Budgeting and strategy A Kraft Foods UK case study
Page 2: Kraft´s income and expenses budget
A typical budget:
relates to a defined time period (usually twelve months)
is designed and approved well in advance of the period to which it relates
shows expected income and expenditure - income is the amount of money a business receives from its sales.
includes all capital expenses likely to be incurred in furthering the organisation's objectives - expenses are the costs incurred in order to make those sales.
To help control expenditure the Finance team collates the costs of the business in relevant groups called cost centres, so that analysis can be meaningful and also well controlled by those directly responsible for authorising the spend.
Many companies, including Kraft, use cost centres that relate to particular factories or production units. Within Kraft each manager is assigned clear responsibility for governing the costs which are allocated to his/her cost centre.
The budgeting process enables Kraft to make clear plans for individual cost centres, which build the budget for the whole organisation. The whole purpose of this exercise is to quantify the likely future costs of the whole operation, whilst always maintaining focus on the future plans for the company.
Kraft sells its wide portfolio of products to a variety of different customers; ranging from the corner shop, to the cash and carry and large multinational supermarket chains. In doing so, it incurs:
raw material costs and production costs to manufacture the products to sell
marketing expenses associated with any promotional activity including media advertising
selling expenses involved in selling its goods into supermarkets and other customers
distribution expenses when transporting the products from its European and UK factories to the customer.
The starting point for building a budget is to forecast the likely sales based on historical information in conjunction with Kraft's and third party understanding of the business environment. This indicates what quantities of products need to be produced and the timing of manufacture.
With these figures in place, budgets can then be allocated for costs relating to sales, marketing and administration, and figures established for the likely costs of storing and transporting the goods (i.e. distribution). These details provide data for relevant departments (e.g. sales, administration etc). Figures can then be inserted for likely capital expenses. The final stage is to construct a budgeted profit and loss account and balance sheet.
Once the budget has been set and agreed by the management teams within Kraft, it becomes the mechanism through which managers monitor progress on a particular business component (for example, a brand, or factory) or on total company performance.