Modern Budgeting Techniques and Strategies

Internationaler
Controller Verein eV

Modern Budgeting

Dr. Walter Schmidt
Year of birth 1950, Dipl. Chemist, Dr. oec.
Married, 2 children
Consultant for
applied strategy and communication:
Development and deployment of strategies
Implementation of Balanced Scorecards and controlling networks
in enterprises

Internationaler Controller Verein eV
Member of the executive committee

Lecturer Humboldt University of Berlin
Dr. Walter Schmidt
ask Dr. Walter Schmidt
Hobbies Schopenhauerstr. 93k, D 14129 Berlin
Writing Fon +49 30 64 84 96 26
Fax +49 30 64 84 96 27
Music Mobil +49 163 318 40 11
walter @ ask-schmidt.de
Philosophy www.ask-schmidt.de
Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 2

Modern Budgeting

Agenda

1. Controllers' definition of budgeting
2. What to do in hard times?
3. Main principles of budgeting
4. The classic way
5. Modern budgeting
6. Knowing one’s business is not enough
7. Conclusion: It’s a question of culture


Controllers’ definition - What to do in hard times - Main principles - The classic
way - Modern budgeting - Knowing one’s business is not enough - Conclusion

What is budgeting? This… ?


Controllers' definition - What to do in hard times - Main principles - The classic

Budgeting as a main instrument of controlling
Definitions according to the dictionary for controllers1
− Budgeting
o In the broader sense, the word budget is used to characterise the
accounting side of planning (budgetary accounting) ... In the narrower
sense, budgeting means the annual process of planning the financial
result.
o To determine a budget does not mean that the money has to be spent.
Since the budget is based on a company’s business objectives, it should
be considered as a guard-rail enabling the firm to reach its goals.
− Controlling
o Controlling takes place, when manager and controller cooperate.
o Controlling is the whole process of defining objectives, of planning and
controlling (in the sense of steering and regulating) and includes all
relevant financial and commercial aspects.
1) © Schäffer-Poeschel, Stuttgart, 2005


Modern Budgeting

Agenda

4. The classic way
5. Modern budgeting



Budgeting in hard times
If you have trouble to pay, you only can steer based on liquidity
− Reach of solvency [days]
day by day forecast approximately 6 weeks : 3 2 1

?

!!!
?
?


Beyond it you can do a lot more to save money
− Sales power
o If the capacities are underused you can deliver quicker as before
o You have more time to manage better quality
o The salesmen have more possibilities for CRM
o Start a different customer orientated pricing
− Intelligent cost reduction / optimizing
o Search for more possibilities in the wide range of working capital
o Seek for closer cooperation with your deliverer – try to become their
preferred customer
− Investment
o Distinguish between potentialities for increasing and things that are
“nice to have”



But please don’t calculate in panic if you really want to save money
− Employees are your most valuable asset in hard times, too
o To fire people isn’t the first solution – think about the cost of new
employees in the next boom
o Perhaps you can use the time for education with support from the
government
− Intangibles are the base for your competitive abilities
o R&D-projects are basic for your future – if you lose time now you have
to pay more tomorrow
o But if you have projects “just for fun” – now is the time to cancel them
for ever
o Don’t stop marketing; but end the unspecific spending by being aware
of the different customer pattern
− Don’t cut costs that earn profit
o Pay attention to contribution margin – you need it to cover structure cost


And next: don’t forget the usual steering elements
− Potentialities = pre-steering of success
o Sales potentiality and target costs
o Potentiality of contribution margin
o Flexibility of structure costs
o Financial capability
− Success = pre-steering of liquidity
o Income statement
o Balance sheet
o Return on investment
− Liquidity
o Per year
o Per month
o Per day


The main questions should be:

1. How will we come out of this crisis stronger
then we went in ?

2. Can budgeting help us
find the right way ?


Modern Budgeting

Agenda

4. The classic way
5. Modern budgeting



Do we need budgeting ?
In smaller companies we don’t need budgeting as a special process of
planning and steering
If there are no business units
(for instance a car workshop – but not a combination of 5 car workshops)
If the company has less than 50 employees
(then you usually have a simple structure with one or two chiefs, one
assistant and perhaps 5 foremen)
In these cases – as far as there is a good leadership – the chief and
his tax consultant plan the year and discuss the operational figures
monthly



Do we need budgeting ?
In bigger and more complex companies we need clear goals and a
flexible steering system to meet the goals.
We need space fore utility innovations both for the customer and the
company.
We have to fulfil what we promise the customers.
Therefore we need reliable processes and a frame for cooperation
inside of the company and with our partners.
This frame for planning and steering is that what we call budget.



What are the most important functions of budgeting ?
We
Deploy strategy
Support decision finding
Address corresponding responsibility for results and costs
Coordinate business units
Enable flexibility
Give space for innovation
Design the cooperation inside the company and with our
partners by agreement
These points give us a standard to evaluate our own budgeting


Controller’s task: Systematical work with goals
The controller assures
sufficient flexibility of budget in order to adapt the
− company’s goals
− personal objectives
Coherence of measures
to the market changes

Coherence of measures
=>



Controller’s task: Put succeeding questions
Don’t forget: key performance indicators (KPI) based on
key performance questions (KPQ)

It is essential to tell the story of budget:
What are the main intentions you will fulfil ?

Modern Budgeting

Agenda

4. The classic way
5. Modern budgeting



The classic way
An example for a budget time schedule

Annual Plan Actual
1. Forecast 2. Fore-cast 3. Fore-cast
(Budget) figures

January March June October January
December

1. Draft 2. Draft Annual Plan
1. Fore-cast
budget budget (Budget)

top - down Bottom - up

Business units


The classic way
Main content of a budget
− Budgetary accounting (generally and per cost centre)
o Sales volume – sometimes in combination with flow charts of amounts
and average prices
o Turnover
o Costs (main cost types)
o Head counts
o Output
− Tools used in budgeting
o Planned balance sheet
o Planned profit & loss account
o Financial budget
o Liquidity budget



The classic way
Main challenges of the classic budgeting
− The classic budget is based on data from the past
o The budget is not connected with the strategy
o If the future is too volatile such kind of budget becomes obsolete before
the accounting year starts
− The classic budget is too detailed
o We often start already the 1st draft with concrete orders or objectives
per article and per every cost centre in every business unit
o On the one hand: The increase in data does not lead to an increase in
information – quite on the contrary
o On the other hand: The increase in data leads to inflexibility – it is very
difficult to adapt this kind of budget to a changing environment
o But if we have to adapt the budget, we also have to change so many
things that we quickly lose our goals out of sight
o So the budgeting process leads to high costs (1 man-day per
employee), but not to an adequate benefit (decreasing marginal benefit)


The classic way
Main challenges of classic budgeting
− The classic budget is combined with incentives
o
The coordination of business units and their alignment to the common
company’s goals is normally incompatible with the incentives for the
business unites’ managers
o Therefore the budgeting process often comes down to a “hide-and-
seek” between centre and business units
− The classic budget isn’t integrated in the whole steering system
o The budget is an important, but not the only one steering tool
o Other parts of planning are often planned separately (e.i. R&D, HR,
CRM, SCM, CSR, RMS)
o The utility of the budget depends on the behaviour of the leading
persons, company’s culture and a lot of context factors (e.i. market
dynamics)



The classic way
Is beyond budgeting an alternative ?
− Beyond budgeting defines 12 principles
o
Organize a new leading culture
o
Stop the inefficient budgeting process
o
There are only relative goals in comparison to the market
o
No obligatory plans, no detailed rules, no central coordination
− There are three essentials for every company
o We need space for utility innovations both for the customer and the
company
o We have to fulfil what we promise to the customers
o We need reliable processes and a frame for cooperation inside of the
company and with our partners
It is not so important, how we call it – but we have to guarantee it !!!


Modern Budgeting

Agenda

4. The classic way
5. Modern budgeting



The principles of modern budgeting
Modern budgeting
is based on the future and thus can support the company’s strategy
is part of a middle-term planning to give space for utility innovation
is embedded in a portfolio of tools for a systemic support of decision
making
is a dynamic framework – based on common values and corporate
policies – which will be concretised per month or quarterly to address
the corresponding responsibility for results and costs
is using dynamic targets within the business units in order to provide
flexibility for meeting the company’s goals in a volatile environment
is aligned with the coordination of business units by agreement along
the company’s value chain, not by incentives
is connected with how to meet the future goals and what decisions are
to be made – not with explaining why the past was as it was


Based on the future Middle term
Long term
planning
planning

Budget 0 1 2 3 4 5 … years

Decision
dimension

Strategic
Prediction

Operational Analysis dimension

Structures
Dispositional Trends
Facts
0 1 2 3 4 5 … years Planning Cube
Time dimension


Space fore utility innovations Initiatives
Southwest
high airlines
level Strategic
pricing
Average
Sales
airlines potentialities
Target
journey costing
by car R&D-Project
HR-Project
PR-Project
low
level
Investment
Price Lounges Hubs Quickness
Middle term
Catering Select Friendly Frequent
planning
on board places service connections Annual
Source: between middle
Kim/Mauborgne, Blue Ocean Strategy (2005) budget
sized towns


Embedded in a portfolio of tools

observe test create act react accept
Trend- Business Product Plan of
HR and
scouts model potentialities initiatives
product
Utility Strategic Strategic development
innovation House pricing
Reporting
Corporate Sales balanced scorecard
SWOT
policy potentialities Corner Integrated
Market stones of system of
Structure of Target
research the plan planning
sales costing
(Finance,
Liquidity, HR,
Development R&D- R&D, CRM,
of inhabitants capacities Performance
Borders of SCM, CSR)
influence capacities and risk
Climatic Finance
management
development capacities


Created as a flexible frame for flexible targets
Middle term Annual Quarterly Monthly
planning planning planning planning
2014 Integrated III / 2009 07 / 2009
system with Rolling forecast
2013 (only) frames 08 / 2009
to visualise
2012 for the market changes 09 / 2009
business
2011 IV / 2009 Details of the
units
cooperation
2010 I / 2010
between the
Corner II / 2010 business units
stones and 2010 and that with
III / 2010
several years external partners
projects / IV / 2010 in order to meet
investments I / 2011 the company’s
goals


Coordination by agreement not by incentives
The kind of agreements depends on the company’s culture
− Service level agreements based on internal transfer prices
− Minutes of planning conferences
− Monthly budget documents based on actual forecast
− ...
Separately organised incentives, i.e.
− Different ways up
o Leading career
o Professional career
o Change agent (project leader)
− Individually adjusted reputation
o Member of the strategic team
o Lecturer at renowned conferences
o Special education
o Award for excellent performance

Modern Budgeting

Agenda

4. The classic way
5. Modern budgeting


Controllers' definition - What to do in hard times - Main principles - The classic way
- Modern budgeting - Knowing one’s business is not enough - Conclusion

Knowing one’s business is not enough
The controller’s business is to manage the economic measures,
instruments and methods
o Budget is one of the basic instruments.
What else do controllers need in order to be professional?
o They have to go to the people; the controller’s working place is not the
computer
o They have to speak the peoples’ language; the people are the
controller’s customers
o They have to show in their behavior, that they fully agree with the
company’s goals and the budget frame to meet them
o They have to inspire people by helping them find their own role in the
company and to develop themselves



Controller’s profession
The formula of success:

S = Q * A
(Succes = Quality * Acceptance)

0 = 0 * 0
0 = 1 * 0
0 = 0 * 1

1 = 1 * 1

0,64 = 0,8 * 0,8


Modern Budgeting

Agenda

4. The classic way
5. Modern budgeting



Conclusion – budgeting is a question of culture

Process and
flexible
structure
simple integrated
Modern
Represent Budgeting
Clear
organisation intentions
Represent
value creating Content

Budgeting by professional controllers
seeing the people behind figures
Source:
White paper ICV special group “Modern Budgeting” (2009)

dziękuję bardzo


Modern Budgeting

Appendix

Selected tools

But don’t forget: A fool with a tool is still a fool !


Appendix

The company’s strategy (I. business model)
The long term company’s goal: e.i. increasing rate of turnover and profit

What kind of do the right How should
potentialities things we use our
do we need do the things available
and should right potentialities
we develop in to meet our
order to meet goals?
our goals? What is our
unique selling proposition Does our
What (USP) ?
is our customer’s core competency
core need ? meet the customer’s need ?
Who is our customer ?
sales potentiality ? margin potentiality ?

Appendix

Company’s strategy (II. Strategic house)

BSC translates strategy into action

What are the most important
steps to be taken now in order to
realise the business model that
meets our goals?


Appendix

Company’s strategy (III. Reporting balanced scorecard)


Appendix

Strategic product analysis


Appendix

Strategic pricing
1. Which prices are your
target customers paying for
market alternatives ? High protection by law
Pricing on Hard to imitate
l
higher leve
Most customers’ Pricing on Bounded protection
spread of prices middle level by law
Pricing on
lower level Low protection by law
Observe 3 types of alternative Easy to imitate
products / services:
The same form
Different form but the same 2. Which price level
function corresponds with the
Different form and function but context of your product /
the same objective service ?


Appendix

Sales potentiality


Modern Budgeting Techniques and Strategies

Recomendados

Recomendados

Más contenido relacionado

Destacado

Destacado (6)

Similar a Modern Budgeting Techniques and Strategies

Similar a Modern Budgeting Techniques and Strategies (20)

Modern Budgeting Techniques and Strategies