Presented by Jason Lundell

Budgeting Techniques
Rolling Budget (typ. 12-18 mo. out) Zero-based Activity Based SALY (Same As Last Year) Fixed Incremental (last yr + %) Flex Bracket (best/worst case scenario)

Budget Reporting

Budget Variance Report

Assumed: Budget is always right
Problems: Doesnt clearly define purpose Confusion, many dont trust it Seasonality mismatch, not trended Budget may be wrong Report only in $ (need rates, %, units, etc) Timing

Strategic Planning Cycle

Strategic Plan Resource or Capital Plan

Analysis

Results of Operations

Operating Plan

Problem

If compensation is based on company performance or meeting certain target levels, it undermines any strategic plan

Beyond Budgeting
Book by Jeremy Hope, Robin Fraser Examined mostly non-US companies Conclusion: Working with budgets, as practiced in most corporations, should be abolished.

Beyond Budgeting
Organizations of any size and industry can use Beyond Budgeting Examples

Toyota Svenska Handelsbanken (Swedish bank) Aldi (German retailer) Southwest Airlines Ahlsell (Swedish building materials wholesaler) ISS (Danish facilities service group) World Bank Sightsavers International (UK charity)

Traditional Hierarchical Control

Traditional Fixed Process

Strategy Fixed Performance Contract Control

Adaptive Devolved Network

Adaptive Devolved Network

Six principles for Devolution

Provide a governance framework based on

clear principles and boundaries Create high-performance climate on relative success Give people freedom to make local decisions that are consistent with governance principles and the organizations goals

Adaptive Devolved Network

Place responsibility for value creation

decisions at front line teams Make people accountable for customer outcomes Support open and ethical information systems that provide one truth throughout the organization

Adaptive Adaptive Process

Radical Devolution

Adaptive Processes

Adaptive Adaptive Process

Six principles for Adaptive Management

Goals are based on maximizing

performance potential Base evaluation and rewards on relative improvement contracts with hindsight Make action planning a continuous and inclusive process

Adaptive Adaptive Process

Make resources available as required

Coordinate cross-company actions

according to prevailing customer demand Base controls on effective governance and on a range of relative performance indicators

Beyond Budgeting
Commonality: All successful companies examined in Beyond Budgeting adopted the balanced score card Focused on four broad categories (FCIL)

Financial Customers

Internal
Learning

Beyond Budgeting

Balanced Score Card

Linkage
Cause & effect Drivers & outcomes

Leading vs. lagging

Beyond Budgeting Balanced Score Card example

Financial
sales growth profit margin sales prices EPS & EPS growth working capital cash flow

Customers
DSO sales per customer receivables time to delivery/completion shipping costs customer satisfaction regulatory

Internal
quality safety yield, waste, scrap rework overtime hours inventory levels back orders

Learning
turnover employee satisfaction head count vs. sales ratio training education performance compensation, benefits

Beyond Budgeting

Identify what matters to company

Must be measurable, quantifiable

Hindsight Numbers need to be flexible Relative

Planning

How 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)

Forecasting information flow and level of detail

Senior Management
Managers

Level of Detail Less

Company Analysts
More

Forecasting Trumpet

Next 12 months

Strategic Plan

Harvard: Cone of Uncertainty Larger the cone, greater the uncertainty and precision Cone of Uncertainty is inevitable

Forecasting

U.S. National Average:

Predict, plan, and forecast with 90%

accuracy only 90 days in advance

Intel model
Budgets in 90 day increments
90 100 90 Forecast a year out

Final Thought

Budgeting is a poor attempt at micromanagement

10 Tools for More Effective Close

Motorola
Identified 10,000 defects in closing process
10 day close Finance & Accounting costs: $140 million or

2.4% of annual revenues

10 Tools for More Effective Close

Flow chart the close process Check sheet for recording instances and frequencies of defects Brainstorming 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

10 Tools for More Effective Close

Line chart / graphical analysis Scattergrams for regression analysis Pareto chart 80 / 20 law law of the significant few & insignificant many

10 Tools for More Effective Close Pareto Chart

Frequency
10 9 8 7 6 5 4 3 2 1 0 A B C D E F G

10 Tools for More Effective Close

Stratification cure the disease once and for all, dont just treat symptoms Cause & effect ishi lowa or fish bone

10 Tools for More Effective Close Cause & Effect fish bone
Man Machine

Defect # 1

Method

Material

10 Tools for More Effective Close

Force field analysis focuses on goal

Assume goal is 2 day close. List support

and constraints

Support A B C

Constraints A B C

10 Tools for More Effective Close

Motorola
End result at end of six year study and

enhancement to closing process:

Reduced defects to 200

95% reduction in overtime hours

Finance & Accounting costs reduced to 1%

(U.S. benchmark)