Most companies have some kind of justification process in place for expenditures above some limit, such as $200. In some cases, this will be a capital request because there’s not enough expense money in the budget for this item. For example, a plant engineer needs to commission a lighting project, and the money for that will have to come from a capital request.
In other cases, it will be an expense request. There’s expense money in the budget, but it’s carefully guarded. For example, the budget allows for $15,000 in test equipment purchases. But you can’t just go out and spend $15,000 on test equipment. You have to get approval signatures.
One reason for the approval process is that budgets are almost never zero-based. If you can’t truly justify enough purchases to use this year’s budget then next year’s budget probably will be about equal to the total of the purchases you did justify. Budgets tend to be a zero-sum game. If you get an increase to $17,000, then some other budget “pocket” will have to decrease by $2,000 or some factor based on the total budget.
All of this means that the people making the approvals cannot take that responsibility lightly. If they do, the company could seriously misallocate its funds.
With expense requests, there’s usually a form to fill out. Let’s look at weak and strong answers to the questions such a form may have.
Explain why you need this equipment.
- Weak answer: It will make us more efficient. This is weak because it’s not specific and it’s talking about your needs rather than the company’s needs.
- Strong answer: If we’d had this during the palletizer failure last week, we would have cut the downtime in half. The revenue saved would buy seven of these.
What is the expected useful life of this equipment?
- Weak answer: A long time. This is weak because “long” isn’t defined. Does it mean two years or 20?
- Another weak answer: At least five years. This is weak because it’s not substantiated. Where does this number come from?
- Strong answer: It’s the latest generation, and we are buying it mainly to support the Widget line. Senior management has projected the Widget line to be active for the next seven to nine years. The life of this instrument may extend well beyond that because of the applicability of its features to other equipment we also maintain at this plant.
What problem does this solve?
- Weak answer: Inaccurate measurements. This is weak because it’s so vague. It’s also an admission that you’ve been doing a poor job all this time.
- Strong answer: On our main process line, the new control system slated for installation next month requires more accurate measurements than we can achieve with the test equipment we have now.
How will this be used?
- Weak answer: Cable testing. This is weak because “cable testing” can mean all sorts of things.
- Strong answer: Sometimes a cable will develop a defect known as a “fault,” but a fault can be anywhere. For now, we have to dig up the cable at the midpoint and conduct a test first in one direction and then in the other. Then we have to keep repeating this process until we get close to where the fault is. As you may have surmised, this is time-consuming and creates a mess. This instrument will allow us to “locate” the fault to within 6 inches of its actual location.
What are the projected savings?
- Weak answer: $5,000. Normally, the more specific an answer is the better. But a specific amount with no justification sounds like a made-up number. It has no credibility.
- Strong answer: Consider three of the unplanned downtime incidents we’ve had over the past year. They totaled $850,000 in lost revenue and $30,000 in preventable repair costs. With this infrared camera, we would have seen those disasters coming and intervened with zero unplanned downtime and repair costs of only $4,500. The camera won’t prevent all downtime, but would have prevented these three instances. See Appendix B for a breakdown of what these were.
When justifying expenses, you stand a far greater chance of approval if you follow certain principles. We’ve illustrated several above. You want to eliminate weak answers, entirely. Always give strong answers.
Strong answers have these characteristics:
- They answer the needs of the company, not of the department making the request.
- Statements are specific, not vague.
- All numbers are substantiated, not merely tossed out as a best guess.
- Wherever possible, the costs and benefits are monetized rather than generalized (after all, this is a request to spend money).
- Wherever possible, they tie costs and benefits directly to specific production equipment or processes. Or even specific customers.
Remember, managers do not want to contribute to the misallocation of funds. You need to give them justification that is so bulletproof, they are completely confident in approving of the expenditure with no repercussions to their career.