Budget Cuts

This case study illustrates how a Wholesale Butchery used budgets to enable it to meet business objectives related to financial performance with a view to achieving its vision: to become 'the undisputed local leader in Butchery.' The business had several important objectives related to its vision including:

- being the employer of choice they employed over 22 butchers and staff
- being a local food industry high performer
- becoming an indispensable partner to customers
- being a responsible organisation and a positive force in the community that their employees live, work and make their products
- remain focused and innovative.
- Retained market-share, but were too busy working in the business and didn't know their costs.

The Butchery met with us at Zoom in Business and identified that they needed a Budget. Budgets help a business owner meet businesses objectives in a planned forward-thinking way. More often than not, budgets are created through consultation with all areas of the business, to achieve a shared understanding about objectives for the future visions of their teams. And, you don't have to be an expert or have employees to develop a budget.

To be effective, the butchery owners recognised that a budget must be challenging but also realistic, so that it be achieved and is worth working towards. The owners decided to employ us to develop their budget, in consultation with their accountant. Although this cost was around $3,500, they felt that having this report started properly was essential to the ongoing success of the business.

Where are the cost savings?

One important element that the we immediately identified were areas of cost savings which could be re-invested to continue to grow the businesses power-brands, like their signature Hickory Smoked Prime Ribs and Christmas Hams. They also wanted to develop their people with any excess funds they understood that finding qualified butchers was one of their biggest challenges.Reducing costs by eliminating waste is vital in the modern food industry which is driven by price competition and consolidation in the wholesale and retail sector, and the budget was designed to counteract needless waste. The butcher specialised in wholesale and selling its wide range of products to a variety of different customers; ranging from the corner shop, to the franchise and large supermarket chains. In doing so, it incurred:

• raw material costs and production costs to manufacture the meat products to sell
• marketing expenses associated with any promotional activity including media advertising
• selling expenses involved in selling its meat goods into supermarkets and other customers
• distribution expenses when transporting the product to the customer.

Find a starting point

The starting point for the owners of the butchery was to forecast the likely sales based on historical information in conjunction with both theirs and 'third party' understanding of the business environment. This indicated what quantities of products need to be produced and the timing of manufacture.

Fill in the details

With these figures in place, budgets were then allocated for costs relating to sales, marketing and administration, and figures established for the likely costs of storing and transporting the goods (i.e. distribution). These details provided data for relevant departments (e.g. sales, administration etc). Figures were then inserted for possible capital expenses, like new equipment or locations. Our final stage of the process was to construct a budgeted profit and loss account.

Once the budget was set for the butchery, it became the mechanism through which the owners, managers and staff monitored progress. It's so important to remember that the budgeting process is a cycle of ongoing review and monitoring. Every month, the owners of the butchery used variance analysis to identify deviations within the monthly result which was the difference between the budgeted figure and the actual figure. Variances can be favourable or adverse. For example, if actual sales income was greater than budget, this would be a favourable variance. On the other hand, if actual expenses were greater than budget, this would be an adverse (or negative) variance.

By monitoring performance monthly, it is possible to take appropriate corrective action or justify the new level of spending.

We attended periodic reviews with the owners of the butchery and their Accountant, which allowed for a forum within which any feedback can be given on current actual spend vs plan to ensure that it was possible to re-forecast the plan or alter current activity.

• Single loop feedback involves making correction to current activities in order to 'get back on course'.
• Double loop feedback involves amending the original plans so that they more accurately reflect current business reality.

The ability to amend the budget is an important aspect any business. The butcher's operating environment will always be subject to rapid change, for example, in consumer demand patterns, in production technology and in competitor activity.

So they needed to remain flexible and ready to respond to any challenges that it faced. Any one budget may be altered a number of times during a year, although there would always be a considered reason for doing so. In the modern business world the rate of change is such that it is impossible to have a clear picture of the future. Inevitably, it takes time to build the 'big picture' from lots of small, shifting scenarios relating to individual cost centre budgets. Budgeting may be difficult, but it is essential for a business to stay in control and 'ahead of the game'.