The document discusses various aspects of budgets, forecasts, and planning. It provides definitions of key terms like budget, forecast, and plan. It also describes different forecasting techniques and the requirements for a budgeting expert. Overall, the document emphasizes that budgets and forecasts are dynamic management tools that require input from various sources to aid in planning, monitoring, and decision making.
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Budgets, Plans and How are we doing?
1. Budgets, Plans and
How are we Doing?
Actual so far (What we have done)
and
Budget from here on (Where we think we are going)
The best-laid schemes o’ mice an’ men gang aft agley
An’ lea’e us nought but grief an’ pain
Robert Burns (1785)
2. Budget – in other words
Pro-forma financial statements
Targeting – HP
Profit plan – Nissan
Goals
Allocations
Contribution
Benchmark
Cost, Control, Profit, Resposibility centers/plans/
Forecast/Prediction/Budget
3. Budget variances – Reasons
Price
Volume/quantity
Rate
Efficiency (or not)
Effectiveness
Determine the reason and then investigate the cause
4. Budget – Rules / Dreams
Have a dream – is this making a rule or a policy
Rules are meant to be broken
If you don’t have a dream.
how do you have dream come true?
Have a ‘standard’ for sales contracts – commision should not be paid on
a $ales basis
5. Dollars, Dollars, Dollars
So is money everything?
Clearly it is not but how do we account for other factors?
This discussion is confined to the Dollar aspect - but do not
think that we have not considered that there are other very
important aspects of strategy, tactics and stakeholders.
$
6. Budgeting-expert requirements
Not just a technical expert (Software Product related?)
Budgeting requires:
- an accounting Subject Matter expert SME (CPA, CMA, CGMA)
- including knowledge of:
► Company
► Business
► Market
► Processes
► Finance
7. Forecasting Techniques:
6 statistical methods
1. Linear regression
2. Moving average
3. Multiple linear regression
4. Productivity ratios
5. Time series analyses
6. Stochastic analysis (a random probability distribution)
3 types of forecasting methods:
1. Qualitative
2. Time series
3. Causal models (including Scenario Planning)
Remember that these are mostly mathematics
– the real expertise is to choose the appropriate
method
- the technique any techy can handle (
Of course there is always
the Chrystal Ball
8. What are we trying to do?
•What are we planning?
•Where do we go from here?
•What actually happened?
Forecast
Actual
Plan
10. THe future is not what it once was
Budget = Plan
Budget
Results going forward
Combo report
Techniques
Macro code
Alternatives
11. Budget
Budgeting is all about management
A budget is a plan:
- plan to succeed
- make it happen
Optimistic
Most
Likely
Worst
Case
Hope
(and Try)
for
Forecast
Prepare
for
13. Budget
The Budgeting process at most companies has to be the most
ineffective practice of management.
It sucks the energy, time, fun and big dreams out of an
organization.
And yet companies sink countless hours into writing budgets.
What a a waste.
Jack Welch
(former CEO General Motors)
14. Position or a Flow
The Balance Sheet is a Statement of Financial Position and
forms a target to be attained.
An Income Statement (or a Cash Flow projection) is the path
that you will take to attain the desired position
Historical cost = Hysterical cost = insane
Be approximately right not precisely wrong
Snapshot of reality
Reasonable is the answer
Not out-of-date because of a convention
15. Some Things that Budgets Achieve
Meeting company objectives
Planning
Monitoring and controlling
Evaluating performance
Improving performance
Communicating and delegating
Allocating resources
Confirming results
16. Forecasting v Budgeting
Forecast = what we think the future will look like
Budget = Our plans – what we are going to do to react to the market
A budget could be renamed Operating Plan
Costs of sales are (by definition) tied to Sales
A typical confusion >> actually Sales forecasts are usually targets
17. Is the Past Past?
Will the past context/environment continue
Change is coming (or is it?)
Will next year stay the same as this year?
Things happen – but will they?
Linear thinking says trends will continue along the same line
18. Forecasts Change
Forecasts change with conditions
Not controllable (Reactive) – PEST analysis:
Political factors
Economic conditions
Social trends
Technological advances
Add: Competition
Controllable (Proactive):
Marketing efforts
19. Forecasts and Budgets
While the name does not necessarily reflect
it – the budget contains elements of
forecasts and planned expenditures
It should be a dynamic process, changing
with the situation requiring updates
20. Elements of a Management Budget
Forecast Revenues
Costs of Sales
Forecast and planned Expenses
on indirect costs and overheads
Planned Expenditures
24. Current Budget 2015 v Actual (line charts)
2014 Actual Prior Year (area chart)
25. Dynamic Management Tool
The models produced in the
forecasting/budgeting/Planning processes are:
• instruments of management
• that can answer ‘What if?’ questions
Can make comparisons with
actual and past history
26. Information needed:
• Past results (from accounting records)
• Past forecasts (from records)
• Past plans (from records)
• Scenario planning (PEST and events)
• Contextual information
• Current information
27. Management Tool:
• Dynamic implementation of consistent model
• Comparisons with actual and past history
• Decisions, feedback loops and interpretations
• Divide and conquer (analyze, interpret)
• Notes applicable to above
42. Price v Value :
A good budget reflects the difference between Price
and Value.
Over time Price tends to regress to Value.
43. Delphi Technique:
Used to avoid GROUPTHINK
The technique can help avoid bias and political problems.
The Delphi technique is a group communication method
where a panel of experts arrive at a consensus over a
series of questions and discussions.
It is used for estimating or forecasting.
Budgeting – a greatly demeaned document (if you print it)
It is not a passive document but an interactive development of a basis for decision making.
The CFO looks forward (along with the CEO) and needs information
Many decisions are made on the basis of incomplete information but the more complete the better
The more certain the better
The more accurate the better
Looking at the future there is a cone of uncertainty. Like a telescope that expends as it goes further into the future.
A model enables What if? Questions
Beware the Law of Unintended consequences (Murphy etc)
Budget = authorized expenditure
PY + 10% is typical (but wrong)
The basis of building a budget is to be appropriate
Functional accounting is an appropriate basis
Built bottom up – Reviewed Top down
Before time and under budget
When (and it should) budgeting = planning, it is crucial and integrated part of managing a company
Reality – a word that should be followed but . . .
Beware of “The Law of Unexpected Consequences”
“That which we call a Rose by any other name would smell as sweet” Romeo & Julliet Act 2 Scene 2
Acceptable means approved by the responsible manager who understands the business model
Some Causes could be:
Quality of process design
Materials waste
Poor work in production
Lack of adequate training
Inappropriate allocations
Congestion
Wrong prices used or change in prices
Loss leaders
BUT if you don’t cover your Direct cost – you are definitely making a loss
If you consistently don’t cover overheads (crack your nut) you will (in the long-term) make a loss
There are always exceptions
Rules are made to guide decisions (whether to accept a job or make a tight quote)
Make a rigid rule and lose out competatively
You may make a ‘group’ deal!
It may be financially best but there may be long-term aspects in other dimensions that have to be considered.
Sun Tzu emphasized strategy rather than direct conflict – it may be as well to consider factors other than Dollars
Strategic decisions to satisfy stakeholders:
1 Owners
2 Employees
3 Suppliers
4 Customers
5 Govt
6 Banks and financiers
Then they will want to be your business partners
Strategy = BEST
1 Rolls Royce
2 Mercedes
3 Apple
Branding – can be Hi or Lo
Expensive but worth it.
Why does the target customer want it?
In the end a budget may be a plan but the end will be a reason
Reason for the cost amount
Reason for the variance from planned amount
Reason for the result
The head of the Budgeting/Forecasting/Projections/Planning department MUST be expert in a number of fields.
Must be able to work with and communicate with:
CFO
Controller
Management accountant
Heads of depts
Sales dept
In addition it should be considered that value is not always based on monetary measurements.
There is the danger that you can win a battle but lose the war.
Dollars are important but not the whole picture.
The case in point is that if you export manufacturing to China and they copy your technology, they can then turn on you and become your competition.
In fact anyone – even those who work for you, can become your competition.
A ‘tech consultant’ asks for specs
Growth has to happen in control (otherwise you are out-of-control)
In the past we could assume that the future would follow the patterns of the past.
This is tantamount to being able to predict the future
Next years sales would be last years sales plus (say) 10%
Today there is nothing constant except the expectation that change will happen – Finding the correct model is difficult and uncertainty faces the people trying to see forwards.
The future – for purposes of trying to predict – can be considered as a cone – increasing as it goes further
PS A Chrystal Ball would be handy!!
The key factor is JUDGEMENT
RISK =>
1 Market risk
2 Operational risk
3 Financial risk
Budget latency
Good practice checklist
1 Info
2 Start plan
3 Resources
4 Activities
5 Organize activities (prioritize)
6 Committee
7 Communication/coordinate
8 Reality check
9 Assumptions (define)
10 Checklist /template reports
11 Demo feasibility
12 Data store
13 Time line
14 Savings v benefits
15 Consistency
16 Ongoing schedule /dynamic /Working /Operational / Reviews /integration
Access the cost v benefits
The success of the company vs the planned budgeting will reflect the success of the process.
B/S is traditionally least important but is actually Most Important
Financial Results vs Financial Position
I/S = current only
Make B/S strong = survival
Make B/S weak and you fail
B/S considers and includes financing
Historical cost = Hysterical cost = insane
Be approximately right not precisely wrong
Snapshot of reality
Reasonable is the answer
Not out-of-date because of a convention
Objectives
1 Survival
2 Cash position
3 Profit
4 Revenue/Growth
Trends are often more important than a static picture
Reality = moving - Going up or down
Take a plan
Work the plan
Analyze why you did not achieve the plan
Research the reasons for the variances
Amend the inputs
Rework the plan
– repeat
The Future is not what it used to be.
PESTLE = PEST and Legal and Environmental analysis
PEST is an acronym for political, economic, social and technological. It's a way of understanding how external forces impact your business. It was created by Harvard professor Francis Aguilar in 1967.
Used in conjunction with:
SWOT (Strengths, Weaknesses, Opportunities, Threats)
And MOST (Mission, Objectives, Strategy and Tactics)
+ SCRS (Strategy, Current state, Requirements, Solutions)
RISK (Probability)
IMPACT ito OBJECTIVES KPI’s (Success factors) Milestones
Linked to Strategy
Remember that what has passed is necessarily right
Scope is wide (huge) – covers every dimension
The process of management is not about administering fixed budgets,
it is about the dynamic allocation of resources.
Lord Brown (former CEO – BP)
The primary objective of a SWOT analysis is to help organizations develop a full awareness of all the factors involved in making a business decision. This method was created in the 1960s by Albert Humphrey of the Stanford Research Institute, during a study conducted to identify why corporate planning consistently failed. Since its creation, SWOT has become one of the most useful tools for business owners to start and grow their companies.
Strengths (S) and weaknesses (W) refer to internal factors, which are the resources and experience readily available to you.
These are some commonly considered internal factors:
Financial resources (funding, sources of income and investment opportunities)
Physical resources (location, facilities and equipment)
Human resources (employees, volunteers and target audiences)
Access to natural resources, trademarks, patents and copyrights
Current processes (employee programs, department hierarchies and software systems)
An alternative approach to budgeting is to have a system of forecasting without formally setting targets.
This is like saying that we can run the company without planning.
It is important to note that a good model increases the understanding of what is going on
B/E analysis => Operational
What are we selling? What business are we in?
Where is the value? Where is the value?
What is your target market? Why do they buy?
Convenience
Quality
Price
Prestige
Costs are either Direct or indirect
The 80/20 rule is a dangerous S/T policy (Don’t shrink to selling only the best sellers)
Model techniques should be matched with objectives
Sensitivity analysis is applicable
Past = clear and precise (verifiable) BUT Future is more important than the past
Where are we going?
For most non-accountants a B/S is a mystery
BUT it is now named Statement of Financial Position
EG: JIT inventory worth the savings and passing the risk
EG2 Accts Receivable Decrease Debtors/days => but is it worth the cost?
All costs including customer G/W
Timing – can be programmed into model
The Fuzzy Delphi Method (FDM) is the modified and enhanced version of the classical Delphi technique.
Improvement was made to rectify the imperfection of traditional Delphi Method (DM) that leads to
low convergence in retrieving outcomes,
loss of important information, and
long progress of investigation.