Валерій Мар’єнко “Short and midterm financial planning for IT companies”

1. Short and midterm financial
planning for IT companies
Valerii Marienko
Unexpected Conference
25 February 2017

2. Role of financial planning
02
To get an effective system of performance appraisal a business should use a combination of financial and non-
financial measures.
One of the major developments in performance measurement techniques in recent years that has been widely
adopted is the balanced scorecard.
The concept was developed by Kaplan and Norton, 1993 at Harvard. It is a device for planning that enables
managers to set a range of targets linked with appropriate objectives and performance measures.

3. Types of financial planning
03

4. Strategic planning
04
NOTE:
Strategic plans usually are developed for a period lasting from
1 to 5 years
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0
20
40
60
80
100
120
140
160
Year 1 Year 2 Year 3 Year 4
Revenue
Employees
Clients

5. Purposes of budgeting 1
05
Planning
Control
Coordination
Communication
Planning the activities of an organization helps ensure that the organization sets out in
the right direction. Individuals within the organization will have definite targets which
they aim to achieve. The planning process itself forces managers to continually think
ahead, planning and reviewing their activities in advance.
Control is best achieved by comparison of the actual results with
the original plan. Appropriate action can then be taken to correct
any deviations from the plan.
A sound budgeting system helps to coordinate the
different activities of the business to ensure that they
are in harmony with each other.
Budgets communicate targets to managers
and other members of staff. They can also
be used to communicate to banks and
other lenders.

6. Purposes of budgeting 2
06
Motivation
Performance
evaluation
Authorization
The budget can influence
behavior and motivate
managers.
The budget can be used to
evaluate the performance of a
manager.
Budgets act as authorities to spend, that is,
they give authority to managers to incur
expenditure in their part of the
organization.

7. Rolling and periodic budgets
07
January
February
March
2017
Year
Q1
Quarter
January
Month
A rolling budget is a budget that is
continuously updated by adding a
further accounting period (month or
quarter) when the earliest accounting
period has expired. Its use is
particularly beneficial where future
costs and/or activities cannot be
forecast accurately.
A periodic budget shows the costs and
revenue for one period of time, e.g. one year
and is updated on a periodic basis, e.g. every
12 months.

8. Incremental and zero-based budgets
08
•Actual
expenses
Dec16 actual
•Dec16
actual
expenses+X
Jan17 plan
•Jan17
planned
expenses+Y
Feb17 plan
Dec16
• Actual
expenses
Jan17
• All costs
are
planned
from
scratch
Feb17
• All costs
are
planned
from
scratch
The incremental budget is based on the budgets or
actual results for the previous period, adjusting for
any expected changes and inflation.
Drawbacks:
· Inefficient allocation or resources
· Perpetuation of inefficient and unnecessary
practices
· Intentional overestimation or underestimation of
revenues in the budgeting process
The zero-based budget is justified from zero. It
requires all costs to be justified by the expected
benefits. Incremental levels of expenditure on each
activity are evaluated according to the resulting
incremental benefits.

9. Participative and imposed budgeting
Participative budgeting may also be referred to as bottom-up budgeting. It contrasts with imposed
or top-down budgets where the ultimate budget holder does not have the opportunity to
participate in the budgeting process.
09
The advantages of participative budgeting are:
Improved quality of forecasts: Better quality forecasts can be used as the basis for the budget. Managers who are
doing a job on a day-to-day basis are likely to have a better idea of what is achievable, what is likely to happen in
the forthcoming period, local trading conditions, etc.
Improved motivation: Budget holders are more likely to want to work to achieve a budget that they have been
involved in setting themselves, rather than one that has been imposed on them by more senior managers. They will
own the budget and accept responsibility for the achievement of the targets contained therein.
The main disadvantages of participative budgeting is that it tends to result in a more extended and complex
budgetary process and can lead to budgetary slack. However, the advantages are generally accepted to outweigh
this.
CEO
Head of
development
Head of QA Head of PM
CFO

10. Preparation of budgets
The key requirements in the design of a budgetary planning and control process are:
10
• All budgets are
interrelated
• Budget manual is
a collection of
documents with
key information
for planning
• Budget
committee has to
be established
• The principal (key) budget
factor is the factor
which limits the activities of
the organization. For
outsourcing – Sales.
Principal factor
Budget
committee
Interrelationship
of budgets
Budget manual

11. What budget to choose for IT company?
11
Zero-based
Numbers are justified from zero
Bottom-Up
Managers are responsible for budgets development of their
departments
Periodic
Formed once a year, controlled every month
3
1
2
* In practice, most companies carry out some form of updating process on all their
budgets so that the budgets represent a realistic target for planning and control
purposes. The formalized budgetary planning process will still be performed on a regular
basis to ensure a coordinated approach to budgetary planning.

12. Example #1
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1) Revenue
2) Budgets by departments
3) General budget

13. Example #2 - Cash budget
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Rolling
Formed at the end of each month
Zero-based / Incremental
Numbers are formed based partly on previous data and partly
justified from zero
Imposed
Cash budget has to be developed due to general budget
3
1
2

14. Budget execution control
VARIANCES
Budgets are used for control purposes to ensure that the organization continues in the right direction.
Budgetary control is achieved by comparing the actual results with the budget. The differences are
calculated as variances and management action may be taken to investigate and correct the variances if
necessary or appropriate. Variances are either adverse or favorable.
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January
February
March
April
May
June
July
August
September
October
40
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10
20
30
40
50
January
February
March
April
May
June
July
August
September
October
Net Profit
Expenses
Revenue

15. Budget execution control 2
Requirements to information
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The information should
be available as soon as
possible
The information should be
precise and correct
The information should be
specific to the need of the
respective budget holder
The information should be
directed to the concerned
authority only
Timely Accurate Relevant
Communicated
to correct
manager

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Discussion
Questions?