EXECUTIVE SUMMARY
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ISSUES:

With Body Glove’s primary goal to become the number one wetsuit manufacturer, how can they properly utilize the budgeting process to forecast and measure revenues and expenses, clearly communicating expectations throughout the entire organization (sales and manufacturing), while motivating all employees to work in support of this strategy .

ANALYSIS:

Body Glove prepared its first formal revenue and expense budget last year. Russ employed a simple bottom-up process to allow participation from his department heads. They used the budgeting system mainly to project revenues basing on a 25% increase in sales the management team estimated. Sales budget being the cornerstone of the entire master budget, became the basis of coordination for all other departments’ budgets. Budget period was broken down by months and by products. Russ consolidates, reviews and discusses the budget with his managers, sometimes suggesting changes. He noticed his managers didn’t implore a lot of budgetary slack because of the way they optimistically forecasted revenues and while not accounting for unforeseen expenses that might be incurred to support the company’s 5 year strategic goal of expanding marketing. Russ also foresees high uncertainty in the market which can come from competition, change in customer demand and taste.

Though Body Glove or any company’s goal is to increase profit, there wasn’t a performance-based incentive in place tied to the budgetary targets other than the employee profit sharing plan. Someone has to be with the company at least 2 years to qualify. Rank and file employees get the first cut of the bonus pool, typically 6%-7% of their base salary. If there is money left in the bonus pool after paying the employee bonuses, the remainder is set aside for management bonuses, which on a good year will be 10%-12% of their base salary. On a less than stellar year, it is a big possibility that management will not get any bonuses. Since bonuses are not based on departments meeting their submitted budgets, there is no real urgency or motivation to exceed expectations. If a certain department over-performs and meets its target, everyone in the company who are eligible will get something anyway.

In reaction to world events and the first 3 months of last year’s actual results, Russ revised the second quarter budget down while adjusting the third and fourth quarters up in effort to keep the totals for the year unchanged. This without consulting his budget committee. This can potentially have implications on sales, manufacturing, and inventory levels since demand for different products are highly seasonal. Forty percent (40%) of the revenues are derived from the spring season, and sixty percent (60%) from the fall. This will not align with the buying behavior of their clients. By lowering the spring’s target and increasing the fall’s target, BG is making an assumption that customers will buy more offseason products when in fact customers buy based on what’s seasonal. From gathered statistics, customers buy fall products August/September, and spring products on February/March. Immediately before the season starts. Fall collection is also more labor intensive and cost more. So by increasing production budget for Fall products, production expenses will certainly go up because of more labor hours and raw materials needed to produce them. This can also potentially create high levels of inventory surplus of Fall products, unless they lower the price.

Additional Analysis

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