Modern budgeting

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Modern budgeting

  1. 1. Internationaler Controller Verein eV Modern Budgeting
  2. 2. Dr. Walter Schmidt Year of birth 1950, Dipl. Chemist, Dr. oec. Married, 2 children Consultant for applied strategy and communication: Development and deployment of strategies Implementation of Balanced Scorecards and controlling networks in enterprises Internationaler Controller Verein eV Member of the executive committee Lecturer Humboldt University of Berlin Dr. Walter Schmidt ask Dr. Walter Schmidt Hobbies Schopenhauerstr. 93k, D 14129 Berlin Writing Fon +49 30 64 84 96 26 Fax +49 30 64 84 96 27 Music Mobil +49 163 318 40 11 walter @ ask-schmidt.de Philosophy www.ask-schmidt.de Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 2
  3. 3. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 3
  4. 4. Controllers’ definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion What is budgeting? This… ? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 4
  5. 5. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Budgeting as a main instrument of controlling Definitions according to the dictionary for controllers1 − Budgeting o In the broader sense, the word budget is used to characterise the accounting side of planning (budgetary accounting) ... In the narrower sense, budgeting means the annual process of planning the financial result. o To determine a budget does not mean that the money has to be spent. Since the budget is based on a company’s business objectives, it should be considered as a guard-rail enabling the firm to reach its goals. − Controlling o Controlling takes place, when manager and controller cooperate. o Controlling is the whole process of defining objectives, of planning and controlling (in the sense of steering and regulating) and includes all relevant financial and commercial aspects. 1) © Schäffer-Poeschel, Stuttgart, 2005 Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 5
  6. 6. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 6
  7. 7. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Budgeting in hard times If you have trouble to pay, you only can steer based on liquidity − Reach of solvency [days] day by day forecast approximately 6 weeks : 3 2 1 ? !!! ? ? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 7
  8. 8. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Budgeting in hard times Beyond it you can do a lot more to save money − Sales power o If the capacities are underused you can deliver quicker as before o You have more time to manage better quality o The salesmen have more possibilities for CRM o Start a different customer orientated pricing − Intelligent cost reduction / optimizing o Search for more possibilities in the wide range of working capital o Seek for closer cooperation with your deliverer – try to become their preferred customer − Investment o Distinguish between potentialities for increasing and things that are “nice to have” Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 8
  9. 9. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Budgeting in hard times But please don’t calculate in panic if you really want to save money − Employees are your most valuable asset in hard times, too o To fire people isn’t the first solution – think about the cost of new employees in the next boom o Perhaps you can use the time for education with support from the government − Intangibles are the base for your competitive abilities o R&D-projects are basic for your future – if you lose time now you have to pay more tomorrow o But if you have projects “just for fun” – now is the time to cancel them for ever o Don’t stop marketing; but end the unspecific spending by being aware of the different customer pattern − Don’t cut costs that earn profit o Pay attention to contribution margin – you need it to cover structure cost Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 9
  10. 10. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Budgeting in hard times And next: don’t forget the usual steering elements − Potentialities = pre-steering of success o Sales potentiality and target costs o Potentiality of contribution margin o Flexibility of structure costs o Financial capability − Success = pre-steering of liquidity o Income statement o Balance sheet o Return on investment − Liquidity o Per year o Per month o Per day Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 10
  11. 11. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Budgeting in hard times The main questions should be: 1. How will we come out of this crisis stronger then we went in ? 2. Can budgeting help us find the right way ? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 11
  12. 12. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 12
  13. 13. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Do we need budgeting ? In smaller companies we don’t need budgeting as a special process of planning and steering If there are no business units (for instance a car workshop – but not a combination of 5 car workshops) If the company has less than 50 employees (then you usually have a simple structure with one or two chiefs, one assistant and perhaps 5 foremen) In these cases – as far as there is a good leadership – the chief and his tax consultant plan the year and discuss the operational figures monthly Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 13
  14. 14. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Do we need budgeting ? In bigger and more complex companies we need clear goals and a flexible steering system to meet the goals. We need space fore utility innovations both for the customer and the company. We have to fulfil what we promise the customers. Therefore we need reliable processes and a frame for cooperation inside of the company and with our partners. This frame for planning and steering is that what we call budget. Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 14
  15. 15. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion What are the most important functions of budgeting ? We Deploy strategy Support decision finding Address corresponding responsibility for results and costs Coordinate business units Enable flexibility Give space for innovation Design the cooperation inside the company and with our partners by agreement These points give us a standard to evaluate our own budgeting Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 15
  16. 16. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Controller’s task: Systematical work with goals The controller assures sufficient flexibility of budget in order to adapt the − company’s goals − personal objectives Coherence of measures to the market changes Coherence of measures => Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 16
  17. 17. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Controller’s task: Put succeeding questions Don’t forget: key performance indicators (KPI) based on key performance questions (KPQ) It is essential to tell the story of budget: What are the main intentions you will fulfil ? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 17
  18. 18. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 18
  19. 19. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion The classic way An example for a budget time schedule Annual Plan Actual 1. Forecast 2. Fore-cast 3. Fore-cast (Budget) figures January March June October January December 1. Draft 2. Draft Annual Plan 1. Fore-cast budget budget (Budget) top - down Bottom - up Business units Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 19
  20. 20. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion The classic way Main content of a budget − Budgetary accounting (generally and per cost centre) o Sales volume – sometimes in combination with flow charts of amounts and average prices o Turnover o Costs (main cost types) o Head counts o Output − Tools used in budgeting o Planned balance sheet o Planned profit & loss account o Financial budget o Liquidity budget Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 20
  21. 21. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion The classic way Main challenges of the classic budgeting − The classic budget is based on data from the past o The budget is not connected with the strategy o If the future is too volatile such kind of budget becomes obsolete before the accounting year starts − The classic budget is too detailed o We often start already the 1st draft with concrete orders or objectives per article and per every cost centre in every business unit o On the one hand: The increase in data does not lead to an increase in information – quite on the contrary o On the other hand: The increase in data leads to inflexibility – it is very difficult to adapt this kind of budget to a changing environment o But if we have to adapt the budget, we also have to change so many things that we quickly lose our goals out of sight o So the budgeting process leads to high costs (1 man-day per employee), but not to an adequate benefit (decreasing marginal benefit) Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 21
  22. 22. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion The classic way Main challenges of classic budgeting − The classic budget is combined with incentives o The coordination of business units and their alignment to the common company’s goals is normally incompatible with the incentives for the business unites’ managers o Therefore the budgeting process often comes down to a “hide-and- seek” between centre and business units − The classic budget isn’t integrated in the whole steering system o The budget is an important, but not the only one steering tool o Other parts of planning are often planned separately (e.i. R&D, HR, CRM, SCM, CSR, RMS) o The utility of the budget depends on the behaviour of the leading persons, company’s culture and a lot of context factors (e.i. market dynamics) Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 22
  23. 23. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion The classic way Is beyond budgeting an alternative ? − Beyond budgeting defines 12 principles o Organize a new leading culture o Stop the inefficient budgeting process o There are only relative goals in comparison to the market o No obligatory plans, no detailed rules, no central coordination − There are three essentials for every company o We need space for utility innovations both for the customer and the company o We have to fulfil what we promise to the customers o We need reliable processes and a frame for cooperation inside of the company and with our partners It is not so important, how we call it – but we have to guarantee it !!! Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 23
  24. 24. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 24
  25. 25. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion The principles of modern budgeting Modern budgeting is based on the future and thus can support the company’s strategy is part of a middle-term planning to give space for utility innovation is embedded in a portfolio of tools for a systemic support of decision making is a dynamic framework – based on common values and corporate policies – which will be concretised per month or quarterly to address the corresponding responsibility for results and costs is using dynamic targets within the business units in order to provide flexibility for meeting the company’s goals in a volatile environment is aligned with the coordination of business units by agreement along the company’s value chain, not by incentives is connected with how to meet the future goals and what decisions are to be made – not with explaining why the past was as it was Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 25
  26. 26. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Based on the future Middle term Long term planning planning Budget 0 1 2 3 4 5 … years Decision dimension Strategic Prediction Operational Analysis dimension Structures Dispositional Trends Facts 0 1 2 3 4 5 … years Planning Cube Time dimension Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 26
  27. 27. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Space fore utility innovations Initiatives Southwest high airlines level Strategic pricing Average Sales airlines potentialities Target journey costing by car R&D-Project HR-Project PR-Project low level Investment Price Lounges Hubs Quickness Middle term Catering Select Friendly Frequent planning on board places service connections Annual Source: between middle Kim/Mauborgne, Blue Ocean Strategy (2005) budget sized towns Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 27
  28. 28. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Embedded in a portfolio of tools observe test create act react accept Trend- Business Product Plan of HR and scouts model potentialities initiatives product Utility Strategic Strategic development innovation House pricing Reporting Corporate Sales balanced scorecard SWOT policy potentialities Corner Integrated Market stones of system of Structure of Target research the plan planning sales costing (Finance, Liquidity, HR, Development R&D- R&D, CRM, of inhabitants capacities Performance Borders of SCM, CSR) influence capacities and risk Climatic Finance management development capacities Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 28
  29. 29. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Created as a flexible frame for flexible targets Middle term Annual Quarterly Monthly planning planning planning planning 2014 Integrated III / 2009 07 / 2009 system with Rolling forecast 2013 (only) frames 08 / 2009 to visualise 2012 for the market changes 09 / 2009 business 2011 IV / 2009 Details of the units cooperation 2010 I / 2010 between the Corner II / 2010 business units stones and 2010 and that with III / 2010 several years external partners projects / IV / 2010 in order to meet investments I / 2011 the company’s goals Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 29
  30. 30. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Coordination by agreement not by incentives The kind of agreements depends on the company’s culture − Service level agreements based on internal transfer prices − Minutes of planning conferences − Monthly budget documents based on actual forecast − ... Separately organised incentives, i.e. − Different ways up o Leading career o Professional career o Change agent (project leader) − Individually adjusted reputation o Member of the strategic team o Lecturer at renowned conferences o Special education o Award for excellent performance Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 30
  31. 31. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 31
  32. 32. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Knowing one’s business is not enough The controller’s business is to manage the economic measures, instruments and methods o Budget is one of the basic instruments. What else do controllers need in order to be professional? o They have to go to the people; the controller’s working place is not the computer o They have to speak the peoples’ language; the people are the controller’s customers o They have to show in their behavior, that they fully agree with the company’s goals and the budget frame to meet them o They have to inspire people by helping them find their own role in the company and to develop themselves Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 32
  33. 33. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Controller’s profession The formula of success: S = Q * A (Succes = Quality * Acceptance) 0 = 0 * 0 0 = 1 * 0 0 = 0 * 1 1 = 1 * 1 0,64 = 0,8 * 0,8 Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 33
  34. 34. Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing one’s business is not enough 7. Conclusion: It’s a question of culture Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 34
  35. 35. Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing one’s business is not enough - Conclusion Conclusion – budgeting is a question of culture Process and flexible structure simple integrated Modern Represent Budgeting Clear organisation intentions Represent value creating Content Budgeting by professional controllers seeing the people behind figures Source: White paper ICV special group “Modern Budgeting” (2009) Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 35
  36. 36. dziękuję bardzo Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 36
  37. 37. Modern Budgeting Appendix Selected tools But don’t forget: A fool with a tool is still a fool ! Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 37
  38. 38. Appendix The company’s strategy (I. business model) The long term company’s goal: e.i. increasing rate of turnover and profit What kind of do the right How should potentialities things we use our do we need do the things available and should right potentialities we develop in to meet our order to meet goals? our goals? What is our unique selling proposition Does our What (USP) ? is our customer’s core competency core need ? meet the customer’s need ? Who is our customer ? sales potentiality ? margin potentiality ? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 38
  39. 39. Appendix Company’s strategy (II. Strategic house) BSC translates strategy into action What are the most important steps to be taken now in order to realise the business model that meets our goals? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 39
  40. 40. Appendix Company’s strategy (III. Reporting balanced scorecard) Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 40
  41. 41. Appendix Strategic product analysis Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 41
  42. 42. Appendix Strategic pricing 1. Which prices are your target customers paying for market alternatives ? High protection by law Pricing on Hard to imitate l higher leve Most customers’ Pricing on Bounded protection spread of prices middle level by law Pricing on lower level Low protection by law Observe 3 types of alternative Easy to imitate products / services: The same form Different form but the same 2. Which price level function corresponds with the Different form and function but context of your product / the same objective service ? Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 42
  43. 43. Appendix Sales potentiality Internationaler Controller Verein eV | ® Dr. Walter Schmidt| 2009 | Poznań 09-06-18 | page 43

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