Budgets, Plans and How are we doing?
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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
- 9. Forecasts • Financial Forecasts and Projections - Paul Beckman (2020)
- 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
- 12. Predicting the Future? sjef in Futures Words posted February 13, 2016
- 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
- 23. Combo charts Possible layout: PY = Actuals CY to date = Actual Future = budget See next slide
- 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
- 28. Source - Accounting Data:
- 29. We need input from: Trial Balances or other source data Zero-based budget Scenario data Parameters Stored reports Research data
- 30. Debt & Equity - Current Actual - Prior Year Actual
- 31. Debt & Equity - Current Actual - Prior Year Actual
- 32. Example Budget - Notes
- 33. Example Audit area - Summary
- 35. Budget: Ongoing process (rolling) Multiple inputs Multi-dimensional Starts with Sales projections from Assumptions and Forecasts
- 36. Operations Budget: Note: Considers ONLY operations Sales Production Materials Labor Overhead Sales & Marketing Admin Expenses Operations Cash Budget
- 37. Budget: Note: Considers ALL activities Sales WorkingCapital A/Rec A/P S/T Credit Investments Finance Company Cash FlowBudget
- 38. Inventory – Cash Payments:
- 39. Actual to Date - then Budget:
- 41. Cash Flow - Quarterly:
- 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.
- 44. Example Audit area - Summary
- 45. Cash v Accrual It has to be remembered that Accounting is based on the Accrual Model and Cash Flow does NOT follow the same flow
- 47. IS YOUR LIFE NOW CHANGED? The End
- 48. 48 CliffB
Editor's Notes
- 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.
- Budget plans can account for this difference