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Introduction Deepite the severe recession of 2008-09. Davis continued to be a profitable company. Tris has been the realt of careful budgeting. Davis Service Group is a large public mited company empioying_ Budigeting imolves making detaied francial plars for every aspect around 17.000 peopie. Its shares are quoted on the London Stock of the business, identifying risks and ensering that managers are Exchange. The business is based on semice contracts to source, committed to the outcomes that they have agreed. ciean and maintain industrial textles, such as protective cbothing and linens. This is across four key sectors: workwear, heathcare, Budgets are forward financial plans. They show fnancial targets hotets and restaurants, and general tacilities, such as wastroom over a given period of time for income expenditure and cash Inen. The compary's headquarters are in London but its flows within a business. Davis uses budgets to plan the future use operations are spread across the UK and Ireland, continental of its resources, gither in the short or long temn. For example, Europe and Scandinavia. These are managed by two separate_ operational areas need to assess the colts of the people needed companiest: Sunlight in the UK and Berendsen on the Contirent. Io meet production targets of the marketing team must determine Suntight is the market leader in the UK; Berendsen is the market_ costs of promoling services to increase sules. Budgets are ano leader in Norway. Sweden, Denmark and Holand. Sales for the commuication tools which alow employees to understand where oombered group in 2008 were worth 5954 milion. Cay financial the businees is heading. analysts have forecast that 2009 seles will be at least equivalent to the 2008 level, if not modestly ahead. This case study shows how the development and use of budgets contribute to Davis Service Group meeting its objectives. Building a budget A company's objectives budget is the overal fnancial plan showing expenditure of the avalable funds, t is diven by the aims and objectives of the orgarisation as wel as what the organisation can actually accomplish. Many variables in a buaness can be budgeted. Losindra puozppe innow oq pacu syed sacp is drove vxp chorg jesso ay bupnoid we pos to ay Latueyp of fant spocu nupporo an woy suatepeng Grunuoddo aun p scenuerpe esen tuedwos as or aporpen ucyevado Apure; we uone isvquaded jo woie paugap ry payesore Suppllers What is happering in supplier makete? For examplet, what will be the effect of Fas East imports on prices of workweer? What is the impact of increases or reductions in Lelity prioos fonergy and water)? How wht exchange rates alfect coets? Davs Service Group oflen constructs two or thoo posidito scenarios so it can andyse the eflects of tavounible and less tesourable outcomes on the bushess. The ilustrative dats below highights the eftect on profit of this approache Soenaro A Scinavo B (with rew compotitod Varianoes may be tavourable (better than expected) or acterse (worse than expected. Small varances are inevitable and uaculy not signticart. A key task of managers is to watch for variances that ase unerpected, eitter in thet size or timing, and taks action accordingly. Maragers goneraly tocus their energy an these 'ecceptard'. For eample, the weoher cal cave on inespected varance for Daves Sorvice Groupla bushess. June and Jly 2005 "al dita a dentrative any Were wam, arny monts n the Uk: the hote and satariant indestry was buty and therefone the lauindres and ther stalt wite in Scerano A. Davis noreases market thovo and ovenues. busy. This was followed by a wet Auguat. The number of people The lagger volumes and rolatively amal increase in cocts would going on holdiy fell and reouled in reduced inen servoos. The gre incresced profits. In Soeviano B. a compector cpens a new inock.on elsect of toduced traffic in the hold ind restrurart ooets wosid noed to be reduced to meet the gie. Adverse varianoes prompt invetigstion nto what has gone wrong. They moy rogesti: - Urealssic budpeting budget data may need to be texsed or flowed - a falure with port of the process (ing misced targets by sales Using budgets forcels this neods mosedate moragenent attention Typical budgot stabemerts are given iar the Tecties budget K - a crangs in the exteend efvirorment (e.g a retw oampestorif Malind region of Dais Senvoe Group. The budigh for the yoa _ budge. 1591m| is based on the hictoris yor dith and the aesumptions tor the year. The two forocast culcomes wese two ditleront sets of Favourable verances sepritiert good news but shoud nat be assumptions resulting in lower or higher leves of sabs. In the Groted retead they may carly an ooportivity - pethes a new exampbs, sales for the frst thee months of the jear were budgcted mahet is emerging a compestor has withorawn? Emer woy. to eeport on outoomes and propose action to ther omn marager. www.thetimestos.co.uk Davis Service Group I Planning a budger 35 Budgats use resources so they are closely inked with key At Davis, 750 people are involved with budgeting. The time performance indicators (KPis). KPis help to evaluate the overall these workers give to the budgeting process means they are performance of the business. Davis Service Group's KPis include not avalable to carry out other responsibities. measurement of: - Errors and inaccuracies wil aways remain since it is impossible to - orgaric revenue growth (1.e. sales growth excluding acquisitions) prodict the future. Major external events such as rising energy - operational throughput (e.g. tonnage of linen processed) prices or the global recession may distort the whole process. - management retention rate fi.e. keeping experienced staff in - Budgats irvolve and affect people, they may cause confict. There the company) may be difficult choices over where limited funds are spent. Some - health and safety records (e.g. major incident injury rate) departments with tight budgets could feel constrained. This - emironmental performance (e.g. water and energy consumption). carries the risk of frustrating initiative and enterprise. As with the budget, action is prompted through variance from the Conclusion KPI. For example, if a plant's environmental performance has worsened, does it require additional investment in equipment? if Davis operates across 15 countries and has sales tumover of over health and safety incidents have increased, do employees need I1 bilion. To meet its needs, the company has developed a more training? robust and detaled bucgeting and planning process involving its managers. Budgeting provides an essential forecasting, control The benefits and drawbacks of budgeting and feectack system on which effective management depends. There are many advantages to using budgets. They: This process translates competitive strategy into reality. - provide a method of allocating and using resources within the Evidence of the power of managed budgeting was seen as organisation recession gripped the European economies in 2008. Davis was - help to monitor and control operations able to assess eflects and build new and realistic assumptions - promote forward thinking into its budgets for the remainder of 2008 and 2009 . These have - show employees an overall picture of the direction of the proved resilient in practice. As an exceptionaly challenging year organisation which can motivate staff ended, the company was on track to tulfil budget expectations. - help to co-ordinate different departments and align them By identifying and managing risks, Davis Service Group has been towards shared objectives able to return profits, dividends and cash fow for shareholders in - provide a framework for delegation. a diflicult economic climate. This also allows the business to invest for growth in 2010 and beyond. Most importantly, budgets are an early warning system, They highlight where imvestigation and appropriate corrective action is necessary. For example, Davis recognised as early as 2008 that the recession was affecting its UK inen operation. It took action to ensure the impact was managed for the second half of 2008 . It then assessed the implications of recession right across the 1. Outline the purpose of budgets within organisations. 2. Explain the relationship between an objectives budgot and operational budgets. business - management was put on 'full alert'. 3. Analyse the factors that managers might have to take into consideration when preparing budgets. 4. Evaluate how budgeting can contrbute to a business These benefits do not come problem-free: achieving its aims. - Staff time devoted to budgets carries a real opportunity cost