Professional Documents
Culture Documents
Budgeting
A budget is a „contract‟
Budget
contract
• Target [Fixed]
• Resources [Allocated]
• Control [Periodic]
• Rewards [Predetermined]
• Agreed by [Negotiation]
• Signed by [Mgr/Dir]
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What is a budget?
The Traditional Model Targets
Target
Rewards
Mission/Vision
Basis for incentives
Strategy
Strategy
Annual budget
Plan in quantitative terms
“Keeping on track” Resources
Allocation of resources
Control
(Vs budget)
Coordination
Incentives
(Vs budget)
Forecast
Control
Basis for control
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Reasons for Budgeting
Inform all staff the future plans.
A way of resourcing different areas involved in order to
achieve organisational goals.
◦ i.e. allow coordination of resources for the organisation over the
budget period;
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Where do budgets fit in?
Budgets are used to
◦ coordinate operations across and organisation
◦ force consideration of the future
◦ set standards of performance expect for a period
◦ implement plan and control within an organisation
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Behavioural Aspects of Budgets
Behavioural aspects are as important as the numbers
Ideal budget system aligns the goals of the organisation
with the goals of the individual decision maker.
Incentives often used to align goals
◦ Must ensure incentives encourage the desired behaviour
◦ Realistic goals
◦ Measures used to award incentives must be appropriate and
not open to manipulation.
◦ Monetary and non-monetary incentives to control the
tendency to shirk and waste resources
Incentives based on budgets also affect behaviour
◦ Managers can influence results or budget figures to influence
rewards received.
To influence behaviour –must have regular feedback
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Budgets imposed by higher level of management may not
receive support as they are “Head Offices budget”.
◦ Participation by staff considered to improve acceptance of budgets and
improve effort made towards achieving them.
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Activity Based Budgeting (ABB)
Same basic approach as budgeting but the unit on which
the budget is built is individual activities as identified by
ABC.
Useful to those cos. that have implemented an ABC system
A useful approach to support continuous improvement and
process management.
An ABB approach emphasize on cost reduction
Variance analysis within activity framework improve
budgetary performance reporting
But does not alter the behavioural impacts of budgets
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Rolling Budget
Also called continuous budgeting.
Always involve maintaining a plan for a specific time period
in the future.
◦ As each period passes (e.g. a month or a quarter), a new
period is added.
Continuous or
2009 Rolling Budget 2010 2011 2012
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Therefore, involves significant more works as budgeting is
now more than an annual process
◦ Technology is often considered an important part of rolling
budgets as a way of reducing the work involved in regularly
recasting budgets.
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Better Budgeting – Some Issues with
Traditional budgeting
Issues with Traditional budgeting
◦ Time consuming and costly
◦ Can become political
◦ Generally focus on the financial year
◦ Often static
◦ Fail to take into account non-financial information
◦ Sometime difficult to relate to the organisational
strategy
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How to improve Budgeting Accuracy:
effectiveness
Responsiveness
Level 1 Level 2 Level 3
Level 4
•Arithmetic accuracy •Precision •Vision
•Rolling plans
•Formulaic accuracy •Insight
•Adaptive
•Front-line
management 21
knowledge
Rolling Budget
◦ Where as a period passes, the forecast is automatically
being updated to include a budget for an additional period.
The budget therefore comprises of an agreed timeframe
(1 or 2 years) where the periods are always changing but
the length of the budget remains the same.
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High level budgeting
◦ Budgets that are presented at a summarised level.
avoid unnecessary details;
reduces time spent on the budget and frees up
management time to think strategically;
can be used with the shortened budget approach.
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Is Any of the Better Budgeting Technique a
Good to Solution?
X
Empowerment
KM
PREDICTIVE
&
Budget
Balanced scorecard
ADAPTIVE
&
CENTRALISED
EVA
ABM contracts DEVOLVED
Rolling forecasts
Benchmarking
Enterprise-wide IS …
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Beyond Budgeting - Beyond Budgeting
Movement
Beyond Budgeting Movement (BBM) –
◦ About 10 years ago the BBM was established.
◦ Argued that traditional budgeting approaches no longer
useful.
◦ International organisations adapted the beyond budgeting
approach (BBA)
◦ Purpose of BBA is to encourage managers to-
think laterally
take fast decision
develop innovative project in collaborative teams.
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Reasons for not Budgeting (contd.)
◦ The industry is changing so rapidly and therefore it makes
budgets are ineffective.
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Beyond Budgeting- The win Peaks
Adaptive Organisations –
◦ Have reduced the cost of budgeting and have made the
performance management process more relevant to its
users
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Traditional vs. Beyond Budgeting-
Leadership vision
Mission/Vision
Radical
devolution
Strategy
Annual budget
“Keeping on track”
Adaptive
processes
Control
(Versus budget)
Incentives
(Versus budget)
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Traditional vs. Beyond Budgeting-
Shared visions
Command Coaching
+ +
Mission/Vision Radical
devolution
Control Strategy Support
Annual budget
“Keeping on
track”
Adaptive
Control
processes
(Versus budget)
Incentives
(Versus budget)
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Implementing Beyond Budgeting
Leadership vision
Predictive & Centralised Adaptive & Devolved
1. Climate
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„Tools‟ – Must support, not conflict
“Budgeting” “Beyond Budgeting”
Information systems
Provide multiple views of the business
through integrated performance
reporting
Balanced Scorecard
Aligns strategy and actions at every
level in the organisation
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Beyond Budgeting – Common Factors
The main organisational goals of businesses who
have successfully introduced Beyond Budgeting
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Example of the New Performance Contract
compare to Fixed Performance Contract
Fixed Performance Contract Relative Performance Contract
‘Your (sales/profit) target is fixed at ‘We trust you to maximise your profit
Targets ($ x million) potential to continuously improve
against the agreed benchmark KPIs’
‘Your rewards for reaching this ‘You trust us to assess your rewards by
Rewards target are x% of profits starting at a peer review panel based on your
80% and capped at 120% of target’ performance at the end of each year’
‘Your agreed-upon action plans are ‘We trust you to take whatever action is
attached to this contract’ required to meet your goals within
Plans agreed-upon governance principles
and strategic boundaries’
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Handelsbanken: Unique philosophy
• No budgets
• No absolute targets
• No forecasts for control
• No fixed plans
• Little central marketing
• No product push
• No individual incentives
• Almost no hierarchy …
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Handelsbanken: Adaptive processes
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Conclusion
Is budgeting worth the effort?
◦ You need to have an opinion
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