budgeting, forecasting, and closing process
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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
A B C D E F G0123456789
10
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)
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