The company that was chosen to be discussed in this paper is Handy, formerly known as Handy Book. Handy is a startup firm. It operates in the information technology industry. Its business model can be compared to the likes of Uber and Air Bed and Breakfast. This means that its business model is based on the on-demand economy. Handy generates revenues via commissions. It enables people who do repairs find work using their existing pool of clients. Their commission then can be classified as payment that the individual contractors and clients have to pay for using their platform. The role of Handy in such a relationship is to connect people who need repair and cleaning services to the people or companies who would be able to offer such services. The company has been profitable so far in the past years. It was founded in 2012 by Oisin Hanrahan, Weina Scott, Umang Dua, and Ignacio Leonhardt. Their goal was to connect handyman and cleaning services personnel to people who actually need the service, minimizing the need for actual employment and focusing more on the use of on-demand services. What makes the company unique is that they do not have a lot of actual employees yet they cater to a large number of people. The number of the company’s actual employees is only 200. The people who actually provide their services are referred to as individual contractors and the company earns commission every time these individual contractors close a deal with one of he clients who signed up to use the platform of Handy.
The main reason why the company has to have a budget planning and control system is the fact that it is a startup firm. Startup firms have higher chances of going bankrupt than more established ones . Additionally, startup firms tend to be more focused on expansion. This is why it is not too uncommon for these firms to have higher budget allocations for marketing and advertising initiatives. In the case of Handy, it has been especially focused on acquiring smaller firms from overseas markets. Compared to starting marketing and advertising campaigns, acquiring companies is considerably costlier. In 2014, for example, the company acquired Mopp, a company that has a familiar business model based in London. Another reason why they have to do this measure is because they have to stay liquid in order to sustain their operations. They cannot rely solely on debt and investor money and so they have to value every dollar they have and use it wisely.
An outcome where Handy ends up overspending on its expansion program is not a farfetched one. This is because one can already see how aggressive the company has been in expanding into other markets even at an early stage like this. This is something that is observable among tech firms; some of the popular examples would be Facebook, Google, and Uber. All of these firms engaged in highly aggressive acquisition projects during their first five year period. The first outcome is where Handy expands heavily and ends up being bankrupt because the businesses it acquired failed to yield enough sales and revenue.
Another outcome (i.e. outcome two) is where the company’s aggressive expansion program pays off. One thing that is common between these two outcomes is the element of risk. It all depends on whether the rate of return that the company expected and betted on would materialize. Certainly, the company is hoping that they would materialize because otherwise, the financial resources they used to acquire their assets would just go to waste.
Two methods or techniques that are recommended for Handy is the use of top to bottom budgeting. This is where a budget is planned centrally by the heads of an organization . Those in the lower level management positions should then make sure that the budget is used wisely; to make the most of their allocation. Another recommendation would be the toning down of their aggressiveness when it comes to acquisition. The company should focus more on generating recurring income and a more solid and larger customer base.
In cases of financial challenge, the two methods or techniques that the author of this paper proposes that Handy should use are: staying away from debt and making use of recurring income or in tough situations, seed money from investors. Whenever debt is generated, additional credit risk is generated as well . This is why for startup firms that can have unstable cash flows, staying away from debt and opting for more conservative forms of financing their expansion projects is important.
The bottom line is that the company must make use of a flexible budget, one that enables them to pay off their obligations and keep their optimal and not so optimal operations and processes running and roll out their expansion programs, all without causing financial instability. For a profitable startup firm like Handy, this should be easy. However, it would also be easy to mismanage their budget and cause financial problems that when left unaddressed could easily lead to bankruptcy.
Below is a flexible budget control (or allocation) for the company. This is based on the roughly $127,000 selling, general, and administrative expenses that the company posted in its annual report for 2015. Using that figure, the author of this paper allocated the budget into different functions and or departments. The focus, of course, was on the information and technology-related functions because the company is a tech firm after all.
References
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Ehrhart, K., Gardner, R., & Hagen, J. (2007). Budget Processes: Theory and Experimental Evidence. Games and Economic Behavior, 279-295.
Gelderen, V., Thurik, R., & Bosma, N. (2006). Success and Risk Factors in the Pre-Startup Phase. Small Business Economics, 319-335.
