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Budgeting & Planning

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This article is a stub. It is currently undergoing major changes as it is in the very early stages of development and is only a placeholder. Please help improve MIKE2.0 by adding to this article.

Draft WIP by: Bert 16:35, 25 April 2007 (EDT)

Few activities in an enterprise are more ubiquitous - or reviled by users- than budgeting. What should be a reasonably straightforward exercise of forecasting capital, personnel and operating needs and the assumptions that drive those needs often turns into a highly complex, multidimensional exercise in iterative futility. "Tell us how much you need. Nope too much. Cut it by 10% and tell us again. Still too much (the other guy went up by 3%). Cut it again." And so on. On top of it all, there's the data. And the reports. And the supporting schedules.

While there are numerous perspectives on Planning and Forecasting (Rolling Budgets & Plans, Continuous Planning, Top Down-, Bottom Up- and more), the purpose of this article is to show how taking a rigorous approach to information management can streamline the Budgeting and Planning process and help to add information value to budgeting and planning data.


Contents

Solution Overview

Planning vs Budgeting vs Forecasting

These are terms that are sometimes used interchangeably, but that each serve a distinctly different role in a complete Budgeting solution.

Budgeting

Business Definition

Process of expressing quantified resource requirements (amount of capital, amount of material, number of people) into time-phased goals and milestones.

Topic applies to any organization or agency, in any industry and any size company.  

Types of Budgeting

  1. conceptual budgeting
  2. kaizen budgeting
  3. capital budgeting
  4. objective budgeting
  5. top-down budgeting
  6. bottom-up budgeting
  7. time budgeting
  8. activity based budgeting (ABB)

Capability

The expense transaction capability is a system of dependent actions which lead to clear summary views of the event records with a zero data loss and zero downtime.  Plainly said, we must assume this process is a priority for any organization and/or agency. 

Understanding

Many people associated with the projects, programs or portfolio management practices will best understand the definition as stated within this article.

Private or Public Sector

In the private sector most people associate the annual planning process as the time of year that each leader must submit their plans for the upcoming year. 

In the public sector most people associate the cost and value estimating process as the method which equals the same requirements of budgeting. 

In summary, both public and private sectors will perform task associated with creating a budgetary quote which includes any cost of capital, materials and number of people a people, a project intends to utilize in which period(s) or quarters the expense for any of the before mentioned items based on a time phased deliverable and milestones. 

Any industry, anywhere in the world whether big or small and within the organization or agency we have multiple resource types

  1. an action taken by a project sponsor in order to intiate the work defined in the project scope 
  2. an action taken by people managers enabled by budget managers in large Enterprise size organizations or agencies
Project Budget(s)
  1. A project may appear as an allocated line item on a C-Level executives allocated budget
  2. A project may be a collection of budget manager allocated budget.
  3. A project may be funded by an external stakeholder

Management Budgets

An allocated amount assigned a group of segmented variables from the financial management capability; often referred to as the chart of accounts or cost accounting segments. 

A people manager will have an allocated budget line detail on each quarter representing a summary amount for the headcount expense or cost of having a singular or multiple employees in the people managers reporting hierarchy. 

1. People managers typically begin with the last years budget amount and grouping of expenses working with their management team (employees with a direct reporting relationship with a people manager who has an assigned budget.  Not all people managers have an assigned budget. 

Traditional employee to manager reporting relationship-employee to their manager. 

2. Incremental funding above and beyond the prior years performance an organization within the company and with any direct stakeholder impacts above the ones known and targeted by the sponsor. 

Dynamic employees from other groups remain in their reporting structure while these person's may be working on something outside the department goals or business groups span of control. 

If the project scope is funded in part or in its totality; we can expect employees will have part of the years goals and performance inputs from the project leader or project manager. 

we can be assured the boundaries will need to be crystal clear. 

The budget management process is a sub-set of the Expense Transaction Capability.  The pre-requisite for creating a new expense request or enabling a purchase in an accounting system would be to have an allocated line greater in value than the requested items or services outlined in the transaction.  Upon financial validation or during the close period a financial analyst will perform validation to confirm the budget or plan was allocated for the amount and general ledger code and/or project and sub-account.  for the ledger code associated to the purchase.ability to create a new expense transaction in the accounting system begins with a request for a budget. 

Budget types

There are two types of budget;

  1. A management budget applied to the employee in a management role to cover the expenses of all direct reports and all goods or services acquired from a supplier.
  2. A project, program or portfolio budget incremental funding structured to enable dynamic reporting relationships and delivery of a

A new people and budget manager may assume the role with an existing budget allocation which allows the department or business unit to purchase goods or services from an approved supplier.  The journal codes or chart of accounts segments are assigned a budget amount during the annual planning process.  A manager works with their team to establish the cost of meeting the companies strategy and objectives.  A budget process has a corporate policy which governs the procedures and process followed by all employees. 

A budget process and the events which follow the budget planning or investment management decisions are all part of the corporate quality performance measurements.  A distinct set of codes are assigned to the budget during the annual planning process. 

In certain scenarios a project will be created and codes assigned as described; yet a project will allow dynamic relationships with other employees in another management hierarchy will have a project reporting relationship with a manager other than the direct manager through the work done in the scope of the project.  

Planning

This refers to a very high level set of targets and hurdles, articulated in order to set a strategic direction. The Plan is typically prepared by a strategic group of the firm's leadership using summary account (often reporting line item) level of detail, and reflects more of an external focus. That is, the "plan" shows how the organization's financial and operating plans roll up so that investors and owners can plan and plot the general progress of the firm. Plans are typically on a multi-year cycle and updated annually.

Annual Planning

APQC Business Process Framework

1. Design Strategy and Visioncore process. 

The planning process is a firm commitment from a people and/or budget manager to the leadership which commits to meet the prior years performance or improve based on the negotiated percentage increase.   The improvement generally goes beyond the continuous improvement all organization leaders and employees are expected to do as an operating procedure. 

Performance Measurement

The performance of an organization is an outcome of measuring leverage points in system.  A system may be an extension of other systems and always integrates functional boundaries as required to enable the most effective and efficient forms of delivery to meet the companies objectives.  

maintain the current performance for themselves and the employees who are reporting into the leaders reporting structure.  The plan will be the starting point in the profit and loss hierarchy.  The expense detail is tracked by transaction and summarized into standard grouping of categories for example;

Expense Segmentation

  • Headcount
  • Facilities
  • Assets

The above isn't in its entirety rather a short list for the purpose of an example. 

During planning the strategy includes the norms or core operating expenses, in many cases an advanced category of expense as the offer in an innovation phase or Research and Development maturing as determined by external analyst definition.  

contains the expectations and commitment from a leader to the executives to deliver as defined in the plan. 

The activity generally will be an increase over the prior years plan, by a few percentages. 

  • No changes impacting people, start the new year with the messaging for the new strategy for the company. 
  • Align the way the organization contributes to the strategy.through a series of team building meetings. 
  • Identify recruiting requirements and timing with managers in the leaders hierarachy for any new employees
  • Identify any consultant requirements and renew enagement statements of work
  • Identify any temporary resource requirements for any employees who will be going on leave. 
  • Some change requires

When the market changes an organization may be re-organized under another leader or disolved with resources re-assigned to other organizations.

In the final option an organization may be part of an organization or agencies reduction in force. 

determines the next fiscal years expenses by line item detail. The plan is the basis for expense authorizations in an organizations Accounting systems specifically the expense modules.

Actors

Executives

The stakeholders who are accountable for their respective organizations from a management hierarchy perspective, the Profit and Loss component of the C-Level responsibility

Corporate Finance

The stakeholders who report the plan to actual and manage the companies reporting to external stakeholders.

Human Resources

The stakeholders who must monitor the leaders (any people manager) and employees performance against the plan.

Budgeting

Budgeting refers to a detailed program of how the firm is going to execute against the plan. Budgets are prepared at a level of detail that corresponds to how actual results are to be recorded. "Budget vs Actual" is simply a yardstick for measuring how we performed against what we told our leadership we would do when we submitted our budgets. Budgets typically are not updated and do not change over the budgeting horizon (typically a year). At the same time, when a dramatic (and usually unforeseen) business event occurs within a budget cycle, basic budgeting assumptions may change and the relevance of the original budget can decrease dramatically. This can have dramatic consequences, when individual employees' compensation is based on performance against a budget.

Forecasting or Projections

Like a used car, the value of the budget usually diminishes the moment it "goes out the door". Assumptions change, business rules change and things happen that are outside of the control of the budgeting manager. For this reason, most firm's have projections or forecasts. The forecast is simply a reflection of our new best estimate of how the remainder of the budget cycle is going to finish. The forecast or projection typically includes out year-to-date actual results along with our best estimate of the remainder of the budgeting cycle.

Variance and Exception Analysis

Most managers like to track actual results against track all three numbers (Plan, Budget, Forecast) - although, since Plan numbers are typically focused on higher (more summary) levels of detail, actual vs plan analysis is most valuable only at a roll-up of cost centers (profit centers, departments, business units, etc.). The most important of the analyses, however, compare actual results against budgets (how well did we forecast our sources and uses of company funds at the beginning of the year), or those that compare actuals versus projections. Both of these analyses take a forward looking approach as well as a retrospective viewpoint in that the focus should be

Budgeting as a Component of Your Performance Management Framework

Typically, budgeting actually begins with planning. Planning is a related discipline in which targets are defined for certain revenue and expense (and maybe capital and headcount) targets, so that a higher level goal can be set. The goal generally serves a dual role. First, the goal acts as guidance (either a target or a hurdle) for the line and staff managers as well as the enterprise, it also provides firmwide management with a high level benchmark for strategy. The targets are designed to demonstrate how certain strategic moves should impact the P&L, Balance Sheet and Cashflow over a defined planning horizon. Maybe we're introducing a new product, entering a new market or adopting a new pricing strategy. Maybe our strategy is to "stay the course" and let last year's strategy play out. Whatever course the firm is taking, targets communicate the demands on a firms financial and human resources and can usually be expressed at a somewhat summary level. As targets become more detailed, their value relative to budgets diminishes. In essence, they become the budget and the role of the line or staff manager becomes more executional and less directional. Fundamentally, the target should be the "what".

On the other hand, budgets represent the "how". Budgeting, at its simplest, represents predictive analytics. By this, I mean that you seek to have operating line and staff managers estimate how much money they will need over a given time period to produce a target revenue and profit. (Some firms may take this yet one step further to predict cashflow - but that will have to be another topic for another day - er - posting). Budgets take the input of the managers actually responsible for expending resources that will ultimately drive the profitability of the enterprise. How many accounts payable clerks will it take this year to produce 1 widget that the marketing guys tell me I can sell for $x and that the accounting guys tell me I can sell for $y for a profit of $z? How many trips to Cleveland? How many pencils? From a predictive perspective - how confident am I that I am right (budgets vs actuals)? Am I willing to bet my bonus on it?

From a systems perspective, budgets represent a poster child for large, federated data architectures. Most conscientious managers want to be able to present their budgets along with the drivers behind their predictions. Maybe a specific cost driver is a number out of the Financial Ledger (# of BU's, # of Accounts). Maybe it is out of the Supply Chain system (Orders, Units on Hand) or maybe the Personnel system (Headcount, Hours Worked). Often the driver of a budget amount is not stored in an ERP system at all but in some structured or unstructured data store either from elsewhere in the enterprise or perhaps from the web. It is at this point, that budgeting becomes a data problem - and not just a process problem. No longer is the budgeting manager or director responsible just for budget data, but for budget driver data as well.

From the executive viewpoint, it is the management of the drivers that will result in real bottom line improvement. By managing the the details that really drive budgets (headcount, units sold, assets under management, square footage, etc.), management can actually lead the organization into a more proactive form of management. Budgets become not only a tool for communicating direction to investors and other stakeholders (often including employees), budgets become a tool for actively managing for results. That is, budgets become a tool for measuring and managing performance.

Components of a Financial Budgeting Solution

You can think of your budgeting solution as a the management of a collection of performance measurements. These measurements must collectively encompass:

  • Fixed Assets and Capital Requirements
  • Revenues, Direct Expenses and Gross Margin
  • Positions and Human Capital Costs (salary, benefits, etc.)
  • General and Indirect Expenses

These "sub-budgets" collectively form the true performance management framework for the firm over the budgeting horizon. Typically, many firms address each of the component pieces discretely, but it is the package - taken in its entirety - that really creates a proper reference architecture for a performance budgeting and planning solution.

Capital Budgeting

Revenue Budgeting

Position Budgeting

Expense Budgeting

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