Kaizen Budgeting

by David Ingram

Kaizen is a Japanese word which roughly translates to "continuous improvement." In the business world, kaizen refers to a systematic quality improvement tool used first in manufacturing before gaining popularity in other areas of business. Business owners can apply the kaizen philosophy to any area of operations to continuously improve quality standards and reduce costs. Kaizen budgeting involves setting budget goals in accordance with future plans for operational improvement, rather than basing budgets on current cost structures. Kaizen budgeting forces managers to make solid commitments to reduce costs during the budget period.

Production Costs

Kaizen budgeting looks forward rather than backwards when it comes to production costs. A kaizen budget takes the end result of cost-cutting initiatives, like process re-design, into account to set financial goals. Production managers can use kaizen budget figures as a guide when planning for operations, encouraging them to remain innovative and committed to reducing costs and meeting budget goals. Kaizen budgeting can also account for new economies of scale in anticipation of higher production volumes, or for new cost structures due to anticipated changes in suppliers or purchasing costs.

Waste, Errors and Shrinkage

Comprehensive budgets include line items for inventory loss due to waste, errors, spoilage or theft. Kaizen budgets continually reduce the allowances for these expenses over time, forcing managers to implement tighter and more effective loss control policies to keep up with the budget's shrinking figures. As with production costs, kaizen budget figures for inventory loss and other inventory-related expenses acts as an external motivation for managers to implement meaningful change in their departments to address these issues.

Utilities

Utilities expense is an overhead cost for manufacturers, which can remain constant for long periods of time. However, overhead costs can still be reduced over time with effective planning and policy development. Kaizen budgets can set goals for energy expenses and other utilities which are lower than current expense amounts. This can encourage managers to find ways to save energy in their departments or be less wasteful with utilities. Reducing overhead expenses through kaizen budgeting can boost profit margins while having positive effects on the environment by using less water, electricity or fuel.

Drawbacks

Kaizen budgeting can be more of a gamble than traditional budgeting techniques, as there is no historical basis for ambitiously altered budget items. If the business fails to meet the goals set by kaizen budget items, its entire cost structure can become skewed. Because of this, it can be helpful to develop traditional budgets alongside kaizen budgets, but this can introduce new expense and time requirements to the budgeting process. Kaizen budget goals can be easier to meet in earlier stages than in later stages, introducing seemingly insurmountable challenges to departments which have done all they can to reduce costs as budget amounts continue to tighten.

About the Author

David Ingram has written for multiple publications since 2009, including "The Houston Chronicle" and online at Business.com. As a small-business owner, Ingram regularly confronts modern issues in management, marketing, finance and business law. He has earned a Bachelor of Arts in management from Walsh University.

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