Você está na página 1de 25

Week Five

Budgeting

A budget is a „contract‟
Budget
contract

• Period [Short Term]

• Target [Fixed]

• Resources [Allocated]

• Control [Periodic]

• Rewards [Predetermined]

• Agreed by [Negotiation]

• Signed by [Mgr/Dir]

1
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

Budgeting: Six Key Assumptions


1. Targets - Negotiating fixed financial targets maximizes
profit potential
2. Rewards - Financial incentives build motivation and
commitment
3. Strategy - Annual plans direct actions that maximize
market opportunities and meet strategic goals
4. Resources – Central resource allocation optimizes
efficiency
5. Coordination – Central coordination brings benefits of
coherence
6. Reporting - Financial reports provide relevant
information for strategic decision-making
4

2
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;

 Allows opportunity to have a say in the direction of the


organisation;
 Used to assign responsibility and authority to managers
and inform them of the performance that is expected
 Means of assessing performance.

Budget – A Fixed Performance Contract


Targets are fixed for the year ahead and specified in
Fixed targets
terms of financial numbers
Incentives are fixed to the agreed target and cover
Fixed incentives
a range of outcomes
A reasonably rigid plan, expressed in strategic and
Agreed upon plans
financial terms, is prepared

A statement of resources The master budget is prepared and resources allocated


to functions and departments

A commitment to cross- The contract specifies the commitments that one


company actions business unit must make to another

3
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

 Must complement other systems


◦ Decentralised organisations must have decentralised budgets
 i.e Organisational structure is decentralised – therefore
managers have authority for their business unit – but
budget and any alteration to it over say $500 must be
approved by Head Office – No authority is delegated.

Budgeting and Strategic Planning


 Strategic Planning - Involves selecting between alternatives
 Budgets can provide information to explain the impact of
different options
 Variations from budget can provide information on the success
or otherwise of strategies

Strategic Planning Budgeting


Strategic planning is the process of Process of preparing budget follow
deciding on the nature and size of the strategic framework within which
the several programs that are to be the annual budget is developed
undertaken in implementing an
organization's strategies

Strategic planning focuses on Budgeting process focuses on single


activities that extend over the period year. Therefore A budget is, in a
of several years sense, a one-year slice of the
organization's strategic plan.
Strategic plan is structured by Budget is structured by responsibility
product lines or other programs centres.
8

4
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
9

 How budgets are used has a behavioural impact


◦ If penalties applied for not achieving budget, managers will
take more steps to avoid missing budgeted target, such as-
 Game playing
 Padding budget estimates
 Inflating budgets knowing Head Office will trim the
figures
 Moving performance
 In a good year deferring income or prepaying expenses
 In a poor year recognising income early or deferring
expenses

10

5
 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.

 Impact can be less explicit as the budgeting systems can


focus attention on only some aspect of performance.

11

Dysfunctional Behaviour - Overall

 Always negotiate the lowest  Always have the ability to


targets and the highest explain adverse variances
rewards
 Always make the bonus,  Never provide accurate
whatever it takes forecasts
 Never share knowledge or
resources with other teams  Always meet the numbers,
– they are the enemy! never beat them
 Always ask for more
resources than you need,  Never take risks
expecting to be cut back to
what you actually need

6
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

13

 To build an ABB, three steps are needed:

◦ The activities within an organization must be identified


(accomplished by implementing ABC system)

◦ The demand of each activity‟s output must be estimated,


and

◦ The cost of resources required to produce this level of


activity must be assessed

14

7
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

This budget is usually a twelve-month


budget that rolls forward one month
as the current month is completed.
9-
15

 As the period passes, the changes in economic and financial


environment are reflected in the new period budget.
◦ Note: it is more than just adding another period to the end of
the budget – a new budget is prepared for the new period.

 In other words, a budget which, having been established at


the beginning of a period, is then constantly amended on
account of developing circumstances.
 The overall process of creating a rolling budget is same as
annual budgets
◦ Key changes is the facts that budget is redone each period. i.e.
it can be monthly.
◦ Most companies do quarterly.
16

8
 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.

 Effective for organisation that have a long term strategic focus


but need to remain aware of changing current conditions.

17

Rolling Budget - Advantages


 Advantages of rolling budget over static budget:
◦ Forces people to think beyond the end of the financial
year;

◦ Encourage reviewing of targets on a regular basis – thus


allowing changes in circumstances to be included in the
new forecast;

◦ As forecasts are updated every few month – it makes


managers review their operation on a regular basis to
keep the forecast realistic.

◦ It prevent a variance arising from external and


uncontrollable circumstances. 18

9
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

19

Better Budgeting - Some Questions to ask-


 Before undertaking the budgeting process some questions
need to be raised -
◦ What to achieve through budgeting?
◦ Is the process strategic?
 i.e. how well does the budget reflect strategy
◦ Is it accurate
◦ Does it increase company‟s agility?
◦ Does it provide deeper insight?
◦ How can budgeting be improved to make management
reporting more useful?
 Is there a way to include non-financial information in the
budget?
20

10
 How to improve Budgeting Accuracy:

◦ Many levels of accuracy e.g.


Planning and budgeting
Completeness of View

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

Better Budgeting – Some Techniques


 Shortened Budgets
◦ Reviewing the time and effort put into the budget process
and identifying ways of changing the process to shorten
the individual stages or eliminating unnecessary stages,
without reduceing quality of the outputs from the process.

 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.

22

11
 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.

 Priority level budgeting


◦ Budgeting for potential excess funds and identifying
priority areas for those funds.
 i.e. allows the organisation to think strategically about
where it wishes to spend it‟s discretionary money should it
become available.
23

 Zero based budgeting


◦ Starts the budget process from Zero and each area having
to bid for all of their activities.
 All expenses need to be justified, irrespective of the budget
allocation they received in previous years

 Activity based budgeting


◦ Involved planning and controlling along the lines of value
adding activities and processes.
◦ Resource and capital allocation decisions are consistent with
ABM

24

12
Is Any of the Better Budgeting Technique a
Good to Solution?

• ZBB - Zero base budgeting can be useful as 1-off


exercise but is time consuming & bureaucratic
• ABB - Activity based „budgeting‟ can be useful as a
better way to predict resource requirements

Therefore – ‘Better budgeting’ is


not a good solution as it will not
overcome the fundamental flaws
in the budget model

We need a new model …

Industrial Age Information Age


Model Model
Decentralization
Team- working

X
Empowerment
KM
PREDICTIVE
&
Budget
Balanced scorecard
ADAPTIVE
&
CENTRALISED
EVA
ABM contracts DEVOLVED
Rolling forecasts
Benchmarking
Enterprise-wide IS …

Adopted from BBRT Introductory Meeting

13
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.

27

Beyond Budgeting - Reasons for not Budgeting


 Reasons for not Budgeting
◦ Time consuming and costly to prepare
 e.g. Ford Motor company calculated a few years ago that
they were spending US$1.2 billion annually on planning and
budgeting.

◦ Size and nature of activities of the organisation


 Time and costs involved may outweigh the benefits

◦ Focus too much on financial results and do not take into


account other aspects of the business which can lead to
unethical behaviour.

28

14
 Reasons for not Budgeting (contd.)
◦ The industry is changing so rapidly and therefore it makes
budgets are ineffective.

◦ Some people in the industry think that budget sometime


hinder innovation

◦ People don‟t like numbers and/or don‟t like being tied


down to only one course of action.

 Therefore Beyond budgeting takes the view that budget


are not worth the effort.
29

The New Emerging Model

Adopted from BBRT Introductory Meeting

15
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

 Success factors include:


◦ Replacing a Fixed Performance Contract with a Relative
Improvement Contract
◦ Managers are expected to reach high competitive standards,
particularly when compared with their peers
◦ Managers are evaluated and rewarded after the event
according to the circumstances that actually prevailed

31

 Adaptive & Devolved Organisations –


◦ Adaptive organisations who realised that the results would be
more sustainable if supported by leadership actions that were
more in tune with a radically decentralised model

 Success will be dependent on:


• The willingness and ability of leaders to transfer power and
authority from the centre to operating managers, and;
• Vesting in those managers the authority to use their
judgement and initiative to achieve their goals without being
constrained by some specific plan or agreement

32

16
Traditional vs. Beyond Budgeting-
Leadership vision

“Traditional” “Beyond Budgeting”


Centralization of performance Devolution of performance
responsibility within decentralized responsibility to people closer to the
budgets customer

Adopted from BBRT Introductory Meeting

Traditional vs. Beyond Budgeting –


Finance vision
“Traditional” “Beyond Budgeting”
Help managers continuously
Ensure that managers
improve performance and
meet budgets
adapt to change

Mission/Vision
Radical
devolution
Strategy

Annual budget

“Keeping on track”
Adaptive
processes
Control
(Versus budget)

Incentives
(Versus budget)

Adopted from BBRT Introductory Meeting

17
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)

Adopted from BBRT Introductory Meeting

Adopted from Kaplan

18
Implementing Beyond Budgeting
Leadership vision
Predictive & Centralised Adaptive & Devolved
1. Climate

Performance contracts Competitive success


2. Motivation

Plans & incentives Responsibility for outcomes


3. Devolution

Constrained to plan Freedom to decide


4. Empowerment

Bureaucratic „red tape‟ Capability to act


5. Organisation

Centralised hierarchy Customer focused teams


6. Information

Closed & controlled Open & “one truth”

Adopted from BBRT Introductory Meeting

Implementing Beyond Budgeting


Finance vision
Predictive & Centralised Adaptive & Devolved
1. Targets

Negotiating fixed targets Setting relative measures


2. Rewards

Paying individual incentives Recognising team-based success


3. Strategy

Centrally driven, annual event Devolved, inclusive & continuous


4. Resources

Allocated annually thru budgets Free access with accountability


5. Coordination

Predetermined by central plans Dynamic market-like processes


6. Control

Top-down thru variances to plan Multi level, fast and open

Adopted from BBRT Introductory Meeting

19
„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

Value Based Management


Aligns strategy, target setting &
decision making with shareholder
value creation

Activity Based Management


Mission/Vision Aligns work and resource consumption
with customer value Devolution
Strategy

Annual budget Rolling forecasts


“Keeping on Provide rolling view of most likely
track” future outcome, not tied to current
fiscal period Adaptive
Control processes
(Vs budget)
Benchmarking
Incentives Compares performance and practices
(Vs budget)
with the best in other organisations

Adopted from BBRT Introductory Meeting

Beyond Budgeting – Basic Principles


• BB methodology has 12 following principles:
Principles designed to Principles designed to
develop a developed develop a creative and
decision making active management
culture process that retains a
strategic focus
◦ Governance ◦ Goal setting
◦ Empowerment/delegation ◦ Strategy
◦ Accountability ◦ Anticipatory systems/rolling
◦ Organisation forecasts
◦ Coordination ◦ Resource utilisation
◦ Leadership ◦ Management and control
◦ Motivation and rewards
Sources: CPA Australia
40

20
Beyond Budgeting – Common Factors
The main organisational goals of businesses who
have successfully introduced Beyond Budgeting

 To satisfy shareholders by achieving sustained competitive


success
 To find and keep the best people
 To be innovative
 To operate with low costs
 To satisfy customers profitably
 To maintain effective governance and promote ethical
reporting

The shared common principles of businesses


who have successfully introduced Beyond
Budgeting

1. Built a governance framework based on clear principles


and boundaries
2. Created a high performance climate based on visibility
of relative success at every level
3. Provided front line teams with the freedom to make
decisions consistent with governance principles and
strategic goals
4. Placed the responsibility for value creating decisions on
teams
5. Focused teams on customer outcomes
6. Supported open and ethical information systems

21
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’

‘The agreed resources to support ‘You trust us to provide the resources


the plan are set out in the attached you need when you need them. We
Resources budget statements’ trust you to keep within agreed KPI
boundaries

‘Your activities will be co-ordinated ‘We trust you to co-ordinate your


with other budget holders according activities with other teams according to
Co-ordination to the agreed plan’ periodic agreements and customer
requirements’

Adopted from Kaplan

Beyond Budgeting – Some Example


 Example of companies that are using BBA –

◦ Svenska Handelsbanken – largest Swedish Bank


◦ Toyota – Motor vehicle manufacturer
◦ Boots – UK retailer
◦ Volvo – Swedish car manufacturer
◦ General Electric – US-based appliance manufacturer and
finance giant

44

22
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 …

Consistently one of Europe’s most successful banks

Adopted from BBRT Introductory Meeting

Handelsbanken: Radical devolution


• Focus on customers, not products
Customer • All customers belong to a branch
• Customer profitability continuously reviewed
s
• Decides customers, solutions, and prices
520 Branch • Responsible for branch staff and P/L
Managers • Key ratio measured is “income/cost”

• Decides regional strategy (e.g. Branches to open/close)


10 Regional • Provides support to branches
Managers • Target is beat the bank’s ROE and other regions

CEO • Sets and reinforces framework of principles/values


Product Companies • Sets climate for top-down challenge and local stretch
Treasury, IT etc • Measured on ROE against other Nordic banks

Adopted from BBRT Introductory Meeting

23
Handelsbanken: Adaptive processes

• Targets - Aspirational & relative targets


Radical - Driven by league tables
devolution
• Rewards - Peer recognition
- Group wide profit scheme
• Strategy - Devolved, inclusive & continuous process
• Resources - Free access with accountability
Adaptive
processes - Investment priorities juggled
• Coordination– Internal market, not central planning
• Control - Many self-governing profit centres
- Activity based customer profitability
- Fast, open, distributed information
- No forecasts for control purposes

Adopted from BBRT Introductory Meeting

Handelsbanken: A coherent model


Better to do business Better for society Better to invest in
with 6.Ethical & social standards – 1.Sustainable value –
5.Customer intimacy – Highest Support the long term interests of Beats peer group every year
(independent) customer satisfaction the bank and society. on ROE and cost-to-income
scores in sector year-after-year; ratio; highest total
lowest customer complaints; monitors shareholder return in sector;
customer acquisitions/defections. devolved adaptive
organization is key driver of
4.Operational excellence – Lowest
success.
costs of any bank in Europe; lowest
bad debts; cost reduction culture; flat
organization (half a head office Better to work for
person per branch versus five for
rivals); internal market exerts 2.Best people – SHB is first
constant pressure on central services. choice financial services
company in Sweden for
3.Continuous innovation –SHB
graduates; employee
voted joint best Internet bank in
turnover is lowest in sector;
Europe in 2000; any competitive
challenge, personal
products and solutions are fed back
responsibility and freedom to
from branches to product
run their part of the
development.
business; group-wide profit
sharing scheme.

Adopted from BBRT Introductory Meeting

24
Conclusion
 Is budgeting worth the effort?
◦ You need to have an opinion

 How can budget be improved?


◦ Activity based budgets
◦ Rolling budgets
◦ Beyond budgeting

 Consider how budgeting and forecasting fit together?

 If not Budgeting – then What?


49

25

Você também pode gostar