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BUDGETING

The Employee-Run-Budget Work Sheet

An up-close look at one company's budget work sheet used to support open-book management techniques.
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When Steve Wilson finally opened the books to employees, he had one proviso: They had to do the budgets. Cost control is great now

Those two years were probably the worst years of my life," says Steve Wilson about the period when his fast-growing company almost self-destructed.

From the outside, things didn't look so bad for Mid-States Technical Staffing Services. In 1990 the Davenport, Iowa, engineering service opened two new divisions -- one in Madison, Wis., and another in Omaha. Since Mid-States' inception, in 1986, annual sales had grown to $4.6 million, and the company was more profitable than ever.

But Mid-States was suffering from growing pains. In 1991 Wilson's top managers were engaged in a power struggle. Employees picked sides. Soon, revenues and profits began to slide, and turnover rose to more than 30%. "My sales manager and operations manager would fight about which projects to do, how contracts should be worded, how much commissions should be," says Wilson. "I'd make a decision, and one side was inevitably unhappy."

He figured there had to be a better way. He began reading about "open-book" management -- in which a company's financials are regularly presented to all employees -- and after visiting an open-book company, he became convinced that he could salvage Mid-States by sharing the company's numbers and teaching employees how to make their own decisions. His first goal was to remove himself from the disputes. "I thought, 'I'm not going to make any of these damn decisions anymore. I'm going to teach you to do it yourselves, because this is going to kill me."

Mid-States was in for a complete overhaul. After attending a seminar on open-book management, Wilson and his key managers created a three-year strategic plan built around employee involvement. Now what Mid-States needed was a tool to keep employees focused on the company's finances so they could start participating in decision making. The chief executive and his operations officer came up with a simple, user-friendly work sheet for the employees to use to manage the fixed-cost line items in the company's budget. Then they tied a bonus program to profitability to reward savings.

Wilson got the ball rolling with a one-day financial-training seminar for the entire staff, followed by another 20 hours of open-book workshops. Afterward, all nonmanagement employees were asked to pick a budget line item they would like to be responsible for, and Wilson and his managers matched those choices with items employees were involved with daily. Once their budgets had been approved, employees would be free to buy. They would regularly track actual expenditures against the budget work sheets, noting any discrepancies on the sheets.

Wilson's plans met with plenty of fear and skepticism. "The employees' first reaction," he says, "was, 'None of us have a clue how to create a budget." So Wilson had his support staff show how to price items, where to find vendors, and so on.

But many workers welcomed the opportunity. A group of designers measured the paper wasted by their blueprint plotter and proposed that the company invest in a laser printer to handle small jobs. Says division manager Jim Kieffer, "It caught me off-guard that they'd be concerned enough to figure out the square inches wasted on a roll of paper."

The launch of the first "bottom-up" budget took months of coaching (and about 90 hours of managers' time) over a six-month period. Three budgets later, the process is much smoother. And the results are persuasive. Explains Wilson, "Employees were always saying, 'Why doesn't the company do this?' Now every issue comes down to a financial matter. The biggest payoff is that there are fewer disputes over day-to-day spending decisions." Also, expenses are running 15% below their 1991 levels now that 17 people control costs. That's helping profits:for 1994, net pretax income was expected to come in at 11.3% of $5.6 million in sales, up from 3.5% three years earlier.

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Sample Worksheet (italics entered by employee):

Division: Admin Date: 12-12-93
Acct #: 3490 By: Sandy Moeller
Description: Printing
# Budget Item Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Tot
1 Mailing labels 40 40 40 40 160
2 Graph pads 500d 500
3 Non-window envelopes 150a 330 330 810
4 Window envelopes 180b 240 420
5 Letterhead 340 340f 340 1020
6 Letterhead (Dubuque) 0
7 Time tickets 150 150e h 200 150 650
8 Misc (PT request, business & note cards) 100c g 50 60 50 260
9 Half-sheet letterhead 100 100
Totals 40 100 920 540 480 340 50 540 0 670 200 40 3920

Notes:

Admin pays for all printing that is NOT for a specific division (except letterhead).

ex. ALL letterhead, envelopes, time tickets, business cards without employee names, etc.

Mass mailings are planned for February and October. (5, 3)

Admin plans to hire new staff member in February. (8)

Should have enough Dubuque letterhead to last through 1994. (6)

a + b = $270

c - $20

d - $490

e - $70

f - $330

g - $55 - business & note cards

h - $87

Steve Wilson's guided tour of the employee-run-budget sheet:

One of the staff's biggest concerns was its ability to make predictions. I was afraid that might cause people to pad their budgets. But they agreed to budget as accurately as they could without padding, and so we added an item called "miscellaneous unplanned" to the income statement. The first year, they got a 5% "slush fund" allowance on the total dollars they budgeted. They used 1.2%. Last year they got 2%, and they used less than 1%.

The form is kept really simple, so it's less threatening to use. We list enough information that each division manager knows whom to ask about discrepancies.

By listing the items, it's easier to identify when they should be purchased. It's better than budgeting a lump sum each month to be spent on whatever comes up first, because you might discover later that you blew the whole budget on one item.

Senior designer Brian Farnum:

"Morale has really increased around here. The biggest thing is the bonus program. It keeps employees trying to learn how to budget a lot better."

Occasionally, you need to purchase something before or after it was budgeted. If so, a notation should be made to help with next year's budget. If stationery was budgeted for a big printing order in February, say, and we used it all up doing mailings during Christmas, employees would have to buy more. If that occurs two years in a row, they would know that they'd have to either stock up on stationery in November or always budget for the fact that after the holidays we'll be short on a lot of things.

Here [ Notes] you might find the past price of an item or the expected price increase for the next year. Each note should be numbered to reference the budget item it corresponds to. This kind of information is often shared at our monthly meetings. Once, an employee had read in the newspaper that the utilities had filed for a rate increase. So the person who's in charge of budgeting utilities wrote it on the work sheet and budgeted for the expected change.

Budgeters [ footnotes] make note of anything that may be different from what they originally budgeted, such as price increases or items that should have been budgeted for but were not. So when the employees are sitting in a review meeting and somebody asks why they overspent their budgets in July, they'll have their notes there to update everyone.

Steve Wilson explains his rationale for having employees do the budgets:

"I shouldn't have to make decisions about whom we're going to buy paper clips from or about whether we get 1,000 sheets of stationery printed or 10,000 sheets printed. Many people push those decisions up the chain because they're afraid to pick wrong. The reason they're afraid is that nobody taught them how to make a good decision."

The monthly totals are entered into our financial budget for the year. Clamping down on the monthly spending is not something employees take lightly. They see how dollars saved go directly to the bottom line, and they get 35% of everything they save. When they budgeted last year, they predicted that they would receive five bonus payments during all of 1994. We ended up paying out nine. Those bonuses equaled an average of 25% of employees' total income.

The "Tot" column allows us to see how much has been budgeted for each item. Employees reconcile the budget on a monthly basis, and that information is fed into the income statement, which compares the actual dollars spent with the dollars budgeted. The managers review it monthly and post it on the bulletin board, so employees can see their line item showing how much they said they would spend, the profit generated, and the bonus earned.

Administrative associate Sandy Moeller talks about the joy of budgeting:

"Every day's really a challenge. I've picked up lots of additional responsibilities. I feel as though I'm needed, and I take real pride in that."




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