M: Business 3rd Edition by O. C. Ferrell, Geoffrey Hirt, Linda Ferrell

Exercise 89

Finance managers became key players as the recent recession forced many companies to alter how they budget. With plummeting revenues, the recessionary business climate seemed to offer few positives. For example, for the United Parcel Service (UPS), the recession removed the company’s ability to predict the path its finances would take. Management no longer had concrete information with which to make such predictions.

However, instead of seeing this as a liability, UPS Chief Financial Officer Kurt Kuehn and several others saw this as an opportunity to improve the financial function of budgeting. According to Keuhn, UPS was forced to adapt to focus on bare bones costs. Instead of focusing so extensively on absolute targets and measures, managers began to examine the minute details of budgeting. As a result, they created a system allowing them to match spending to changing revenue. This new philosophy was applied to every department. Focus on growth was replaced with an emphasis on balancing gains and losses in revenue with the company’s spending costs. A good portion of this focus was turned toward identifying and trimming unnecessary spending. For UPS, this resulted in a more flexible budget that received periodic reviews. The company is now making a comeback; recent quarterly numbers beat analyst predictions.

Financial consultants have long advocated for this shift and continue to urge CFOs to increase budget revisions. For example, rather than having a budget with set forecasts, managers should continually review the budget and make changes when needed. In addition, consultants are advising companies to plan for a variety of scenarios. Having strategies in place can potentially save a company, and periodic reviews of the budget can help companies identify changing scenarios and develop appropriate strategies. The effects of the recession might just change how finance departments view budgeting—for the better!

Do you think that UPS’s new budgeting process would work well during a more prosperous economic period?

Step 1 of 2

When the economy is relatively prosperous, the business should understand that growth cycles do not last forever. Knowing that economy could have cyclical pattern, business owners must figure out how to take advantage of healthy economic conditions by focusing on continuing growth trajectory and boosting profitability as well.