Agile budget v1.01

Product Management
© 2013 Johan Oskarsson

Innovations require you to
change directions with both your
product and strategy as new
information comes to light. A
budget process needs to support
this agility, it should roll with
you, help you learn faster and
trigger creative behavior.
The Agile
Budget

Budgeting is a big part of an organization,
it consumes a large amount of peoples time
and sets constraints on plans and projects.
It can, in worst case, determine what the
organization should do a year and a half in
advance. The budget process can also add
to command and control behavior,
strangling innovation.
Budgeting may not be the only thing holding you back, but it can
certainly be a major issue. Personally, I want to know if money is
being used wisely, if we spend it on things that matter for us, not
only right now but also in the long run. I want to know that we are
making more money than we spend. I want to know what the
forecast is looking like. I want to know if we should regroup our
forces in some other direction to react to opportunities or threats.
What I don‟t want is to be controlled by an estimate that does not
make sense anymore. I don‟t want a business case that is based
on early assumptions long past their expiration date, that have
become false realities my project revolves around. I don‟t want to
spend endless of hours gathering data, re-estimating, debating
why I should get more funding to keep my current commitment on
annual basis. I don‟t want performance targets that aim to keep
my budget.
I‟m pretty clear on what I want and what I don‟t want and I‟m not
the only one. That said most companies budget process is more
like what I don‟t want. They often stand in the way of agility and
doing what is right to do. They are designed with good intentions
but often have counterintuitive side effects, resulting in us
spending more money instead of using wisely.
The annual budget process has some nasty side effects that are
hard to see because it all seams to be logical at first sight. It also
has a long legacy in the traditional way things are done.
The biggest of all fallacies is that you can predict how much
innovative projects will cost a year in advance. Most projects are
late and over budget because of unknowable factors that make
predictions obsolete.
A second fallacy is that a budget stops you from spending more
money than you can afford. I sometimes wish I was bugged with a
secret microphone linked to the CFO when I hear people say “We
have to spend our budget in order to get the same amount next
year”. Consider what behavior this triggers, and if it encourages
money to be used wisely.
Another problem is that the budget is claimed as someone's
property, usually a manager, to do with what he or she believes is
best. This encourages command and control behavior from that
manager, since they are responsible to keep within the budget,
and, in worst case, are rewarded if successful.
The budget process can be an enabler of agility and innovation, or
it can be an obstacle people have to overcome. I prefer a more
innovative budget process and this article aims to provide some
guidelines for developing this.
[wikipedia.org]
“No complaint … is more common than
that of a scarcity of money.”
Adam Smith, “The
Wealth of nations”

Income statement
A product or a product line should somehow
contribute to an organizations profit. Whether it
contributes directly or strategically should be
known. An Income Statement, also known as
Profit & Loss statement, is a good way to come to
grips with these questions.
An income statement is not very different from your household
budget. In fact many homes could benefit from using this
technique to keep from entering the luxury trap. I wish my parents
had used it when we were kids, we would have had a lot more
respect for where money come and went.
The income statement consists of two parts, income and
expenses. It tracks products or business performance over a
period of time. It‟s a periodic statement that can illustrate trends a
cross-functional team would be very interested in. Even if I have
never heard anyone address it directly, the idea that “Money that’s
someone else’s concern”, is an attitude I‟ve observed frequently.
Maybe this is because so few have insight into the money
process. Often all that‟s communicated is the CEO quarterly
numbers. These are both uninspiring and mean little to the
average Joe. However money is a shared resource and should be
treated as such, it‟s everyone's business as it directly effects how
we spend our time.
The income statement usually has the same components. It
shows the Total Revenue (number of units x price). The cost
required to produce the product known as COGS and the
difference or Gross profit. It shows Expenses such as R&D,
sales, etc. Some use Earnings before Interest and Taxes,
Depreciation and Amortization (EBITDA). The most important part
is the Net Income which tells you if you are making money or not.
The income statement can be used together with a rolling budget
with a time window looking back a short period, and forward a
longer period. It is more important to look forward in order to plan
and facilitate direction changes when needed, than focusing on
analyzing the past. Questions remain weather we invest harder in
future innovations, or focus on sales and marketing to boost short
term revenue? These are the responsibility of the cross-functional
team.
Imagine that there is an annual budget and it is fixed. A fixed
amount of money is allocated to each different part of the
organization. Imagine that sales of a new product line are not taking
off. The income statement shows the loss of the first three moths.
What are you going to do? Stick to the plan and begin the next
projects, or do you shift focus to find out why sales haven‟t
performed as planned? Did you develop something that no-one
wanted. Did you spend to too much money before testing your
assumptions? Did the sales force have to cut prices in half in order
to meet their sales targets and keep their bonus.
The income statement is a great method for getting everyone
involved and to alert you to changes from forecast. It can be used
to track trends and work to relatively reduce cost and increase
revenue. It is a periodic, rolling and iterative tool supporting your
agility and ability to create value.
[garyhamel.com]
“Most companies are run by
executives who know everything
about cost and next to nothing
about value.”
Gary Hamel, “What matters
now”

Business Case Learning
Have you ever had an idea for an innovation and
gone running to your manager to present the
idea only to be given a business case template.
“Please fill this in and come back”. Did you loose
or gain motivation?
You should be more motivated. If I was the one who approved
new projects I would definitely want people to understand the
reasons behind their business case and to clarify and understand
the assumptions of the new idea. When I went to business
school I was taught that a business case should show the value of
a new idea and be used to determine if you should go further with
it or not. Generally this is how it gets used however I think this is
the wrong approach. The value of the business case is not
determined by the expected outcome, return on investment, net
present value, or bang for the buck, It rests on the assumptions
made. You assume that you will sell this or that amount of
products, you assume that it will take this or that much time and
resources. Based on what data? Early and rough estimates. The
more innovative the product the more uncertain the estimates. Not
that the revenue is unimportant, it‟s just not the most important
part. If I were to create a business case manifesto, this would be
something I highlight.
Verifying assumptions early through rapid
prototyping over detailed financial business cases.
Don‟t get me wrong, I see the benefit in using business cases and
use them frequently, but I also see them being used incorrectly,
blocking innovation and creative thinking. You can get stuck in
time-and-cost-only mode. Below I outline some ideas I have on
different financial tools for calculating value.
Net Present Value
This tool is good for understanding on which assumptions the new
product idea is based. Focus should be on listing the assumptions
and outlining actions for testing them, not the actual NPV and IRR
numbers. These only become interesting when the assumptions
have been verified and early risks are eliminated. It should not be
used in early decision making and is not really a good tool for agile
projects.
Bang for the Buck Index
This tool has the same weakness as NPV, but adds the time critical
factor which might help when time is short and cash flow is focus. It
promotes maximizing value in the shortest time. But what about
long term innovations? They are probably not a problem anymore,
there won‟t be any if this tool is used for decision making.
Return On Investment
This is my choice when I can choose. It is the easiest tool to use,
focusing on the relationship between revenue and cost. It still
requires you to understand the assumptions you make but it can
also be combined with income statements as forecasts for new
products, listed as separate statements for each product.
[claytonchristensen.com]
“These are not bad [financial] tools
and concepts, we hasten to add. But
the way they are commonly wielded
in evaluating investments creates a
systematic bias against innovation.”
Clayton Christensen, “HBR
article: Innovation Killers”

Portfolio Management
The Portfolio Management function should help you
understand how to collectively move forward with
your products, aligning them strategically. It
facilitates decision-making on projects, people and
money allocation. Note that it should help you not
restrict you. Moving forward is about exploring as
fast as possible, anticipating and adapting when
needed. Allocating money should be about the same
things.
Classical Portfolio Management theory is about maximizing the
value of the portfolio of projects, with the goal that you spend
money on the investments that bring you the greatest return. If this
was the only approach it would be quite restrictive, focusing only
on anticipation.
The financial methods used in Portfolio Management are financial
investment and allocation methods. The different allocation
methods are more or less adaptive. Developing an innovative
product is mostly about exploring and adapting until you have
reached the mass market and have a strong product penetration.
However anticipation handles only incremental growth with
relatively low risk. Innovation needs a different approach.
Strategic Buckets
One common method is Strategic Buckets. Here different budgets
are separated into different “buckets” and handed over to
individual responsible units to spend on investments. Each unit
handles its own bucket. Usually planned annually (We know the
problem with this approach).
Target levels
Another more flexible method is Target Levels. The difference from
Strategic Buckets is that the money is in one bucket only and that
targets are only targets, not fixed budgets. It gives you much
greater freedom to move money after opportunities.
Emergent budget
The most flexible approach would be to have investments emerge
bottom-up, from the front line in the organization. That is reacting to
market opportunities, not trying to control it top down.
Top-down, bottom-up
A combination of Target levels and an Emergent approach can be a
good thing whether you are in the middle of a transformation or
you‟re a big mature company. This approach qualifies on all three
parameters; exploration, adaptation, and anticipation.
The key characteristics of the Portfolio Management function are;
Easy to move money as new information and opportunities emerge,
Not planned in a too far advance (monthly rather than yearly), A
focus on strategic investments rather than uncertain financial value.
[jurgenappelo.com]
“Apart from looking forward
(proactive), and looking
backward (reactive), don’t forget
to try things out (safe-to-fail
experiments).”
Jurgen Appelo,
“Management 3.0” on
Complexity Thinking

Beyond Budgeting
Innovation is today perhaps the only way to stay in
business. Constantly seeking new products and new
business models is necessary. By following
traditional plan-driven models you may wind up
with a product that’s obsolete before it’s even
launched. A complete management model must
seed and support internal startup innovation as the
only sustainable option.
If the words „Beyond Budgeting‟ suggests that we don‟t manage
budgets any more, this is not the case, it simply means that they
are managed differently. It means that we move beyond the
command and control methods that the annual budget cycle
promotes.
The Beyond Budgeting model has 12 principles . These are more
management principles that actual budget tools. As with any tool
they need healthy management to work properly. If you follow
these principles I think that the question of how to manage the
budget is no longer such a problem. Check them out, they speak
for them selves.
Govern through a few clear values, goals, and boundaries,
not detailed rules and budgets.
Create a high performance climate based on relative success,
not on meeting fixed targets.
Promote open information for self management, don‟t restrict it
with hierarchy.
Organize as a network of self-organizing lean, accountable
teams, not around centralized functions.
Give teams the freedom and capability to act, don‟t micro
manage them.
Focus everyone on improving customer outcome, not on
hierarchy relationships.
Set relative goals for continuous improvements, don‟t negotiate
fixed performance contracts.
Make planning a continuous and inclusive process, not a top-
down annual event.
Coordinate interactions dynamically, not through annual
planning cycles.
Make resources available as needed, not through annual budget
allocations.
Base controls on relative indicators and trends, not on variance
against plan.
[theleanstartup.com]
“Startups often accidentally build
something nobody wants, it doesn’t
matter much they do it on time and
on budget. The goal of a startup is to
figure out the right thing to build as
fast as possible.”
Eric Ries, “The Lean Startup”

The Rolling Budget
Where is the best way to look if you want to
know where you are going, backward or forward?
This question has multiple answers, we need to
know where we have been, but of course we have
to look forward. I guess the right answer is both,
but we also need to look at where we are right
now.
The rolling budget follows a different cycle than annual budgeting.
The annual budget usually has a cycle which follows the fiscal
year. The rolling budget doesn't follow the fiscal year, but uses a
time window looking forward for a period that makes-sense to you,
perhaps 5 months for small fast moving companies, perhaps 18
months for large industrials. That said the rolling budget is
updated as soon as you have learnt something new.
Annual budgeting reports on variance against plan while rolling
budgeting reports on trends. Where traditional budgets struggle
with time, cost and expanded budget requests for project
overruns, beyond budgeting focuses on the best way forward and
promotes creative solutions to meet ambitious targets. Look at the
two charts, which one gives you the most information?
Annual reporting shows a target budget (agreed budget), the
monthly spend up until year-to-date, and a total forecast which is
the overrun. What will be your focus? How much time and money
is needed to complete the projects, right? Is that the right focus? Shouldn‟t the focus be: What have we learned? What should we
change to develop something that the customer really wants, and is
willing to pay for? The rolling forecast helps focus on the future and
those actions needed to adapt to new information.
[axiomgroup.com]
“The forecast shall revel issues
on the radar screen early
enough for us to take the
necessary actions.”
Bjarte Bogsnes, “Implementing
Beyond Budgeting”
0
500000
1000000
1500000
2000000
2500000
3000000
3500000
4000000
4500000
5000000
Target Budget
Forecast
YTD
Annual reporting
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Feb Mar Apr Maj Jun Jul Aug Sep Okt Nov Dec Jan Feb Mar Apr Maj
Target
Month actual
Forecast development
12 month avg actual
Rolling reporting

Transvisual Spending
Are you scared that costs will get out of control if
people can just do what they want when it is “the
right thing to do”? I’m more scared of the traditional
situation where only a few people have the insight
into how much money there is and they lack the
knowledge of exactly how it’s spent.
This is actually the case in most companies I‟ve worked for and in
others I know of. Not unusually the line manager has the budget
for the department and the project managers have their budget for
each project. People spend money every day, every hour. The
only way for the managers to keep track is to control all expenses
and activities. And that‟s where the creativity goes out of the
window. Creativity needs a fundamental prerequisite, “space to
move”. People have to be able to spend time and money without
asking permission before they do it. You can‟t know everything in
advance especially when you are not sure what you are about to
do next.
That said, we need to manage this shared and limited resource.
Believe it or not, there is never an endless supply of money, even
if you work for one of the biggest companies. This is where
Transvisual Spending comes in. When there are too many cost
drivers and too few people who know about them, this is a
situation that needs to change. Everyone has to know about the
spending and care about it.
Transvisual Spending is an abbreviation of transparent visual
spending. Transparent so that everyone can see who has spent
money, when, on what and why. Usually you just get a report that
money has been spent, from an unknown source and for an
unknown purpose.
Visual in that it is more than just numbers on a wall, it needs to
have a physical form in order to trigger your right brain, like a
bucket of gold wrapped chocolate coins
By having a physical representation and transparency everyone is
aware of what is going on.
“Oh my, the money is almost gone. Why did you spend it on that
stupid thing when we need this instead.”
This initiates positive peer-pressure, helping everyone to micro
manage each other in a way better than any manager could do.
There is huge difference in mindset this triggers a completely
different behavior. As Bjarte Bogsnes puts it. ‟The traditional
question is “Do we have budget for this?”, where the question really
should be “Is this really the right thing to do?” „. Transparency and
the resulting peer supervision encourages people to ask the right
question.
What do you think will happen to costs when spending is open and
transparent, combined with attitudes of responsibility and
accountability, when each action is judged by peers and the budget
is visually accessible every single day. Will it go up or down?
[jurgenappelo.com]
“Management is too important
to left to managers”
Jurgen
Appelo, “Management 3.0”

The Agile Budgeting
To manage uncertainty is to manage your
present, near future and visionary goals. We need
to be able to make quick changes in
direction, verify that we are on the right
track, and continue to explore our way into the
future.The Agile Budget model is composed of different models each
fitting into an iterative development cycle that supports agility.
Some of the models have already been described breifly. It is time
to put them together.
Each agile cross-functional team is usually part of a bigger cross-
functional team, call it the product team. It consists of all the
people needed to produce the product;
R&D, Marketing, sales, logistics, IT, etc. They form an internal
ecosystem, a viable system responsible for their product. They
might be part of an even bigger system, but lets ignore that for the
moment. To be viable is to be self sustaining. In money terms it
means you are on top of your finances and contribute to the whole
organization, i.e. you make a profit.
Use the rolling budget cycle and map it to your iteration, and
release cycles. For example two week sprints means updating the
forecasts on a two week basis. Use a rolling window with a forecast
horizon of 3-5 x release length. If you release every second
month, that window would be 6-10 months. It should fit in with your
strategic milestones and vision time line as well. Calculate the
average sprint cost to use as a reference point. Make sure you
update the forecast with future reoccurring costs like
license, hardware, etc. The example below has a 1 week iteration
period and monthly releases.
Agile
teams
Product
team
0
50000
100000
150000
200000
250000
300000
350000
400000
450000
Target
Month actual
Forecast development
12 month avg
Use the Income Statement to manage profit and loss and map it
to release cycles. Add separate accounts for new project
business cases and calculate expected forecasts of Return On
Investment. This fits well with forecast periods and your agile
estimation techniques, provides pretty detailed and reasonably
good estimates for the next release period and rougher estimates
for a couple of releases away.

The example (left) is an Income Statement for an iPhone app. They fill in
actual, forecast and target for each release (period). They have synchronized
the release cycles with each calendar month for simplicity. As you can see they
need some drastic changes to increase Net income. Let’s hope that the other
projects will deliver expected ROI. I use a Cash Flow Statement to show the
actual money available. This is easy to map to the release periods. In this case
the product team is low on cash and need to borrow from the corporate budget
for release A and B, until they start a positive trend.
The budget is emergent and updated on a regular basis. You don‟t
have to ask for budget permission, you already know the answer
from the Cash Flow Statement. The cash flow can easily be
managed with, as suggested, a physical bucket with say candy
representing the cash. Every time someone spends money on
things other than “normal” expenses like salary, office rent
etc, they take some candy coins. After each iteration when the
product is generating some profit you fill the bucket up again
according to actual. Lego or other playful items can symbolize the
same thing, figure out something that is visual and fun for you.
Release A (Jan) Release B (Feb) Release C (Mar) Release D (Apr)
Sales iPhone Apps
Actual 400
Forecast 420 600 1000 1200
Target / period 500 800 1500 2000
Price per unit $2,00 $2,00 $2,00 $2,00
Total Revenue Actual $800,00
Total Revenue Forecast $840,00 $1 200,00 $2 000,00 $2 400,00
Total Revenue Target $1 000,00 $1 600,00 $3 000,00 $4 000,00
Diff Actual / Target 80%
Cost of goods sold (COGS)
Total Material & Labor
Actual $100,00
Forecast $80,00 $80,00 $80,00 $80,00
Target $50,00 $50,00 $50,00 $50,00
Gross profit actual $700,00
Gross profit (%) 88%
Gross profit Forecast $760,00 $1 120,00 $1 920,00 $2 320,00
Gross profit (%) 90% 93% 96% 97%
Gross profit Target $950,00 $1 550,00 $2 950,00 $3 950,00
Gross profit (%) 95% 97% 98% 99%
Expenses
Marketing Actual $80,00
Marketing Forecast $120,00 $120,00 $120,00 $120,00
Marketing Target $100,00 $100,00 $100,00 $100,00
R&D Actual $3 000,00
R&D Forecast $3 200,00 $4 000,00 $4 000,00 $4 000,00
R&D Target $3 500,00 $3 500,00 $3 500,00 $3 500,00
Admin Actual $40,00
Admin Forecast $20,00 $20,00 $20,00 $20,00
Admin Target $15,00 $15,00 $15,00 $15,00
Total expenses Actual $3 120,00
Total expenses Forecast $3 340,00 $4 140,00 $4 140,00 $4 140,00
Total expenses Target $3 615,00 $3 615,00 $3 615,00 $3 615,00
Net income Actual (profit) $-2 420,00
Net income Actual (%) -303%
Net income Forecast (profit) $-2 580,00 $-3 020,00 $-2 220,00 $-1 820,00
Net income Forecast (%) -307% -252% -111% -76%
Net income Target (profit) $-2 665,00 $-2 065,00 $-665,00 $335,00
Net income Target(%) -267% -129% -22% 8%
Income statement
New projects
Project A
Total Revenue $1 000,00 $2 000,00 $4 000,00 $8 000,00
Total Expenses $3 000,00 $3 000,00 $3 000,00 $3 000,00
ROI -67% -33% 33% 167%
Cash flow from operations
Gross profit Actual/Forecast, new
project return $1 700,00 $3 120,00 $5 920,00 $10 320,00
Cash flow from financing
Loan incoming, repaymanet, and
taxes $4 420,00 $1 000,00 $- $-
Cash flow from investments
Total expenses actual, new project
investment $-6 120,00 $-3 000,00 $-3 000,00 $-3 000,00
Net Cash Flow $- $1 120,00 $2 920,00 $7 320,00
Investment and Cash Flow Statement

Adding budgeting to your agile process is simple and valuable.
The periodic process is already there, it‟s just a matter of adding
the actions needed to manage the finances. There are some new
artifacts and processes that are required.
For example, in the release planning process, financial forecasts
such as expected revenue for existing and new products, should
be added. These can be called Financial Spikes that you estimate
and include in order to gain more knowledge. The DoD (Definition
of Done) for these have only one initial bullet, that is to update the
Income Statement.
If the Financial Spike needs to be broken down into different parts
they can be called Financial Stories. These can be different
depending on what is required. For example: Meet with sales force
to understand market needs, help key account sales with pre-
sales of a newly launched product to boost short term sales, or
replace a costly license with open source to cut fixed costs.
At the end of each release, the Income Statement is updated and
the figures are reviewed by the whole team at a retrospective
meeting. Suggestions for making the financial balance better are
gathered and added to the backlog. The Financial Improvements
are planned for each iteration. The different activities can be
mapped into the Agile Product Management Framework as shown
on the next page. See Investment Review, Budget Review, and
Spending Review
Agile teams are self-organizing, empowered, self-developing and
self-directed right? Trust is a core value. What do you have to do
to gain trust? Would you trust someone who does not have the
finance under control? My answer would be no, I guess that each
company have to figure out how to transform their financial
governance to Finance as a Service.
Financial Spikes
Financial Stories
Retrospective
meeting
Planning
meeting

Agile Product Management Framework (A-PMF)
BUSINESS
STRATEGY
3-6 MONTHS ITERATION
1-5 YEARS HORIZION
PRODUCT
RELEASES
1-3 MONTHS ITERATION
3-6 MONTHS HORIZION
CONTINUOUS
SPRINTS
1-4 WEEKS ITERATION
2-8 WEEKS HORIZION
DAILY
BUILDS
DAILY ITERATION
WEEKLY HORIZION
“Things change, roll with it!
PRICING
ANALYZE
PRODUCT
LIFECYCLE
REVIEW
POSITION
REVIEW
COMPETITOR
STORIES
INNOVATION
EXPLORATION
PROFIT &
LOSS
BUSINESS
MODEL
GENERATION PORTFOLIO
ALIGNMENT
PROJECT
DECISION-
MAKING
PORTFOLIO
VISUALIZATION
INVESTMENT
REVIEW
WORK FLOW
ANALYZE
CUSTOMER
STORIES
VISUAL
PRODUCT
ROADMAP
SHARED
PRODUCT
BACKLOG
PRODUCT
DESIGN
REQUIREMENT
DEFINITION
SYSTEM
ARCHITECTURE
ALIGNMENT
KEY PARTNER
ALIGNMENT
PRODUCT
DOCUMENTATION
PRODUCT
TRAINING
PRODUCT
LUANCH
KEY CUSTOMER
SALES
SUPPORT
PRODUCT
MARKETING
BUDGET REVIEW
PRODUCT
SUPPORT
CUSTOMER
RELATION
SPRINT
PLANNING
ACCEPTANCE
TESTING
TEAM
COLLABORATION
SPRINT REVIEW
PRODUCT
DEMO
SPENDING
REVIEW

Johan Oskarsson
@johanoskarsson
www.captaintrouble.com Inspirational sources
Management 3.0 – Jurgen Appelo
The Product Manager‟s desk reference – Steven Haines
Implementing Beyond Budgeting – Bjarte Bogsnes
Beyond Budgeting – Jeremy Hope, Robin Fraser
The Lean startup – Eric Ries
The four steps to the epiphany – Steven Gary Blank
Thanks to David Jackson for editing and theoretical dialogues.

Agile budget v1.01

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Agile budget v1.01