Beating the Budget Blues

Budget Blues

Ahhh… the annual ritual

Most Purchasers are called upon each year to prepare a budget for the products they buy. Given the uncertain marketplace, estimating Suppliers' prices is a tough job. It's easy to go wrong, easy to make decisions you'll come to regret.

This article will help you survive & thrive in this career minefield.

Guessing the marketplace

Don't read this article unless you agree with the following:
At any moment in time there is an even chance that the price of a commodity will next move up or down.

Suppliers' prices depend heavily on the market price of the commodities & services their products are made from (e.g. paper for packaging, natural gas & oil for chemicals & plastics). To a large extent, predicting Suppliers' prices means predicting the cost of commodities.

The simple fact is that marketplace behavior is truly beyond calculation: there are too many variables & unknown factors. You are forced into the realm of informed guesswork, with only a 50/50 chance of being right about the direction of a cost trend, let alone the amount!

So what approach should a Purchaser take?

Despite the uncertainties it is possible to confront the difficult task of budgeting using a well informed, thoughtful, team approach.

Rather than taking on all the responsibility yourself, turn budgeting into a collaborative process.

Why? Because teamwork usually produces better results, especially when uncertainty is involved, and because responsibility for such financially important decisions should be shared.

Here's a recommended six-step process.

1. Gather & organize the data, prepare graphs & charts.
2. Chair a meeting with your colleagues.
3. Present the facts.
4. Discuss various ways to interpret the numbers.
5. Lead the group to a consensus on key budget items.
6. Publish minutes of the meeting.

You should aim to be seen as the person best informed about the marketplace, who presents & explains the facts, and who leads the organization through a structured process that achieves well considered and well documented results.

(You may want to tailor the process to suit your organization's culture: for example, after step 1, meet with your boss or a colleague in Finance to plan the next step.)

At the meeting

Use graphs & charts to present cost histories. Propurchaser data is ideally suited for this.

There are many methods of projecting future costs, each with particular strengths. For example: you can base your calculation on 6 months of data or 12 months; you can choose to exclude the highest & lowest values; and you can choose to weight the most recent 3 months more heavily in the calculation.

Be sure to focus on the process rather than the numbers. Think of your job as leading the budgeting process rather than crunching the numbers. Getting people thinking & involved is more important than the math. Solicit everyone's input: the contribution of different points of view is always valuable.

Example using aluminum

A Budget Chart

Against a background of 12 months of aluminum costs, the graph shows the results of five common calculation methods.

Which one you choose will depend on the collective wisdom of the group you have brought to the meeting.

Peer interaction is valuable at this point, especially if you want to add inflation & contingency factors. For example, there may be compelling reasons for hedging certain purchases the CFO knows about; or someone may have information that causes you to increase the contingency factor.

It is in forums like this that risk can be best assessed, and decisions such as hedging with futures contracts or pre-buying large quantities can be taken.

When a decision is reached, make notes for future reference, including the budget estimate itself, and the historical data, formula, & assumptions behind it. The minutes should provide a clear record of the decisions taken and their rationale.

It's good for your career

Managing this process will not only beat the budget blues - it is likely to give your career a boost. Senior management will see value in the process you have introduced, and in the background knowledge & data you bring to the table.

Most of all, they will appreciate your ability to lead the team through a disciplined process to a logical conclusion.