Aligning costs with revenues: at a time when revenues are unpredictable, closing the gap between operational planning and budgeting is imperative, and companies simply have to become more agile at aligning controllable costs with revenues.

• Author: Sherratt, Mike
• Position: Budgeting

Delivering paramount business performance is progressively more difficult in today's uncertain economy. In business-to-business markets, deals evaporate into thin air as boards defer everything but the most essential spending. In consumer markets, customers are taking advantage of the best deals available. Meanwhile, competitors simply step up aggressive practices--doing everything they can to make their own numbers.

Since the hyper-exuberance of the bull markets in the late 1990s, some markets have gone into spectacular decline. For instance, Tech Data, the Florida-based computer products distributor and services provider, noted in its January 2003 annual report that corporate spending on computing hardware and peripherals--which rose almost exponentially towards the end of the last millennium--had fallen nearly 30 percent since its 2001 peak.

If growing revenue is no longer an option, companies can only deliver the earnings they have promised to stockholders and the analyst community by placing more focus on the things they are actually able to manage. This means creating a lean business by constantly monitoring operational resources and capacity, and keeping it tightly in step with demand.

For most organizations, this simply means managing headcount. But, depending on the type of business, it could also include bought-in or leased products or services that can be controlled in the short-to-medium time frame. This could include vehicles used in distribution or the number of telephone lines being leased at any one time. In such a situation, how can a company achieve this control--and what systems are there to help?

Some companies clearly expected that the heydays of the '90s would soon disappear, and used the time to prepare for a more difficult future. These companies deployed cost management methodologies, such as activity-based costing (ABC), driving it deep into the belly of their organizations, so that managers benefited from a broader understanding of what was profitable business and what drove costs.

Tech Data did just that. Having started a global rollout of ABC in 1997, Tech Data is still delivering satisfactory earnings while its competitors flounder and their markets stagnate.

From its 2001 peak of $20.4 billion, its 2003 revenues fell to $15.7 billion, but it managed to hold sales and general expenses (SGA) before special charges to 3.89 percent of revenue; more than a clear percentage point less than its biggest competitor.

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