Planning a budget
Davis Service Group is a large public limited company employing around 17,000 people. Its shares are quoted on the London Stock Exchange. The business is based on service contracts to source, clean and maintain industrial textiles, such as protective clothing and linens. This is across four key sectors: workwear, healthcare, hotels and restaurants, and general facilities, such as washroom linen. The company's headquarters are in London but its operations are spread across the UK and Ireland, continental Europe and Scandinavia.
Despite the severe recession of 2008-09, Davis continued to be a profitable company. This has been the result of careful budgeting. Budgeting involves making detailed financial plans for every aspect of the business, identifying risks and ensuring that managers are committed to the outcomes that they have agreed.
Budgets are forward financial plans. They show financial targets over a given period of time for income, expenditure and cash flows within a business. Davis uses budgets to plan the future use of its resources, either in the short or long term. For example, operational areas need to assess the costs of the people needed to meet production targets or the marketing team must determine costs of promoting services to increase sales. Budgets are also communication tools which allow employees to understand where the business is heading. This case study shows how the development and use of budgets contribute to Davis Service Group meeting its objectives.
Building a budget
A company's objectives budget is the overall financial plan showing expenditure of the available funds. It is driven by the aims and objectives of the organisation as well as what the organisation can actually accomplish. Many variables in a business can be budgeted. These include: * sales
* costs operating and fixed
* cash flow
* capital investment.
The budget will be based on key assumptions about likely business conditions for the year ahead. These inform the detailed operating budgets that plan month-to-month sales, activity levels and expenditure, for example, staff costs. Managers may need to accommodate unexpected changes with flexible budgets. For example, sales may be lower than originally expected, so the budget may need to reduce marketing expenditure and/or operational activities. An increase in orders may require additional recruitment costs for temporary staffing.
Sometimes managers use zero budgeting. This means that they must start every year from zero and justify all planned expenditure, rather than starting from the previous year's figures. This may be appropriate for a specific, self-contained project. In larger firms budgets are allocated for defined areas of responsibility such as: * cost centres - sub-divisions of an organisation that are a significant source of financial cost, for example, a factory or laundry operation * profit centres - units that contribute to the overall profits of the firm, for example, services to hotel groups. Budgets often cover one year but may form part of a longer term plan, such as when a business is considering entering a new market. Davis Service Group's budgetary cycle runs from January to December: * By July/August, the financial targets for the coming year are agreed. * In August/September, the budget is developed; accurate data is collected from the different profit centres from the new set of assumptions made for the next year. * In October of each year, these figures and assumptions are confirmed in formal review meetings. * By December, the full budget has been finalised at country level as well as providing the overall Group data. Davis Service Group is careful to set budgets in consultation and not to impose them on the different parts of the business. In this way, managers at all levels feel involved in the process and are more likely to feel motivated to...
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