Budgeting, Forecasting, and Closing Process
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This document discusses various budgeting techniques, budget reporting challenges, and alternatives to traditional budgeting approaches. It provides an overview of rolling budgets, zero-based budgets, and other budgeting methods. Issues with traditional budget variance reports are outlined. The balanced scorecard approach and its focus on financial, customer, internal and learning perspectives is presented as an alternative. The concepts of devolved networks, adaptive processes, and hindsight-based evaluation are introduced as principles of the "beyond budgeting" model. Tools for improving the financial close process including flowcharts, checklists, and cause-and-effect diagrams are also summarized.
Budgeting, Forecasting, and Closing Process
- 1. Budgeting, Forecasting, and Closing processPresented by Jason Lundell
- 2. Budgeting TechniquesRolling Budget (typ. 12-18 mo. out)Zero-basedActivity BasedSALY (Same As Last Year)Fixed Incremental (last yr + %)FlexBracket (best/worst case scenario)
- 3. Budget ReportingBudget Variance ReportAssumed: Budget is always rightProblems:Doesn’t clearly define purposeConfusion, many don’t trust itSeasonality mismatch, not trendedBudget may be wrongReport only in $ (need rates, %, units, etc)Timing
- 5. ProblemIf compensation is based on company performance or meeting certain target levels, it undermines any strategic plan
- 6. Beyond BudgetingBook by Jeremy Hope, Robin FraserExamined mostly non-US companiesConclusion: Working with budgets, as practiced in most corporations, should be abolished.
- 7. Beyond BudgetingOrganizations of any size and industry can use Beyond BudgetingExamplesToyotaSvenskaHandelsbanken (Swedish bank)Aldi (German retailer)Southwest AirlinesAhlsell (Swedish building materials wholesaler)ISS (Danish facilities service group)World BankSightsavers International (UK charity)
- 11. AdaptiveDevolved NetworkSix principles for DevolutionProvide a governance framework based on clear principles and boundariesCreate high-performance climate on relative successGive people freedom to make local decisions that are consistent with governance principles and the organization’s goals
- 12. AdaptiveDevolved NetworkPlace responsibility for value creation decisions at front line teamsMake people accountable for customer outcomesSupport open and ethical information systems that provide “one truth” throughout the organization
- 13. AdaptiveAdaptive ProcessRadical DevolutionAdaptive Processes
- 14. AdaptiveAdaptive ProcessSix principles for Adaptive ManagementGoals are based on maximizing performance potentialBase evaluation and rewards on relative improvement contracts with hindsightMake action planning a continuous and inclusive process
- 15. AdaptiveAdaptive ProcessMake resources available as requiredCoordinate cross-company actions according to prevailing customer demandBase controls on effective governance and on a range of relative performance indicators
- 16. Beyond BudgetingCommonality: All successful companies examined in Beyond Budgeting adopted the balanced score cardFocused on four broad categories (FCIL)FinancialCustomersInternalLearning
- 17. Beyond BudgetingBalanced Score CardLinkageCause & effectDrivers & outcomesLeading vs. lagging
- 18. Beyond BudgetingBalanced Score Card example
- 19. Beyond BudgetingIdentify what matters to companyMust be measurable, quantifiableHindsightNumbers need to be flexibleRelative
- 20. PlanningHow do you document your planning assumptions?Need minimum of 3 (per experts):Source of information (where did you get it?)What are the interdependencies between various assumptions? (sale are dependant on…, cost of sales depend on…)Timing issues (when is it going to happen, how long will it take, etc)
- 21. Forecasting information flow and level of detail
- 22. Forecasting Trumpet Next 12 months Strategic Plan Harvard: Cone of UncertaintyLarger the cone, greater the uncertainty and precisionCone of Uncertainty is inevitable
- 23. ForecastingU.S. National Average:Predict, plan, and forecast with 90% accuracy only 90 days in advanceIntel modelBudgets in 90 day increments90 – 100 – 90Forecast a year out
- 24. Final ThoughtBudgeting is a poor attempt at micromanagement
- 25. 10 Tools for More Effective CloseMotorolaIdentified 10,000 defects in closing process10 day closeFinance & Accounting costs: $140 million or 2.4% of annual revenues
- 26. 10 Tools for More Effective CloseFlow chart the close processCheck sheet for recording instances and frequencies of defectsBrainstorming – ask questions and scrutinize the process (why is this taking so long?, etc)Nominal group technique – through process of discussing & voting, prioritize and narrow down list of reasons why things take so long
- 27. 10 Tools for More Effective CloseLine chart / graphical analysisScattergrams for regression analysisPareto chart – 80 / 20 law – “law of the significant few & insignificant many”
- 28. 10 Tools for More Effective ClosePareto Chart
- 29. 10 Tools for More Effective CloseStratification – cure the disease once and for all, don’t just treat symptomsCause & effect – “ishilowa” or fish bone
- 30. 10 Tools for More Effective CloseCause & Effect – fish boneManMachineDefect # 1MethodMaterial
- 31. 10 Tools for More Effective CloseForce field analysis – focuses on goalAssume goal is 2 day close. List support and constraints
- 32. 10 Tools for More Effective CloseMotorolaEnd result at end of six year study and enhancement to closing process:Reduced defects to 20095% reduction in overtime hoursFinance & Accounting costs reduced to 1% (U.S. benchmark)