hong Kong

1. Budgeting – A Management Tool
Nov 14, 2008
春有百花秋有月
Dick Lam
夏有涼風冬有雪
若無閒事掛心頭
便是人間好時節

2. Budget,
Budget in a nutshell
• Look at your chart of accounts or your
monthly income statement
y
• Empty the cells by months
• Fill i the fi
Fill-in h figures you think that most
hi k h
likely reflect the following year situation
• Tell the people to act on it next year
• Fi i h!!!
Finish!!!

3. Structure of the course
Some underlying
S d li
concepts
Changing Action
Items
Mind
Strategy
Persuasion
Constraint
Budgeting Budget
Theory of
Constraint
C i Organiza-
tion
Theory of
Exchange Kaizen Plan
Manage-
ment
Consistency Culture

4. What am I doing here?
• Exert my influence to persuade you to
accept budgeting in your business
p ggy
activities
– It is beneficial to the company and you
– Align your internal budgeting process to
company b d i
budgeting

5. Factors of successful persuasion
• people like those who appreciate them
• mutual benefit
• like to listen those are alike to them
• authority/professional
• Scarcity
• make explicit commitment
Hope, I could do the above for you

6. Sigmund Freud
conscious Interact with the outside world
super-eg
preconscious ego
go
subconscious
id

7. Changing Mind
What is in our mind?
• Id & C
Idea Concept t
• Theoryy
• Stories
• Skill

8. 7 Re to change people mind
• Reason
• Research
• Resonance
• Representational Re-description
• Resources & Rewards
• Real world events
• Resistance
口開神氣散, 舌動是非生!

9. This is me…
• BBA in Accountancy (HKBU)
• Master of Arts in E-Business (CityU)
( y)
• Associate of HKICPA
• Fellow of ACCA
• Worked in various enterprises and industries, mainly
manufacturing in mainland China focus on management
China,
accounting, business strategy, tax planning, supply chain
management and new business setup in PRC
g p
• Currently, working in a US company as Director of
Administrative Services
• Email:
• Blog:
• and more ….

10. 2007 Cohort

11. Reference
• Sonshi - http://www.sonshi.com/learn.html
• Tao - http://www.wenhuacn.com/zhexue/daojiao/dianji/01laozi.htm
• The World is Flat
• Harvard Business Review, Dec 2007 Issue
Review
• Changing Mind
• 5 Minds for the Future
• Maverick at works
• Halo Effect
• Myself & Other More Important Matters
• Wikipedia
• 社會心理學 – 浙江教育出版社

12. Content
1. The need for budget & budgeting
2. Reasons for ineffective budget
3. Budgeting Process
4. Application of Budget
5.
5 Paradox of Budget
6. Implementation of Budget
7. In-depth meaning of budgeting
How little we know, how much to learn…

13. Why do
Wh d you come to the class?
hl?
道隐于小成，言隐于荣华。

14. Another Angle
Angle….
• Who is keeping the check book in your
family?
• Do you plan for next year or the following
months for your family?
y y
• Your spending is to:
– f lfill need and want of you & your f il
fulfill dd f family
– generate income for the above purpose
Family = Father and mother i love you

15. Social Exchange Theory
• people will do things that are rewarding
• the frequency of a person doing an action
q y p g
depends on the value of the outcome and
p
probability of ggetting it
g
• everything we do has costs (to be minimized)
and rewards (to be maximized) associated
( )
• Maximization subject to constraint
• W are all b
We ll busy t k
to keep our ledger balanced!!
ld bl d!!
天下熙熙，皆为利来；天下攘攘，皆为利往。

16. Manageable Change/Calculated Risk
• Change is exciting when it is done by us,
threatening when it is done to us
g
• B d is the outline of any manageable
Budget i h li f bl
change for the coming year

17. Before you start to think of Budgeting
• Do you regularly read the financial
statement?
• Do you regularly read the departmental
profit & loss?
• What kind of target are you assigned?
– Market Share?
– Sales?
– Cost?
?
– Net Income?
Offering ownership to promote commitment

18. In God, we trust; all others bring data
God
Profit = Sales - Cost
Everything happens in a company will finally go to PNL

19. 夫未战而庙算胜者 得算多也
未战而庙算不胜者 得算少也
多算胜 少算不胜 而況于无算乎
孙子兵法 - 始计篇

20. • Before doing battle, in the temple one calculates
and will win because many calculations were
win,
made;
• b f d i b l i the temple one calculates
before doing battle, in h l ll
and will not win, because few calculations were
made;
d
• many calculations, victory, few calculations, no
y y
victory, then how much less so when no
calculations?
Calculation – The Art of War

21. Human
H man beings is not rational
but rationalizing!!
g
曲則全，枉則直，窪則盈，敝則新，少則多，多則惑

22. Why rationalizing?
y g
• Deep need for consistency
p y
• When doing something, we need to have
something
consistency and alignment between our actions
and our belief
• Where there is inconsistency, either change
y, g
– what they are doing; or
– What they believe
• Worry about what people think about us if
i it t
inconsistent
Excessive money reward is an excuse of wrong-doing

23. What is the need?
• Bonus Determination
– B t should the profit target be after the
But h ld th pr fit t r t b ft r th
bonus?
• Resources Allocation
– A battle for struggling resources
gg g
• Setting Expectation
–U d
Under-committed b over-performed; or,
i d but f d
– Over-committed but under-performed
• Political Tool or Economic Tool
– Can you determine your budget ultimately?
为善无近名，为恶无近刑。

24. Primary value of budgeting
• A tool for simulation/induction
• Help us identify risk & opportunity for the
following year
• It is a financial model
Objectives Calculation
o o
Assumption
A ti Walkforward / D f
W lkf d Defense
o o
Strategy Contingency
o o
Constraint
C i Execution Pl
E i Plan
o o
Methodology Conclusion
o o
Budgeting – An iterative process

25. 2.
2 Reasons for ineffective budget
? It is an exercise of top management
? It is of no value to real practice
? Nobody monitor the departure of budget
if any
? Who is doing the budget? Or who is
g g
doing my budget?
? D you have th same perspective as
Do h the ti
previous slide towards budgeting?

26. Top Down vs Bottom Up
vs.
• Failure to link up the budget to daily operation
Plan lags behind reality
o
Budget is a dream (lofty goals)
o
Who takes care of it?
o
System compatibility
o
• Failure to link up the budget to p
p g performance
No reward system linked to budget
o
Manipulation
p
o
• No Budgeting basis
Zero Base vs. Incremental Base
vs
o

27. Devil is hidden in the detail!!
• Too many estimation without solid grounds
Management assigned target
o
Inertia
o
Too many buffer
o
• Mixed up of new projects with old one
Too detail will lead to blame inevitably
y
o

28. 3.
3 Budgeting Process
• What is the objectives of your budget?
知足 不辱，知止不殆，可以长久

29. Assumptions
• What is the inflation rate? Economic
Growth %?
• What is the % increase in salary? General
and Promotion – the overall increase
ceiling
• What is the % between direct and indirect
sta ?
staff?
• Exchange rate, Rent, Contract price
• What else…

30. Your strategy to target…
target
There is no leader without at least a follower…

31. Constraint
• Only project with payback period < 3
y
years being considered
g
• Headcount Ratio
– Di
Direct vs. Indirect - 3 : 1
I di
• Gross Margin > 15%
g
• Emerging market at least 10%
• C R d i 5% on SG&A from 2007
Cost Reduction: f
With scarcity, we have economics.

32. The Theory of Constraint
y
• 5 Focusing Steps
1. Identify the constraint
2. Decide how to exploit the constraint
3. Subordinate all other processes to above
decision
4. Elevate the constraint
5. If, as a result of these steps, the constraint
has moved, return to Step 1. Don't let
inertia become the constraint

33. TOC Thinking Process
• Gain agreement on the problem
• Gain agreement on the direction for a solution
g
• Gain agreement that the solution solves the
pb
problem
• Agree to overcome any potential negative
ramifications
• Agree to overcome any obstacles to
implementation
il t ti
上下同欲者勝

34. What is your constraint?
• Any way to broaden it?
• Can you pinpoint the constraint year by
year over the past 5 years?
• Wh the constraint i the past di
Why h i in h disappear?
?
And how?
• Balance the cost & benefit of doing it…
Are you the constraint of the budget?

35. Questions of change
• What to change?
• What to change to?
• How to cause the change?
• How to maintain the change?
McCain: I use my career to promote change..

36. How to change
g
1. Establish a sense of urgency
gy
2. Create the guiding coalition
3.
3 Develop i i
D l a vision and strategy
d
4. Communicate the change vision
g
5. Empower broad-based action
6. Generate short-term wins
7. Consolidate gains and produce more
change
8. Anchor
8 A h new approach i the culture
h in h l

37. What should be your focus?
• Strategy
– Internal vs. External
– Expansion/Integration/Breakeven
– Sales/Operation/People
/p /p
• Organization Structure
– Resource re-allocation
ll
– Rightsizing / Business Process Re-
engineering
• Organization Culture
Walk the Talk and then Talk the Walk

38. Methodology & Calculation
gy

39. Sales: The Beginning of Budgeting
• Everything starts from Sales
• Everything must be related to Sales
Cost
o
Direct
Expenses
E
o
Indirect
Headcount
o
Capital Expenditure
o
• Focus on value-added cost & expenses
value added
• Critical: Who determine the sales target?
Good news: the Africans do not wear shoes!!

40. Sales Bridge
2008  2009
•
• Market/Customers Segmentation
• Identify h i k
Id if the risk & opportunities
ii
• Outline sales strategy & execution plan
gy p
• Tell the story of Sales
– Truth
T h to the T ll
h Teller
– Truth to the Audience
(HBR Dec 2007)
D
– Truth to the Moment
– Truth to the Mission
Storytelling: a force for turning dreams into goals and then into results

41. What is your sales strategy in 2009?
• Selling product or services (what
services?)
• Segmentation / Classification
Market/Product
• Existing Business vs. New Business
– L l of confidence
Level f fid
• Do you have the right people in place?
– If no, then…..
• What is your sales expense budget?
Finish your job; people in China is hungry for yours

42. Projection > Prediction
2008 Gross 2008 2008 net Inc/(Dec) in New (Lost) X Y Z Net 2009
Customers Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget
A
B
C
D
E
F
G
H
Total:
Critical Elements: Surprise and Fulfillment

43. Projection > Prediction
2008 Gross 2008 2008 net Inc/(Dec) in New (Lost) X Y Z Net 2009
Products Forecast Rebate Forecast Contract Price Program Program Reason Reason Reason Change Budget
A
B
C
D
E
F
G
H
Total:
只要信, 不要問; 我办事, 你放心!?

44. Questions to new program
• Is there any measurable evidence of the
y
value of the program under review?
• Are the goals and objectives of the
program important enough to warrant the
expenditure b i made?
di being d ?
• What would happen if the p g
pp program were
not provided at all?
• A there other l costly and more
Are h h less l d
effective ways of achieving these
objectives?
Walk in stupid everyday

45. Last 2 Questions…
Questions
• Where would the program fit in if all
pg
programs were displayed in order of
py
importance?
• Would the benefits be greater if a portion
of the funds spent on the program under
review were used instead of other
pg
programs?
Keep it fun

46. Keep the sales
• Why customers loyal to your company?
• Have you ever got the satisfaction score
from your customers?
• H d your customers l k at you?
How do look ?
• Exploration vs. Exploitation
p p
– Sales & Marketing / Customer Service
– P d t Engineering (PE)
Product E i i
Make your people happy so that they can make your customer happier

47. Income Statement
• Putting Sales, Cost & Expenses altogether
• But how do you work out the cost &
expenses d il?
detail?
• Product PNL / Customer PNL
CQ + PQ > IQ

48. How detail?
• No free lunch!!
• Nothing is impossible provided there is
sufficient resources
• Work out the detail of resources
requirement so as to materialize the goal,
regardless of its nature – self determined or
assigned
• Detail is to differentiate your aspiration
from dream
The more the detail, the stronger the confidence

49. In the new middle, we are all temp!
HK'000
HK$'000
Sales 35,000 C/M Budget F/(U) %
Sales 30,000
30 000 32,000
32 000 (2,000)
(2 000) -6 3%
6.3%
Cost 28,000
Cost of Sales 24,000 26,500 2,500 9.4%
Commission 1,000 1,100 100 9.1%
Gross Margin 7,000 25,000 27,600 2,600 9.4%
% 20.0%
20 0%
Gross Margin 5,000 4,400 600 13.6%
16.7% 13.8% -30.0%
Selling Expenses 2,500
Selling Expenses
General Admin 1,800 A&P 1,300
, 1,500
, 200 13.3%
Staff Salary 1,000 977 (23) -2.4%
Staff Welfare 100 98 (2) -2.0%
EBITDA 2,700
Entertainment 30 25 (5) -20.0%
7.7%
Traveling 60 55 (5) -9.1%
Others
Oth 10 11 1 9.1%
9 1%
• Do you know your business? 2,500 2,666 166 6.2%
General Admin.
• If yes, do you know the Staff salary 800 810 10 1.2%
expenses pattern or Staff welfare 80 75 (5) -6.7%
Rent & Rates 100 100 - 0.0%
relationship with sales? Communication 30 25 (5) -20.0%
Others 20 19 (1) -5.3%
• If yes, can you tell i the
ll in h 1,030
1 030 1,029
1 029 (1) -0.1%
0 1%
budget? EBITDA 1,470 705 435 61.7%
4.9% 2.2% -21.8%

50. The detail worksheet
Name Position Sep-07 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Existing
Fin
Fi
Dick Lam Controller 1 1 1 1 1 1 1 1 1 1 1 1 1 65,000
Stephen Ip Manager 1 1 1 1 1 1 1 1 1 1 1 1 1 35,000
Lily Lin Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 14,800
Tina Tan A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 9,500
Linda Lee A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 7,500
Samantha A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 7,500
Debora A. Accountant 1 1 1 1 1 1 1 1 1 1 1 1 1 7,500
------------ --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
7 7 7 7 7 7 7 7 7 7 7 7 7
Salary
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
65,000 65,000 65,000 68,250 68,250 68,250 68,250 68,250 68,250 68,250 68,250 68,250
35,000 35,000 35,000 38,500 38,500 38,500 38,500 38,500 38,500 38,500 38,500 38,500
6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000 6,000
9,500 9,500 9,500 10,450 10,450 10,450 10,450 10,450 10,450 10,450 10,450 10,450
7,500 7,500 7,500 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250
8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250
7,500 7,500 7,500 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250 8,250
--------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- --------------- ---------------
Salary 138,750 138,750 138,750 147,950 147,950 147,950 147,950 147,950 147,950 147,950 147,950 147,950
MPF 6,938 6,938 6,938 7,398 7,398 7,398 7,398 7,398 7,398 7,398 7,398 7,398
Medical 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100 2,100
Double Pay 11,563 11,563 11,563 12,329 12,329 12,329 12,329 12,329 12,329 12,329 12,329 12,329
Bonus 13,875
, 13,875
, 13,875
, 14,795
, 14,795
, 14,795
, 14,795
, 14,795
, 14,795
, 14,795
, 14,795
, 14,795
,
Simple is beauty!

51. From macro to micro…
• 2 levels are enough
• Working is even more important
Nov-07 Dec-07 Total 2007
Department RMB USD RMB USD RMB USD
Customer Service 515.00 68.67
Engineering 1,520.00 202.67
Finance 4,412.10 588.28
HR 2,423.00 323.07
IT - -
KPO 900.00 120.00
945.00
Manufacturing 126.00
Operations 950.00
950 00 126.67
126 67
PMC - -
Production 2,020.00 269.33
Program 2,195.00 292.67
Project - -
QA 1,915.00
1 915 00 255.33
255 33
Security 2,350.00 313.33
Supply Chain Management 300.00 40.00
--------------------- ------------- ------------- ------------- ------------- -------------
20,445.10 2,726.01
20 445 10 2 726 01 0 0 0 0
Total
=========== ======= ======= ======= ======= =======
Thanks to Comparison: We found beauty!

52. Another example: Traveling
6,000 10,000 8,000 15,000 30,000
Department China Singapore Taiwan Korea US China Singapore Taiwan Korea US Total
Finance
Dick or Financial Controller 2 1 1 1 2 12,000 10,000 8,000 15,000 60,000 105,000
John or Finance Manager 1 1 1 1 1 6,000 10,000 8,000 15,000 30,000 69,000
18,000 20,000 16,000 30,000 90,000 174,000
Sales A
X 4 2 2 1 3 24,000 20,000 16,000 15,000 90,000 165,000
Y 2 1 1 1 2 12,000 10,000 8,000 15,000 60,000 105,000
Z 2 1 1 1 2 12,000 10,000 8,000 15,000 60,000 105,000
48,000 40,000 32,000 45,000 210,000 375,000
66,000 60,000 48,000 75,000 300,000 549,000
Is it too detail?

53. What do we need to do?
• Identify the cash need upfront
• Uncover what leads to liquidity issue
• Smooth out the cash deficit & surplus
• Evaluate the cost of capital
知彼知己，百戰不殆
知彼知己 百戰不殆 ；
不知彼而知己，一勝一負；
不知彼，不知己，每戰必殆

54. Poka Yoke (Avoid any inadvertent Errors)
• Unintentional E
Ui i l Errors
• Overlook
• Misunderstanding
• Judgment
• Inexperience
• Frequency
• No Benchmarking Standard
• Accident
A id t
• Intentional

55. Poka Yoke in action - Reasonableness
• Trend by month
• Benchmarking
• Comparison
– Compare with previous years
– Compare with current year forecast
–CCompare with i d i l standard
i h industrial dd
• Check figure
g
• Encourage Q & A
•Id
Index

56. Walkforward / Defense
• EBITDA bridge
• Quantify all identified risk &
opportunities
• Gi detail of cost reduction and others
Give d il f di dh
• Defense your budget
y g
• Prepare the detail for challenge
• Identify the focus area of Income
Statement
實踐是檢驗真理的唯一標準

57. What is cost saving plan?
ABC Company
2009 Budget
Cost Reduction
Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Total How
1. Material Saving
Connector - - - - - - - - - - - - -
Housing - - - - - - - - - - - - -
Wire - - - - - - - - - - - - -
Packing - - - - - - - - - - - - -
IC - - - - - - - - - - - - -
- - - - - - - - - - - - -
2. Utitlity - - - - - - - - - - - - -
3. Re-structure
3R t t
Department
IT - - - - - - - - - - - - -
Finance - - - - - - - - - - - - -
Production - - - - - - - - - - - - -
Material - - - - - - - - - - - - -
- - - - - - - - - - - - -

58. Any productivity improvement plan?
yp yp p
• How do you measure operator
productivity?
• How to improve it?
• What is the financial impact?
• 7 Waste Excessive Production Rework
Excessive Conveyance Waiting
Excessive Action Inappropriate task
Excessive Inventory
• 8th Waste …..
• What is the target Hourly Rate?
– Labor cost & Overhead

59. 2008 Income Statement Walkforward
(in 000's)
2007 Actual/ Price/ Exchange New Transfers Cost Lost 2008 Inc / (Dec)
Forecast Contract Inflation Rate Programs In Reductions Programs Other Budget $ %
Back to Back
Back-to-Back Sales - -
Outside Sales - - #DIV/0!
Intercompany Sales - - #DIV/0!
Sales - - - - - - - - - - - #DIV/0!
Direct Material - - - #DIV/0!
Material % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Material Adders - - - - - #DIV/0!
Material Adders % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Labor - - #DIV/0!
Labor % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Overhead - - - #DIV/0!
Overhead % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Intercompany Purchases - - #DIV/0!
Mat Interco S l %
M tI t Sales #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Scrap - - #DIV/0!
Restructure - - #DIV/0!
Cost of sales - - - - - - - - - - - #DIV/0!
Gross Margin - - - - - - - - - - - #DIV/0!
Gross Margin % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Selling - - - #DIV/0!
Research & Development - - #DIV/0!
General & Administrative - - - #DIV/0!
Total operating expenses - - - - - - - - - - - #DIV/0!
Op expenses % of sales #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
- -
EBITDA - - - - - - - - - - - #DIV/0!
EBITDA % #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Depreciation - - #DIV/0!
Amortization - - #DIV/0!
Interest expense cash - - #DIV/0!
interco interest - - #DIV/0!
Non-cash interest expense - - #DIV/0!
Translation loss (gain) - - #DIV/0!
Management fee - - #DIV/0!
Other (expense) income - - #DIV/0!
-
Total Non-operating - - - - - - - - - - - #DIV/0!
Income before income taxes - - - - - - - - - - - #DIV/0!
Income taxes - - #DIV/0!
Tax rate #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0! #DIV/0!
Net Income - - - - - - - - - - - #DIV/0!

60. More on Walkforward template
• Projects profitability highlight (new/lost)
• Cost reduction/increase highlight
• Variable Budget

61. New Project Evaluation …..
j
REQUESTED CAPITAL: 1,547,151
REQUESTED EXPENSE: 62,286
Capacity Expansion: 2008 2009 2010
Total Gross Sales 3,930,777 3,930,777 3,930,777
Payment Discount 0.0% - - -
Rebate 0.0% - - -
Total Net Sales 3,930,777 3,930,777 3,930,777
% Tot Cost % Sales
Direct Materials 89.0% 2,797,206 2,797,206 2,797,206 71.2%
Material Adders 1.4% 44,755 44,755 44,755 1.1%
Labor/Overhead 7.1% 224,044 224,044 224,044 5.7%
Logistics/Whse 0.0% - - - 0.0%
Import Duties
I t D ti 2.5%
2 5% 78,616
78 616 78,616
78 616 78,616
78 616 2.0%
2 0%
Total Incremental Cost 100.0% 3,144,621 3,144,621 3,144,621 80.0%
MARGIN on Incremental Sales 786,155 786,155 786,155 786,155
MARGIN % Sales 20.0% 20.0% 20.0% 20.0%
Cost Reduction:
Total Cost Reduction - - -
Requested Expense 62,286 62,286 62,286
COMBINED MARGIN 723,869
723 869 723,869
723 869 723,869
723 869
Ul/CSA Expense -
SG&A % Sales N/A N/A N/A
EBITDA 723,869 723,869 723,869
Depreciation: (Enter Depreciable Life) -----> 7 221,088 221,088 221,088
Taxable Income 502,781
502 781 502,781
502 781 502,781
502 781
Tax Rate 0.00% 12.50% 12.50%
Tax Payments 0 62,848 62,848
Working Capital Items:
DSO (Enter DSO) -----> 30 (327,565) (327,565) (327,565)
Inv Turns-Normal (Enter Inv Turns) -----> 10 (279,721) (279,721) (279,721)
Freight (Enter Days in Transit) -----> 7 (61,145) (61,145) (61,145)
AP Days
y (
(Enter AP Days) ----->
y) 75 582,751
, 582,751
, 582,751
,
Total Working Capital (85,680.0) (85,680.0) (85,680.0)
EBITDA 723,869.0 723,869.0 723,869.0
Tax Payments 0.0 (62,848.0) (62,848.0)
Working Capital Change (85,680.0) 0.0 0.0
NET CASH FLOW (1,547,151) 638,189 661,021 661,021
CASH FLOW ECONOMICS:
RRR 13%
NPV $ (6,585)
IRR 12.8%
PAYBACK (Years) 2.4

62. Zero Base PNL
• Identify the cost nature so as to determine
the breakeven point
p
• Then, is it possible to reduce the fixed
cost?
– What minimum capacity should be
maintained?

63. A simple example …..
Selling Price 10
Material 5
Labor 1
6
Variable Margin 4
40%
Fixed Cost
Rents 100,000
100 000
Salaried Labor 300,000
Office Expenses 70,000
Depreciation
p 50,000
,
520,000
Break-even
Unit f S l
U it of Sales 130,000
130 000
Sales 1,300,000

64. Overhead Variance
6001 Cos - Overhead 411,229
What is the fixed cost?
6004 Sample Charges (8,000)
6006 Freight-In For Pp&E
6009 Indirect Materials-Cos (23,720)
4999 Customs Handling Charge (12,000)
5138 Direct Labour-Employee Benefit (3,000)
5152 Direct Labor-Insurance (17,884)
5156 Direct Labor - Bonus (10,833)
-72%
Standard Cost of Sales
6101 Canteen (21,978)
Material (3,671,172) 6120 Indirect Labor-Basic(Poh) (26,430)
Labor (222,581) 6121 Indirect Labor-Ot(Poh) (11,812)
6138 Indirect Labour-Employee Benef (2,000)
(2 000)
Overhead (411,229)
(411 229)
6139 Indirect Labour-Insurance (5,112)
----------------
6153 Indirect Labour-Housing
Total Standard Cost (4,304,983) 6156 Indirect Labour-Bonus (2,202)
83.9% 6166 Office Supplies (12,000)
6167 TOOLING CHAREGS (1,200)
Material Variance
6168 EXPENDABLE MACHINERY & (5,000)
4510 Purchasr Price Variance - Non
6169 Expendable Mould & Tools (25,000)
4511 Purchasr Price Variance - Copp 6170 Maintenance (1,000)
4512 Invoice Matching Variance - Non 6172 Maintenance-Machinery & Equip (2,000)
6175 Maintenance-All Other (1,000)
4513 Invoice Matching Variance - Copp
6177 Heat & Utilities (15,000)
4514 Purchase Price Variance - Internal
6179 Utilities - Water (2,000)
4523 Std Spoilage 41,639 6180 Quality Ass. Expenses (1,000)
4532 Obsolete 6181 Rental Expense-Misc (38,296)
6185 Lease/Rental - Machinery (8,000)
4527 Scrap (24,289)
6186 Travel & Meeting Expenses (3,000)
4525 Std Packing Expense 31,229
6188 Entertainment (3,000)
6109 Packing Material (31,229) 6189 Miscellaneous (Engineering) (5,000)
6176 Non Refundable Vat - 6190 Motor Vehicles (2,500)
6191 Legal & Audit Fee
L l A dit F (6,500)
(6 500)
4530 Std Cost Revaluation
6192 Expense Supplies-Janitorial (1,500)
4534 Rework Material Expense (17,350)
6196 Expense Credits-Tool Room (5,000)
4535 Inventory Adjustments 6197 Misc. Gov'T Fee/Stamp Duty (5,261)
4552 Import Duty 6199 Telephone Expense (5,000)
6204 Dormitory Expense
4522 Standard Freight-in 69,398
6205 Overhead - Others (,
(2,500)
)
4553 Frieight-In
Frieight In Charges (69,398)
(69 398)
6220 Indirect Labor-Basic(Oh) (70,555)
Others 6221 Indirect Labor-Ot(Oh)
6222 Indirect Labour-Insurance (3,848)
6223 Indirect Labor-Bonus(Oh) (10,097)
----------------
7145 Contract Serive (Oh Setup) (8,000)
-
Labor Variance 6225 INVENTORIZED VARIANCE
5000 5%
71.5%
71 COS - DIRECT LABOR 6184 EDUCATION & TRAINING (5,000)
(5 000)
222,581
222 581
Provision for Long Service Pay (8,000)
5001 Inventorized variance
Recreation Centre
5120 OT (92,581)
Others (10,000)
5121 Basic (130,000)
Others -------------
0

65. Profit Map
$ Sales
Profit
Total Cost
Fixed Cost
Loss
Variable C t
V i bl Cost
Qty
Breakeven point 65

66. Balance Sheet Items
• Inventory
• A/R
• A/P
• Fixed Asset

67. Working Capital
Stock Days 45 days
Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04 Jul-04 Aug-04 Sep-04
Cost of Goods Sold 4,750 3,253 2,540 3,548 4,500 5,000 6,150 5,500 4,700 6,700
(qty or cost)
Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04
Inventory 6,377 4,523 4,314 5,798 7,000 8,075 8,900 7,850
Nov-03 Dec-03 Jan-04 Feb-04 Mar-04 Apr-04 May-04 Jun-04
Purchase 3,000 2,897 3,044 4,024 4,750 5,575 5,825 5,100
Opening + Purchase - Cost of Goods Sold = Closing
p g g
=====> Purchase = Closing + Cost of Goods Sold - Opening
75 days
Creditors Day
Jan-04 Feb-04 Mar-04 Apr-04 May-04
p y Jun-04
Accounts Payable 7,441 8,516 10,296 12,337 13,775 13,713

68. Cash Cycle
Stock Days Debtors Days
Cash Cycle
Cash
Creditors Days Days
Actual Trends
Inventory
DSO Days DPO Cash Cycle
Dec 2007 160 32 85 107
Jan 2008 161 32 75 118
Feb 2008 84 37 88 33
Mar 2008 102 39 88 53
Apr 2008 127 36 93 70
May 2008 85 24 73 37
Jun 2008 83 21 77 27
Jul 2008 82 22 83 20
Aug 2008 80 22 95 7
Sep 2008 104 26 107 22

69. Cashflow
• Fund for investment opportunity
• Rainy-days fund
Rainy days
• Profit without cash inflow is fictitious
profit
fi
• Usage of cashflow statement in budgeting
g gg
– Notify when cash injection needed and cash
return happens
– Yardstick for liquidity performance
世路難行錢為馬, 愁城欲破酒為軍

70. Cashflow working
• Net Income is not cash which include
non-cash spending – d
h di depreciation &
ii
amortization
• Receivable is cash held by customers
– A/R  Cash 
,
• Payable is cash hoarded from suppliers
– A/P , Cash 
•C
Capex i spending ahead
is di hd
• Your cash position is reflected by the
p y
bank statement/cash ledger

71. Cashflow template
Cashflow Cur: HKD'000
Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Dec-08
Net Income 157 (258) 45 22 166 72 57 454 618 489 338 223
Add:
Depreciation 117 117 117 117 117 125 125 125 125 125 125 125
Change of WC
g
A/R (545) 2,172 (1,816) (249) 694 (374) (890) (1,246) (854) 338 890 374
Inventory 1,274 (632) 10 474 (605) (1,160) (1,339) (622) 574 880 453 1,156
A/P (803) (1,233) 784 (702) 380 1,323 1,412 706 (580) (1,063) (579) (1,062)
Others
--------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
(73) 307 (1,022) (478) 469 (211) (817) (1,162) (860) 155 764 468
Capex - - - - (200) - (1,200) - - - - -
Cash (Surplus)/Loan Required
(50) (165) 861 339 (552) 15 1,836 583 118 (769) (1,227) (815)
--------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
150 - - - - - - - - - - -
Bginning Cash Balance 150 300 300 300 300 300 300 300 300 300 300 300
Net Cashflow 150 - - - - - - - - - - -
Ending Cash Balance 300 300 300 300 300 300 300 300 300 300 300 300
===== ===== ===== ===== ===== ===== ===== ===== ===== ===== ===== =====
Sweet lemon; Sour grape!?

72. Weekly cashflow forecast
Asia Harness Week Week 45 Week 46 Week 47 Week 48 Week 49 Week 50 Week 51 Week 52 Week 53 Week 54 Week 55
Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast
10/26/08 11/2/08 11/9/08 11/16/08 11/23/08 11/30/08 12/7/08 12/14/08 12/21/08 12/28/08 1/4/09 1/11/09
Beginning Cash 226 226 441 122 422 292 292 58 258 105 146 476
VAT Receipts - - - - - - - - - - - -
Other Receipts -
Cash Receipts (A/R collections) 100 100 100 10 100 100 100 41 100 138
Total Cash Inflows - 100 100 100 10 - 100 100 100 41 100 138
Cash Payments (A/P Checks and wire transfers) (1,197) (1,919) (1,100) (1,100) (1,277) (1,200) (1,713) (1,000) (1,270) (1,100)
Payroll (200) (40) (200) (40)
Capital expenditures (188) (57)
Other nonworking capital items
VAT Payments
Tax Payments
Other P
Oth Payments t
Total Cash Outflows - (1,385) (1,919) (1,300) (1,140) - (1,334) (1,400) (1,753) (1,000) (1,270) (1,100)
Loan / (Excessive cash) 1,500 1,500 1,500 1,000 1,000 1,500 1,500 1,000 1,500 1,000
Total Intercompany - 1,500 1,500 1,500 1,000 - 1,000 1,500 1,500 1,000 1,500 1,000
Interest
It t - - - - - - - - - - - -
Principal - - - - - - - - - - - -
Total Financing - - - - - - - - - - - -
Other - - - - - - - - - - - -
Ending Cash 226 441 122 422 292 292 58 258 105 146 476 514

73. Contingency
• Challenge of Assumptions
• Sensitivity Analysis
• Backup/Compensating plan
– If plan A fails, plan B will follow
• Opportunity of Cost Innovation
曲突徙薪亡恩澤，燋頭爛額為上客

74. Execution Plan (Monitoring)
( g)
• How to measure?
• Key Performance Indicators (KPI)
– The higher the better
– Return on equity
• Key Risk Indicators (KRI)
– The lower the better
T e owe t e bette
– Overdue Debt to A/R
• L k at your IS at different dimension
Look diff di i
– Customer P&L
– Product P&L
Go fast, Walk alone; Go far, Walk together

75. A picture worths more than 100 words
p

76. • Rolling forecast
– e.g. 3 Actual + 9 Forecast
– Monitor month by month
• 5-Why
– Why the entertainment rise up so significantly?
• Why the entertainment not link to sales?
o Why do we spend so much to future customers?
 Why …..
We do budget every month

77. Application of Budget
• Commitment vs. Compliance
• Commitment generates productive
behavior without the need for monitoring
•CCompliance may result i similar
li l in i il
behavior, but rarely generates initiative.
Compliance strategies rely on external
e o ce e t
enforcement
夫禮者，忠信之薄而亂之首 ！

78. HK$'000
Review C/M Budget F/(U) %
Sales 30,000 32,000 (
(2,000) ) -6.3%
Cost of Sales 24,000 26,500 2,500 9.4%
Commission 1,000 1,100 100 9.1%
• Link the budget to
g 25,000 27,600 2,600 9.4%
performance Gross Margin 5,000 4,400 600 13.6%
16.7% 13.8% -30.0%
appraisal Selling Expenses
A&P 1,300 1,500 200 13.3%
Staff Salary 1,000 977 (23) -2.4%
• Bridge the gap Staff Welfare 100 98 (2) -2.0%
Entertainment 30 25 (5) -20.0%
Traveling 60 55 (5) -9.1%
• Evaluate the degree Others 10 11 1 9.1%
9 1%
2,500 2,666 166 6.2%
of achievement General Admin.
every month Staff salary 800 810 10 1.2%
Staff welfare 80 75 (5) -6.7%
Rent & Rates 100 100 - 0.0%
• Any remedy or Communication 30 25 (5) -20.0%
Others 20 19 (1) -5.3%
compensating 1,030 1,029 (1) -0.1%
0.1%
control? EBITDA 1,470 705 435 61.7%
4.9% 2.2% -21.8%
交數交人交自己

79. Paradox of Budget
o Meet the budget, no significant deviation
o Exceeds the budget, under-commit but
over-perform
f
o Lags behind the budget, over-commit but
under-perform
d f
Be careful! When you start the game, it will continue for good

80. How detail do we need?
Detail (Logic)
Flexibility
People need to prove they are trustable

81. In-depth
In depth meaning of budget
• A break for management to think about
next year
• To determine the corrective actions
required
equ ed
• To determine the yardstick of next year
performance
f
• To allocate resources based on certain
conditions
• To bring(force) e er bod to the strategy
strateg
everybody
Think Ahead

82. Revisit:
Sales & Cost
Customers & Suppliers
l
Assets & Liabilities
Let the figure talk on solid ground

83. Sales – the source of budget
• How to retain the existing customer?
• How to uncover the intrusion of low cost
competitor?
• I the new program profitable and cash-
Is h fi bl dh
collectible?
• Do we have sufficient/correct segmentation?
Don’t expect our employees can make customers happy if they are not happy

84. R-W-W
RWW
• Is it Real?
• Can we Win?
• Is it Worth doing?
知可以戰與不可以戰者勝

85. 5 R – Cost saving strategy
• Remove
– Why does a particular expense need to incur?
y p p
Is there a way to totally remove this expense?
• Replace
– If not possible to remove this expense, can
we replace the f
l h function with a cheaper one?
i ih h ?
One to say Yes, Two to say No.

86. • Reduce
– If not possible to remove it, is there a way to
p , y
reduce the spending?
– We should think about request for price
reduction from supplier or source alternative
supplier.
supplier
There is no repeated fluke!

87. • Redesign
– If not possible to reduce, can we re-design the
process to utilize the scarce resources?
– Kaizen should be a continuous process.
– There should be a regular review of existing process
by freshman.
– The old process creator should only act as a
information provider but not member of new
Kaizen group.
rp
沒有最好 只有更好

88. • Redistribute
– If not possible to redesign the process, can
p g p ,
we have the function to share its value to
different functional area as well as the cost?
– Maximization subject to constraint is maxim
not only in economics but also in cost saving
perspective.
Great intelligence comes from heart, not mind

89. Step forwards to your Suppliers & Customers
Suppliers Customers
Suppliers Customers
Stand still or fly?

90. Budgeting is a practice for making decision
千里之行,始於足下.民之從事,常於幾成而敗之.慎終如始,則無敗事

91. Business Integrity
gy
• http://www.webpronews.com/topnews/2004/0
7/13/the-principles-of-business-integrity
/ /h l fb
• The company need to have the framework to run
the business
• This is the basis for building trust
g
• The way applied in budgeting is part of the
foundation
• The leader of an organization must be willing to
open up to ideas for betterment
• Use budgeting as the 1st step – A foreground for
open-minded di
i d d discussion
i
A small step today, A big step tomorrow

92. Organization Culture
“It i
“I is a collective of
ll i f
–the Values – ideas about what in life seems important
– the C f
h Conformed N d Norms – expectations of behavior in
different situations
–the Artifacts – derived things or materials that abet a culture,
the culture
that influence the behavior of the members of the society
and helps them to cope with their world and with one
another; these are transmitted from generation to generation,
generation
through learning and imitation…”
Tough Empathy

93. Culture Shaping Moment:
• Every breathe you take, every move you
make, they are watching you
,y gy
• The daily words, behavior, events, and
decisions that reinforce who you want to
be
• Create experienced meaningfulness!
A learning organization

94. My experience in budgeting cycle
• A chance for me to practice and discuss
the whole business
• I need to demonstrate the capacity of my
dd h if
mindset, be bold to raise questions
• Further enhance the conviction I learn
from 5 Minds for the Future:
Disciplinary Mind Respectful Mind
o o
Synthesizing Mind Ethical Mind
o o
Creative Mind
o
百川異趣, 必會於海; 萬國殊途, 必通諸夏

95. Johari Window
A B
hers
Kno wn to oth
D C
Known to oneself
Joe and Harry suggested, be a better functioning
p rs n if you could m k p n D as l r as p ssibl
ld make pane s large s possible
person
Nobody is as smart as everybody

96. Acculturation
ees
A B
nown to employe
D C
Kn
Known to the organization
德有所长而形有所忘，人不忘其所忘，而忘其所不忘，此谓诚忘。

97. What am I talking about till now?
• Financial Statements & its construction
• Management by applying the financial
model
• W lk through the b i
Walk h h h business cycle of a
lf
financial year
• Raise questions to elicit intelligence
• N thi more…
Nothing
• But we call it BUDGETING
Early to bed and early to rise, make a man healthy, wealthy and wise

98. dicklam128@hotmail.com
dicklam128@hotmail com