Professional Approach to Transport Budgeting (Part -1 cont.)

Budgeting would be easier if there were no seasonal fluctations. How do you accommodate them in your budget submissions?

Let’s get the Conversation going

As noted from the foregoing extracts; academic views on budgeting lie at the very heart of managing successful businesses. However we need to keep in mind that, while appreciating the valuable contribution these authors have made, this is a “Curated Conversation” (discussion) and not an academic exercise, so we value all points of view on this Topic.

Budgets certainly mean different things to different people for instance: a housewife’s budget is very far removed from that of the supermarket where she shops but both are intended to provide a plan on how best to benefit from a trading transaction.

All too often budgets are prepared under coercion by those who experience the annual ritual. Essentially it becomes a disparity between those responsible and tasked with accomplishment of the mandatory outcomes and management, which is utterly opposed to spending money.

Company accountants/financial managers are mostly referees who field the opposing views of getting the job done, while achieving the anticipated profit to satisfy shareholders expectations. From fleet management experience, I can assure you that your carefully prepared figures get manipulated before inclusion in the company’s consolidated budget, as fleet managers are renowned “big spenders”.

So just what are we focusing on here? It begins with leading the conversation to the fundamental challenges of accepting that budgets are not simply an accounting exercise designed to create conflict within the management team – they are THE most critical mission within the organisation! Budgets chart the course the “ship” will take for a forthcoming financial period.  

Surprisingly budgets, no matter how well engineered, are mostly sheer speculation (plus a little bit of research) about how management predicts the future trading period – and this is where things tend to go wrong. What puzzles me, is when they do [go wrong], they are speedily “adjusted” in the quarterly budget review process, mostly by demands to cut expenses or drive up sales revenues, before researching why the situation exists.  

Budgets mean different things to different people

  • Some see it as a “math exercise in number crunching”

  • Others see budgets as: “A quantitative expression of a plan for a defined period of time. It may include planned sales volumes and revenues, resource quantities, costs and expenses, assets, liabilities and cash flows. It expresses strategic plans of business units, organizations, activities or events in measurable terms.”However for the purpose of this conversation we focus on this latter explanation.

Budgeting Techniques

As we focus on budgeting being a plan of action for the forthcoming business period, the ability to budget effectively is crucial, both in terms of performance and profitability as without an awareness of cost relative to income, it is a pointless exercise. However this is where most budgets fail to provide meaningful information, while insufficient attention is paid to analysing both negative and positive variances and then take appropriate action to correct the situation.

Are positive variances in one division of your company creating negative variances in another? A prime example of this is when a decision is made to reduce staff cost by cutting back on overtime and/or retrenchment, thus affecting service delivery in another. For instance, in the road transport industry it can lead to lower asset [vehicle] utilisation, resulting in an increase in fixed cost and loss of revenue.

Irrespective which of the three budgeting techniques is employed (incremental; zero-based budgeting or flexed budgeting) unless correctly applied can lead to serious disruption of otherwise profitable companies.

In my view, while financial accounting is compulsory under the Companies Act, it is not as ideal as is management accounting in controlling road transport operations. One such example is the way vehicle depreciation is treated.  In the former, it is regulated by the Receiver of Revenue. In the latter it’s projected over whole vehicle economic life. Also, accrued maintenance expenditure is not accepted in financial accounting, but in management accounting it’s factored in over the life to date expenditure. Furthermore, budgeting vehicle operating expenditure does not coincide with calendar month/financial accounting periods, but rather life-to-date expenditure. Having said that, the most confusing thing of all is budgeting vehicle expenditure in kilometre (distance). Value assessment is a function of cost per unit of revenue produced – not distance! I find great inconsistency in expressing cost in km and revenue in R:C.  After all, clients are billed in R:C not tons, M³ or km.

Essentially budgeting should be an exercise in RATIO ANALYSIS. What we want to achieve here is a simple analysis of cost expressed as a percentage of revenue for each expense control point. For example, would fuel consumption, expressed as a percentage of revenue, mean a hell of a lot more than l/100km or km/l? In other words, would budgeted fuel consumption for each contract, expressed as a percentage of revenue, tell you what you need to know to accurately monitor this expense item? If nothing more, it would provide management with the opportunity to monitor up to 40% of the cost per rand of sales revenue. Also, it would provide quick and simple information (not data) about how accurately this budget item was estimated or researched when quoting the rate.  

If this concept makes sense to you then don’t miss my next post where we really get down to what road transport budgeting is all about. Thank you for following my drift this far.

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Johannesburg, South Africa