Riorden Manufacturing Budget
Money management is an important skill for managers. No company, and thus no manager, has access to infinite amounts of money, so it is critical that a manager learn to review budgets, to account for increases in costs, and to determine how to trim a budget if the situation requires it. The Riorden Manufacturing IT Manager oversees a budget of under 2 million dollars, and must be capable of balancing the budget, which means balancing the requirements of running a capable IT department with the actual amount of money he has been given to run his department. His original budget included costs totaling $1,901,300 for the financial year, which runs from October through September. He has been tasked with decreasing the total budget from the expected level by 2%, to meet a total budget of $1,863,274 or less.
In the same financial period, Riorden Manufacturing has been forced to increase costs for hardware, software, and outside IT support, which fall into the budget categories of Contracts, Hardware, and Software Licenses, by 4% in the most recent iteration of his annual budget. Should his other costs remain unchanged, he would require $1,905,048 to fully fund his department's operations for the year. Given the rising costs, the IT Manager must now seek to cut at least $41,774 from his budget for the 2004 financial year.
Table 1: Rioden Manufacturing Revised Budget
Item
Original Total
Cost Increase
New Total
Reduction ($)
Final Total
% Overall Reduction
Compensation
Wages & Salaries
1,111,992.00
1,111,992.00
1,111,992.00
Benefits
255,758.16
255,758.16
255,758.16
Bonuses
200,000.00
200,000.00
20,000.00
180,000.00
10.0%
Total
1,567,750.16
1,567,750.16
20,000.00
1,547,750.16
1.3%
Other Expenses
Conferences
3,750.00
3,750.00
1,000.00
2,750.00
26.7%
Contracts (1)
43,200.00
1,728.00
44,928.00
44,928.00
Hardware (2)
8,500.00
8,840.00
8,840.00
Leased Lines
50,400.00
50,400.00
50,400.00
Maintenance
3,000.00
3,000.00
3,000.00
Office supplies
1,200.00
1,200.00
1,200.00
Postage
Shipping
2,400.00
2,400.00
2,400.00
Software Licenses
42,000.00
1,680.00
43,680.00
43,680.00
Special Projects
150,000.00
150,000.00
16,000.00
134,000.00
10.7%
Subscriptions
Telephone
3,000.00
3,000.00
3,000.00
Training
1,500.00
1,500.00
1,500.00
Travel
22,000.00
22,000.00
4,800.00
17,200.00
21.8%
Entertainment
1,400.00
1,400.00
1,200.00
14.3%
Total
333,550.00
3,748.00
337,298.00
22,000.00
315,298.00
5.5%
Total Operating Expenses
1,901,300.16
3,748.00
1,905,048.16
42,000.00
1,863,048.16
2.0%
The IT manager should attempt to make cuts that maintain optimum productivity and optimum service. The manager's has a duty to his company to provide excellent IT service while simultaneously having a duty to his personnel to maintain a reasonable working climate.
The first cut the IT manager should make is to the budget for conferences. IT professionals use conference attendance to keep up with new developments in their industry, social networking opportunities, and to visit interesting places (Schenberg, 2008, para 1). Keeping up with new developments is the most important aspect of conference attendance, as it is most likely to directly benefit Riorden Manufacturing. However, in the case of budget cuts, it is prudent of the IT Manager to reduce the number of conferences to be attended, or reduce the number of personnel who can attend them. IT personnel can keep up with new developments in their industry online or through training. In the new budget, the budget for conferences is cut from $3,750 to $2,750, a 26.7% reduction.
Next, the IT Manager can make cuts to the budgets for entertainment and travel expenses. Travel is one area where it may be difficult to make cuts in the near future, since the cost of airline flights is expected to rise in the next year (Consumer Traveler, 2011). The IT Manager may instead be forced to cut the number of trips made by his personnel between Riorden Manufacturing's various sites. This may be best done by both reducing and consolidating trips. In the new budget, Travel is cut from $22,000 to $17,200, a reduction of 21.8%.
Entertainment may be somewhat easier to cut as it is less likely to be most costly in the coming year. A modest reduction in entertainment from $1,400 to $1,200, a 14.3% reduction, will require the IT manager to cut some entertainment activities or reduce the cost of entertainment during the year, but not to eliminate it entirely. In a year where cuts are necessary, entertainment seems like a highly optional activity which employees can do without. Employee morale might instead be boosted by implementing low-cost but meaningful public recognition of employees (Business Research Labs, 2007, paras 1-8).
The largest item in then non-compensation budget items is Special Projects, a catch-all line item that covers projects to update and expand IT systems at Riorden Manufacturing. Although it is necessary for the company to continually update its technology and systems to stay in step with modern standards, a small reduction is warranted due to the budget cut. A 10.7% reduction, from $150,000 to $134,000, will cause projects to be delayed or reduced in scope over the next financial year. Upon further consideration, the IT manager may even opt to cut some project from his to-do list. This cut will slow, but not eliminate, special projects in the IT department.
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