You are asked to complete a budget for Doyle Technology (DT). DT is in the software business and licenses optimization software, providing customer support andconsulting services. DT has grown over the past three years from a $10M company to over 30M in the current year. The President and Founder, David Doyle recently attended a seminar on Planning & Budgeting and is very enthusiastic on implementing a formal budget process. He realizes that this cannot be accomplished
overnight and that it will take one or two years to implement the program. He has enlisted you as his Budget Director and would like to get the process kicked off
in the summer with a completion date of October 20th. He’s asked you to coordinate the effort, provide all the necessary financial information but wants the
respective Department Managers to complete their budgets. He is very clear that the Department Managers must take responsibility for their budgets.
DT operates in the U.S., rents all it’s office facilities and has no Capital Expenditures. All of DT’s assets such as laptops, furniture & equipment were all under
the capital threshold of $5,000. Any items over this amount have been leased, so there is no need to consider a Capital Budget.
The current year’s Income Statement (full year) is as follows:
Gross Profit 15.4 51%
Operating Expenses 5.0
Net Income 10.4 34%
** Included in the Cost of Goods Sold (COGS) is Selling Expenses ($5.2M), Consulting Expenses ($6.7M), Research & Development Expenses ($2.9M). For this
external presentation, allocated costs are not included here but shown as part of Operating Expenses.
Maintenance revenue represents the annual fee DT charges its customers for support and updates to the software. This generally represents 20%
of the license fee and the revenue is recognized over the maintenance period. For example, a new license for $1M would generate a maintenance contract
of $200k per year. If the license was signed on July 1st, next year would pick up six months (pro rata) of maintenance revenue.
Operating Expenses consist of the Facilities costs ($0.6M), Administrative costs such as the Management Team ($2.8M), HR($0.5M), Finance & Tax(0.8M)
& Law ($0.3M)
David has indicated he feels the company can grow by 25% over the next year based on his estimate of the market demand for these products.
He feels we can accomplish this with the current staff levels in the sales organization and the consulting group as they have not been fully utilized
in the past, however, he feels we need to do more in the area of Research & Development and would like to see this staff grow by 20%, by the
end of next year.
We have never paid a bonus, however David would like to include one for next year, if we make a profit.
Benefits are estimated to be 30% of salaries, and commissions are 2% of sales.
The CFO has given guidance on inflation for the upcoming year to be at 3%.
The Budget Data will be collected in thousands of dollars (K$).
All allocations are based on Headcounts and only allocated to revenue producing departments and is shown in the Summary Tab at the lower section.
FTE’s are Headcount – Full Time Equivalents.
The budget is prepared before taxes are determined.
Attached are the various schedules needed, along with the current full year revenue and cost numbers. The summary tab is protected but you can
unprotect (no password required) it, if needed. It simply summarizes all of the underlying worksheets as the formulas link the worksheets.
1) David was very clear about separating responsibility and holding the Department Managers responsible for their respective budgets. Do you agree with
his decision to have you work as a liaison, providing the necessary tools and financial information, and having the managers complete the budget.
Also, how will you go about convincing the Managers that this is their role, keeping in mind this is all new to the organization.
2) David has asked you what can he do to help start this process. Can he provide an initial memo or document to be sent along with the budget request.
Please indicate your reply to David and if you agree with a memo, what items would you suggest be included.
3) David has suggested certain growth targets for the next year. How would you propose we communicate these to the organization making sure we
4) Recently, we’ve noticed a 10% increase in travel expenses which may be related to the increase in energy costs. These increases have also been
seen in the costs of facilities. How will you allow for this given the general guidance for inflation is 3%.
5) Based on the actual allocations for the current year, the Sales VP and the Consulting VP have complained that the headcount allocations don’t
make sense as many of their employees travel and are out of the office for extended periods of time. How would you do to respond to their concerns.
6) David has indicated he would like to implement a bonus plan for all employees. What concern or issues might get in the way of implementing a bonus
plan for all employees.
7) David has indicated that he would like to see the company grow by 25% without increasing staff. Do you think this is realistic.
8) David has suggested we increase the Research & Development Staff. This will certainly cause an increase in salaries, however what other expenses
may be impacted as a result of an increase in staff….consider how this may impact other departments such as Facilities, Human Resources ETC.