An Electrifying Case in Budgeting
Imagine that you have just been appointed as general manager of a newly constructed power plant. Further imagine that you have considerable flexibility in running all facets of the plant. But, your compensation and ultimately your job will depend on the financial success of the venture. What is one of the first tasks you will undertake? Think about this question for a few minutes . . . .
You have probably concluded that you need to quickly get a handle on the finances of the business. Your mind likely raced over a number of daunting challenges. How many customers will be served? What are the peak load electricity needs for these customers? What rate can be charged and will it be enough to cover expenses? How much fuel will be necessary to produce the electricity? How many employees must be available? Will the cash supply always be sufficient to meet cash outflow requirements? Furthermore, once the answers to these questions are in hand, how will actions be executed and controlled? In other words, once you decide how much fuel is needed, how will you make sure it is actually purchased (and no more!)? Once you conclude on the staffing plan, how do you put it in place? What will you do about expected periods of cash shortages?
Perhaps the above is simply too much to deal with. Let's assume you decide instead to spend all your time on marketing and personnel management. You join every possible community organization to get the word out about your company. You engage in countless publicity efforts. You attend every employee event, and you get to know most every employee on a personal level. In short, you do a marvelous job of selling electricity and motivating the employees to pull together as a cohesive caring team. Let's assume your efforts sold lots and lots of electricity! Unfortunately, the sales growth was such that the local natural gas pipeline could not deliver enough fuel to your plant to meet your demand. This caused you to truck in more expensive fuel oils to produce the electricity. In addition, the Transmission Department ordered a huge supply of replacement transformers just in case there was a bad electrical storm. Unfortunately, there was an ice storm and the Transmission Department did not have funds to acquire replacement wires that were destroyed. Your suppliers became concerned, as they sensed that your revenues might be inadequate to cover the added fuel cost and down-time due to the ice storm. As a result, vendors began to insist on shortened payment terms, thereby crunching the company's cash supply. To solve this problem, it was necessary to reduce the workforce, which generated ill will among all employees who now believe your caring attitude was anything but genuine. The disgruntled workforce became less responsive to the customers, and those customers began shifting to other electric providers.
Let's rewind this unfortunate scenario, this time utilizing a plan. Careful studies are performed to determine the most efficient levels of production for the plant, in conjunction with an assessment of customer demand. The expected sales are translated into a schedule of expected daily electricity production. Based on this information, long-term supply contracts are negotiated for natural gas supplies. Staffing plans are developed that optimize the number of employees and their work times. Contingency plans are developed for a variety of storm/catastrophe scenarios. Periods during which cash might be tight are noted and a line of credit is set up with a local bank to cover those periods. All of these activities lead to a projected outcome. Once the plan is in place, your managers will be authorized to act consistent with the plan, without having to clear every detail with you. It will be your job to monitor operations and take corrective actions when you observe deviations from the plan. The remainder of your time can be spent on public relations, employee interaction, and so forth. But, you are no longer flying blind; instead, your entire team is steering toward an expected outcome.