This interview was conducted with a Financial Analysist at an Aerospace company.
What steps do you take in the budgetary process in terms of developing, implementing, and evaluating your plan?
I look at the previous year’s budget and then compare the budget numbers to the actual numbers for the past fiscal year. I look and see what the variances are (the difference between the actual and the budget for each line item). Then I prepare account numbers for each department and list the actuals by account number. Then I ask them to put in a budget number for each account. When all department budgets are complete, I look at all the expense items and review the revenue accounts, and also review the revenue accounts. Then I determine what the revenues minus the expenses would be (profit or loss). Upper-management will determine what the return percentage ought to be and then we start whittling down expenses by account numbers, reviewing revenues to make sure the percentage profit is what upper-management wants to have.
Can you tell me more about the costs of your organization: fixed, variable, direct, indirect, controllable, and non-controllable?
Fixed – fixed costs are usually contracted amounts that do not vary from year to year. An example in our company is lease payments.
Variable – the variable cost would rise or lower depending on how many pieces of equipment are produced in a fiscal year. An example in our company is communication equipment (i.e., radios that go in airplanes).
Direct – direct costs are the costs of the parts and labor that go into each piece of equipment. An example in our company is the parts required to build radios.
Indirect – indirect costs would be machinery used to build the product, utilities, and other overhead expenses.
Controllable – controllable costs are expenses that a business has power to change. Some of these in our company would include payroll and materials to build the product.
Uncontrollable – uncontrollable costs are expenses that the business has no control over. An example of uncontrollable costs in our company are State and Federal taxes and benefits legislated by the Government.
What do you do when there is inconsistency between the approved budget and the actual expenditure of a department?
Quarterly, you compare the budget to the actuals. If there was an inconsistency, you can push to generate more revenue or more likely, you would have to start cutting expenses from labor to overhead type costs.
Do you have to oversee several different department budgets? If so, how do you prioritize your time between each department?
Yes. Depending on how many accounts each department has, you will spend a percentage of your time on each department. Monthly I prepare a variance budget report which compares the budget to actuals and explains what the variances are.
Have you been a part of a large budget cut? How did you implement that?
Yes. Generally your largest expense is labor. Once we had to lay off a number of employees. Businesses cannot lose money for very long and stay in business. Cutting labor and other expenses was necessary.
What is the most challenging part of budgeting?
The most challenging part is projecting what the actual expenses and revenues will be. It is best to underestimate revenues and overestimate the expenses.
When you have a big expense once a year, do you allocate it across twelve months? Or do you add it to that month’s budget only?
If the expense is going to transpire over the 12-month period, you would allocate 1/12th of it each month (i.e., if you are leasing a facility).
When you have a variable amount for an item in your budget, how do you handle it? Do you take the mean, or just the highest possible amount for the item?
Most businesses will come up with a variable percentage based on past years’ history. They will add up all the variable expenses and multiple the percentage assigned to each department on a monthly or quarterly basis. An example of this might be upper-management salaries.
Do you use a zero-based budget or do you use last years’ numbers as a basis so you can increase or decrease the numbers from there?
We use a zero-based budget. This means we start with zero and need to justify every expensed dollar requested.
Do you give budgeted salary increases based on a percentage for everyone? Or do you give performance raises, and do you budget for those raises?
We give performance raises based on yearly evaluations. There will be a calculated amount of funds for raises. This will be divided up based on performance.
Who is involved in evaluating/implementing changes to the budget?
The CEO, the Finance VP, the CFO, the Controller, and the Budget Director all work together to develop an annual budget including evaluation and implantation of changes to that budget.
Do employees have access to the budget? Is the budget transparent to everyone in the department?
No, the Director of each department oversees the budget. Not every employee is involved in the budget planning or development.
What I learned from this interview:
Budgeting is a very complicated process to oversee in a company. It takes a specialist with training and an eye for seeing the overall picture. Good budgeting takes time to check and double check the numbers. One small mistake can play a huge part in a financial mishap. I also didn’t know how many people were involved in a financial budget plan. Everyone from the CEO, the Finance VP, The Controller, etc. all play a part in evaluating where money should be spent and where it can be shaved off. I have gained an enormous amount of respect for those who deal with finances in a business. It is a complicated matter that I don’t foresee myself being very involved in anywhere in the near future.