BUDGETING, FORECASTING, AND CLOSING

PROCESS

Presented by Jason Lundell

Budgeting Techniques

Rolling Budget (typ. 12-18 mo. out) Zero-based Activity Based SALY (Same As Last Year) Fixed Incremental (last yr + %) Flex Bracket (best/worst case scenario)

Budget Reporting

Budget Variance ReportAssumed: Budget is always rightProblems:

○ Doesn’t clearly define purpose○ Confusion, many don’t trust it○ Seasonality mismatch, not trended○ Budget may be wrong○ Report only in $ (need rates, %, units, etc)○ Timing

Strategic Planning Cycle

Strategic Plan

Resource or Capital Plan

Operating Plan

Results of Operations

Analysis

Problem

If compensation is based on company performance or meeting certain target levels, it undermines any strategic plan

Beyond Budgeting

Book by Jeremy Hope, Robin Fraser Examined mostly non-US companies Conclusion: Working with budgets, as

practiced in most corporations, should be abolished.

Beyond Budgeting Organizations of any size and industry can

use Beyond Budgeting Examples

ToyotaSvenska Handelsbanken (Swedish bank)Aldi (German retailer)Southwest AirlinesAhlsell (Swedish building materials wholesaler)ISS (Danish facilities service group)World BankSightsavers International (UK charity)

TraditionalHierarchical Control

TraditionalFixed Process

Strategy

Fixed Performance Contract

Control

AdaptiveDevolved Network

AdaptiveDevolved Network Six principles for Devolution

Provide a governance framework based on clear principles and boundaries

Create high-performance climate on relative success

Give people freedom to make local decisions that are consistent with governance principles and the organization’s goals

AdaptiveDevolved Network

Place responsibility for value creation decisions at front line teams

Make people accountable for customer outcomes

Support open and ethical information systems that provide “one truth” throughout the organization

AdaptiveAdaptive Process

Radical Devolution

Adaptive Processes

AdaptiveAdaptive Process Six principles for Adaptive Management

Goals are based on maximizing performance potential

Base evaluation and rewards on relative improvement contracts with hindsight

Make action planning a continuous and inclusive process

AdaptiveAdaptive Process

Make resources available as requiredCoordinate cross-company actions

according to prevailing customer demandBase controls on effective governance and

on a range of relative performance indicators

Beyond Budgeting

Commonality: All successful companies examined in Beyond Budgeting adopted the balanced score card

Focused on four broad categories (FCIL)FinancialCustomersInternalLearning

Beyond Budgeting

Balanced Score CardLinkageCause & effectDrivers & outcomesLeading vs. lagging

Financial·   sales growth ·   EPS & EPS growth·   profit margin ·   working capital·   sales ·   cash flow·   prices

Customers·   DSO ·   shipping costs·   sales per customer ·   customer satisfaction·   receivables ·   regulatory

·   time to delivery/completion

Internal·   quality ·   overtime hours·   safety ·   inventory levels·   yield, waste, scrap ·   back orders·   rework

Learning·   turnover ·   education·   employee satisfaction ·   performance·   head count vs. sales ratio ·   compensation, benefits·   training

Beyond BudgetingBalanced Score Card example

Beyond Budgeting

Identify what matters to companyMust be measurable, quantifiable

Hindsight Numbers need to be flexible Relative

Planning

How do you document your planning assumptions?Need minimum of 3 (per experts):

○ Source of information (where did you get it?)○ What are the interdependencies between

various assumptions? (sale are dependant on…, cost of sales depend on…)

○ Timing issues (when is it going to happen, how long will it take, etc)

Forecasting information flow and level of detail

Senior Management

Managers

Company Analysts

Level of Detail

Less

More

Forecasting Trumpet

Harvard: Cone of Uncertainty

Larger the cone, greater the uncertainty and precision

Cone of Uncertainty is inevitable

Next 12 months Strategic Plan

Forecasting

U.S. National Average:Predict, plan, and forecast with 90%

accuracy only 90 days in advance Intel model

Budgets in 90 day increments90 – 100 – 90Forecast a year out

Final Thought

Budgeting is a poor attempt at micromanagement

10 Tools for More Effective Close Motorola

Identified 10,000 defects in closing process10 day closeFinance & Accounting costs: $140 million or

2.4% of annual revenues

10 Tools for More Effective Close Flow chart the close process Check sheet for recording instances and

frequencies of defects Brainstorming – ask questions and

scrutinize the process (why is this taking so long?, etc)

Nominal group technique – through process of discussing & voting, prioritize and narrow down list of reasons why things take so long

10 Tools for More Effective Close Line chart / graphical analysis Scattergrams for regression analysis Pareto chart – 80 / 20 law – “law of the

significant few & insignificant many”

10 Tools for More Effective ClosePareto Chart

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Frequency

10 Tools for More Effective Close Stratification – cure the disease once

and for all, don’t just treat symptoms Cause & effect – “ishi lowa” or fish bone

10 Tools for More Effective CloseCause & Effect – fish bone

Man

Method

Machine

Material

Defect # 1

10 Tools for More Effective Close Force field analysis – focuses on goal

Assume goal is 2 day close. List support and constraints

Support

• A• B• C

Constraints

• A• B• C

10 Tools for More Effective Close Motorola

End result at end of six year study and enhancement to closing process:○ Reduced defects to 200○ 95% reduction in overtime hours○ Finance & Accounting costs reduced to 1%

(U.S. benchmark)