Business and Marketing

How to begin developing an assumption base? Examine each type of cost or expense individually. Each contains its own specific attributes, and those attributes dictate the assumption base. Telephone expenses, for example, vary with the number of people in your department, pending rate increases, changes in the system you use, or the number of long distance calls your department makes each day. Office supplies can be broken down in a similar fashion; vendor price increases, employee usage, and purchasing patterns all dictate both the amount and the timing of expenses at least for the purpose of assumption.

Remember this key point: The purpose of developing assumptions is not to specifically guess at future expense levels, but to arrive at a reasonable standard against which the level of future expense can be judged.

Some expenses can be budgeted from an assumption base dictated by contract, such as rent or equipment leases. For these types of expense, budgets are incredibly easy. Since there is no varying level to watch for, there is no need for control, nor is there an opportunity to reduce expenses through monitoring and correction. One exception: when market expansion could dictate additional facility or equipment leasing. In that instance, careful planning, control, and pre-approval should be part of the plan and budget.

Other expenses are entirely unpredictable, and present a much more complicated budget challenge. For example, building or equipment maintenance cannot be predicted by amount or by timing. The only fair way to budget is to set up a reserve in the budget, and allow expenses to fall against that reserve. The reserve amount can be established based on historical maintenance patterns, the age of equipment on hand, or plans to replace equipment during the year.

It would be unreasonable to expect people to spend weeks preparing a document that will never be looked at. If you are a leader of your company, you certainly would not want to waste employee time and effort in a meaningless exercise. If you are a department manager, there is certainly more pressing work to be done. We all want to believe that the work we perform has value.

But as unreasonable as it is to ask others and ourselves to waste time, often that’s what budgeting is all about. We stay late every night for weeks and place similar demands on subordinates. We rush to meet deadlines, only to discover that the whole thing is being revised. We make up numbers without any logical reason, and they are accepted without question.

These are the reasons budgeting causes such dread. Everyone knows the budget is a useless waste of time when it is prepared under the usual method. You can change this, however, by suggesting to your management that the budgeting philosophy be changed-that it can be used as a profit center rather than as a waste of time. Your company is constantly looking out for new ways to improve the bottom line. Yet few people realize that the budgeting process itself can be used as a profit center.

The usual process looks like this: weeks of discussion, filling out forms, more discussion, more forms, and, way beyond deadline, a “final” budget. Of course, that final version is changed yet again, so it’s nearly the end of the first quarter before the budget is accepted. In some companies, the budget for the new year is barely finalized when six-month revision work starts.

There is little if any follow-up on the budget. Once the budget is done, there are no meetings to discuss variances and their causes. Or maybe causes are discussed, but no one takes any steps to fix the problem. So it goes on, until the next revision deadline or year-end.

What is wrong with this description? It is not budgeting! It’s only filling out forms and passively finding and acknowledging problems. Lacking are the controls and actions that bring budgets to life, the follow-up, the investigation, and the reversal of discovered negative trends. Without these steps, the budgeting process has only gone a fraction of the way toward achieving its intended purpose.

After finding dependable information, below are guidelines for broadly verifying information used in analysis within your own department:

• Use information you developed yourself. To be completely in control of your own analysis, you may limit source information to that developed within the department. The occasions when you can reasonably do this will be rather limited. Using only your data is practical when your analysis is limited to departmental factors.
• Compare your information to other sources. Many forms of information are easily verified by checking with a second source. Also, the existence of a second source could eliminate unnecessary research for your analysis.
• Review methods for reporting change from one period to another. Be extremely careful in developing any form of analysis involving reporting of changes in factors from one time period to another. There is a vast difference between reporting actual change and degree of change; some methods may distort the truth rather than represent it.
• Be fair. Avoid selecting only that body of information that supports your own bias. Because you are human, you are subject to human error. One form of error is to seek out information that supports the conclusion you have already drawn, or that you would like others to draw. You may do this unconsciously, even when struggling to remain as objective as possible. A good analyst will always remain open-minded to the possibility that basic assumptions are flawed. No one likes to admit this, especially if a number of hours have already been invested in preparing the analysis. But remember, it’s better to catch the error before making a request based on flawed data, than to proceed knowing your claim is wrong.
• Represent the other point of view to add credibility to your report. A decision maker will be impressed by a comprehensive and well-research report. The same decision-maker will be even more especially impressed when you go the extra step: playing devil’s advocate and pointing out arguments against what you’re recommending. This is a powerful technique for strengthening your argument. By presenting arguments against your ideas before anyone else has the chance to do so, you defuse the point, show why and how it’s flawed, and then direct attention back to the argument you really want to make: why your idea should be given approval.
• When results are interpretive, say so in your report. Never let it be assumed that the numbers you present are absolute. If you’re using estimates, disclose that fact in a way that there can be no mistake. And if the numbers were developed from other data in an interpretive form, say this clearly.

In business situations, we often confront moments in which information is used in questionable ways. There are so many possible interpretations of the same sets of raw data that any number of results could be possible. How do you know whether you’re interpreting information correctly? And how do you know whether you have the right information to begin with?

Historical Information
Historical information is all around you. Your department’s budget is one form of historical financial information. Some data will be non financial. For example, your employees have executed a specific number of transactions, worked varying numbers of hours, or used an office machine at an increasing rate over the past year. All these historical facts can be accumulated, organized, and used in requests, analysis, future budgets, and reports you generate.

However, remember: It’s a mistake to take too much comfort in consistency, especially at the expense of accuracy.
Historically based information may not serve your purpose completely. In many situations, an analysis may need to combine historical with other forms of data. Assuming that your analysis will be reviewed, perhaps even challenged, by others will help you to develop valid arguments and explanations.

This is the ultimate test of analysis, even when no one else will ever see it. Would you be able to support your conclusions if discussing them with someone else? How did you define and then collect your raw information? How was your analysis developed? Was it manipulated to create the outcome you wanted? Or did you test and question it to ensure that your study was fair and objective?

It’s a good idea to build a source file of recurring factors in your department. You probably need to develop your source file over a number of months. Correctly developed, this file can become a valuable collection of intelligence, to be used later in many ways.

Validating the Ratio
In many companies and departments today, invalid analysis is being cheerfully performed but never checked. Why? Because there is no means for finding out that the analysis is misguided. No one ever acts on discovered information coming from the analysis. If no one responds, what is the point of doing an analysis and discovering that something is wrong? A key point: The analysis is worth doing only if you and others are able to act in response to what you discover.

The response is where you discover whether or not your analysis has any merit. If your analysis shows a negative trend and you take action to correct it, you would expect to see results. However, if those results don’t occur, either the action you selected was ineffective, or the trend itself is not accurate.

If you are asked to perform an analysis, especially one that is part of a recurring routine, but no one ever acts on what it reveals, resist doing the task. It’s a waste of time. You might not have the power to simply refuse, but there are a number of steps you can take:
1. Eliminate the work itself. Suggest cancelling the routine. There is no value to creating important information no one uses.
2. Recommend the appropriate actions. Suggest actions others might take. Point out the problem: The information is important, but no one is acting on it. One way out is to suggest ways the problem can be solved.
3. Take over and do what’s needed. Volunteer to take the actions yourself. If no one else wants to do anything in response to what your analysis reveals, take on the job yourself.
4. Reduce the time commitment. Suggest completing the task quarterly instead of monthly. This at least reduces your wasted time by two-thirds. If you can’t completely eliminate a useless task, at least do it as little as possible.

After an analysis has been done several times, you will be able to audit your work. Ask yourself: Do the trends reveal what we’re looking for? Are the ratios dear and do they convey information to others? If not, how can they be changed or replaced? To validate the trend, check indicated actions against the trend itself. Do you see a change in direction as the result of changes you have prompted?

The validation process can now be undertaken. Did the changes you suggested reverse the emerging negative trend? Did the number of days required to collect outstanding accounts decline and stabi¬lize? If they did, it indicates that the ratio is valid, that it does give you valuable information.

You will notice, however, that validation can only occur if actions are taken in response to what the ratio shows. If there is no response, there can be no validation. A lack of response validates only one thing: that the analysis itself is a waste of time and will continue to be unless someone changes the situation.

Short-range marketing planning enables the marketing manager to optimize volume and profits with the products or services available to him and with market conditions as they are expected to be in the near term.

Long-range planning of marketing, on the other hand, provides the opportunity for the marketing manager to influence the growth of the company in terms of market conditions of the future. Because long-range planning is a truly corporate management responsibilities, we approach this subject from the viewpoint of the chief executive. The important role of the marketing manager is discussed within the context of overall corporate planning.

Let`s review the reasons for long-range planning, the four principal avenues to increasing profitable growth, the ways of organizing for long-range planning, and approach to long-term planning.

Management`s Dedication to Profitable Growth

One thing that all corporate managements have in common is their dedication to the profitable growth of their companies. Every chief executive who has been on the receiving end of letters from stockholders knows the incessant pressure for improved earnings. Even if management were inclined to be satisfied with the company`s progress, stockholders would never allow it to rest on its oars. But management had no stockholders, it would still work for profit improvement.

These alternatives are also open, of course, to the other, more powerfully financed and organized enterprises; but for the moment, let us consider the small independent shopkeeper`s marketing problems.

In a field of fast-repeating products, standardization -uniformity of brand-types within each product category- has encouraged the building up of chains and the consequent exercise of bulk-buying power to obtain a price advantage over the small independent who cannot buy on such bulk terms; they then aim at high-volume sales on the basis of competing on price at retail. Resale price maintenance (RPM) -that is, the system whereby manufacturers supplied only on condition that stipulated retail price was maintained- has virtually ceased to be fully effective in large areas of retailing and this, together with the bulk-buying strength of the retail chains, is what has enabled these large retailers to use price as a weapon in the competitive struggle.

Some small independents complain that they could not buy a product at the price a chain store sold it at! This is the measure of the independent`s problem.

The word “standardization” used here in relation to brand types was not meant to be interpreted literally that products of different brands were in fact the same! The effect of national branding has been to assure the comsumer that, wherever he bough, there would be the same range of choice available. A range of branded soft drinks, of razor blades, in effect, the same range of choice whether the shop was in Birmingham or Bristol, Leeds or Liverpool -more or less.

Premium position for for shops, the so-called “high-street” sites, can give the retailer a special type of unique selling proportion, and in recent years this line of attack has been followed to such a degree that there has been a variable battle among the multiples for premium positions. But these premium positions are costly -made more so by the competition for them, of course, and they must therefore be made profitable by obtaining high turnover or high profit margins.

The rental of premises can be regarded as a cost of obtaining a selling advantages. A single retailer with only one shop, and in a merchandise field where he appeals to a limited and discriminating market, can still construct a unique selling proposition for himself out of his selection of stock items and his own buying skill which, in turn, will reflect his perception of his customers` attitudes.

For the mass market products, however, the retailer who is not strong enough to aim at the high turnover needed to sustain a High Street position, must go in for either a form of product differentiation such as a special service enterprise attached to the shop (for example, a beauty parlor attached to a pharmaceutical toiletry shop), or a positional advantage (a semi-monopoly) such as a site in a new building development or air terminal, or be lucky enough to find a convenience site in  a poorly-shopped area where he has few, it any, direct competitors and is far enough away from a shopping area to make it too much trouble for customers in the vicinity of his shop to go further afield.

Continue to Premium Position For Shop and Single Retailer -2