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Planning, Budgeting &
Beyond
Strategy Driven or Budget Bound
A key challenge to effective performance management is the link between
strategic planning, budgeting, operations planning, forecasting, and performance
measurement.
Traditionally, many planning processes leap from
executive level, enterprise wide plans, to cost centre budgets. Managers
are told they must do their bit to achieve the "bottom line". Yet often
the next step is to prepare account line item budgets;
typically based on last years, plus a bit...
plus a bit more... if they are clever.
Once Finance adds it all up, we find
that we will not hit the target! Inevitably.....managers must shave,
negotiate, shave and negotiate, in an unequal contest where some have
better skills or more power. Eventually, after many iterations, the
numbers add up, yet the focus has been on the budget, not on optimising
strategy.
This is particularly bizarre when one
considers that budgeting typically:
- Does not question the 85% or so of
costs designed into a business
- Sets the baseline for performance
controlled by monthly variance
Getting the lowest out of people?
Jack Welsh, former CEO of General
Electric, said this "The budget is the bane of corporate America. It
never should have existed. A budget is this: if you make it, you
generally get a pat on the back and a few bucks. If you miss it, you get
a stick in the eye or worse … Making a budget
is an exercise in minimisation. You’re always getting the lowest out of
people, because everyone is negotiating to get the lowest number.”
Budgeting has many purposes
According to the CAM-I Advanced
Budgeting Study, CFOs have many purposes for budgeting. Whilst some are
clearly focused on financial forecasting and control, others have more
to do with goal setting, monitoring and broader performance management.
Nevertheless, there are many weaknesses
to traditional budgeting:
- Incremental and too financially
focused > not strategic
- Too organisationally based > not
outcomes, outputs & processes
- Leads to arbitrary cuts > not
rational resource allocation
- Once a year > not a continuous
improvement process
- Bureaucratic, rigid & time
consuming > not value adding
- Difficulty with intangible assets -
not taken into account
- Focus on bottom line/cash flow -
not other strategic factors
- Over emphasis on appraisal - not
management
Beyond Budgeting
Leading organisations are using a range
of tools and techniques to link strategic planning and high levels goals
with core process objectives that span organisational boundaries and
cross-functional responsibilities. Managers are the engaged across the
value chain in outcome and output based planning and budgeting that can
match resource needs with workload forecasts. This is being coupled with
initiative based planning that is designed to unlock improvement
potential and broader performance management systems that cover
financial and non- financial performance.
Some tools (new and old) that people are
using include:
- Balanced Scorecard
- Activity Based Costing
- Output Based Budgeting
- Zero Based Budgeting
- Priority Based Budgeting
- Rolling forecasting
- Driver forecasting
- SLA planning
- Process Based Planning
These tools may be underpinned by
various techniques such as:
- Value Chain Analysis
- Shareholder Value Analysis
- Process Improvement (eg. Value
Adding, BPR, Six Sigma)
- Discretionary spend analysis
For more information, please contact us
by calling +61 2 8249 4351 or via
mgt@abmsystems.com
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