CIA 09-06-18 - Modern Budgeting - Walter Schmidt

Internationaler Controller Verein eV
Modern Budgeting
Dr. Walter Schmidt

Year of birth 1950, Dipl. Chemist, Dr. oec. Married, 2 children
Consultant for applied strategy and communication:

Development and deployment of strategies Implementation of Balanced Scorecards and controlling networks in enterprises
Internationaler Controller Verein eV

Member of the executive committee
Lecturer Humboldt University of Berlin

Dr. Walter Schmidt
Hobbies
Writing Music Philosophy
Internationaler Controller Verein eV | Dr. Walter Schmidt| 2009 | Pozna 09-06-18 | page 2
ask Dr. Walter Schmidt Schopenhauerstr. 93k, D 14129 Berlin Fon +49 30 64 84 96 26 Fax +49 30 64 84 96 27 Mobil +49 163 318 40 11 walter @ ask-schmidt.de www.ask-schmidt.de
Modern Budgeting
Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing ones business is not enough 7. Conclusion: Its a question of culture
Controllers definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing ones business is not enough - Conclusion
What is budgeting? This ?
Controllers' definition - What to do in hard times - Main principles - The classic way - Modern budgeting - Knowing ones business is not enough - Conclusion
Budgeting as a main instrument of controlling Definitions according to the dictionary for controllers1 Budgeting o In the broader sense, the word budget is used to characterise the
accounting side of planning (budgetary accounting) ... In the narrower sense, budgeting means the annual process of planning the financial result.
To determine a budget does not mean that the money has to be spent. Since the budget is based on a companys business objectives, it should be considered as a guard-rail enabling the firm to reach its goals. Controlling takes place, when manager and controller cooperate. Controlling is the whole process of defining objectives, of planning and controlling (in the sense of steering and regulating) and includes all relevant financial and commercial aspects.
Controlling
o o
1) Schffer-Poeschel, Stuttgart, 2005

Modern Budgeting
Budgeting in hard times If you have trouble to pay, you only can steer based on liquidity Reach of solvency [days]
day by day forecast approximately 6 weeks :
? !!! ? ?
Budgeting in hard times Beyond it you can do a lot more to save money Sales power o If the capacities are underused you can deliver quicker as before o You have more time to manage better quality o The salesmen have more possibilities for CRM o Start a different customer orientated pricing Intelligent cost reduction / optimizing o Search for more possibilities in the wide range of working capital o Seek for closer cooperation with your deliverer try to become their
preferred customer
Investment
Distinguish between potentialities for increasing and things that are nice to have
Budgeting in hard times But please dont calculate in panic if you really want to save money Employees are your most valuable asset in hard times, too o To fire people isnt the first solution think about the cost of new
employees in the next boom
o o o o o
Perhaps you can use the time for education with support from the government R&D-projects are basic for your future if you lose time now you have to pay more tomorrow But if you have projects just for fun now is the time to cancel them for ever Dont stop marketing; but end the unspecific spending by being aware of the different customer pattern Pay attention to contribution margin you need it to cover structure cost
Intangibles are the base for your competitive abilities
Dont cut costs that earn profit
Budgeting in hard times And next: dont forget the usual steering elements Potentialities = pre-steering of success o Sales potentiality and target costs o Potentiality of contribution margin o Flexibility of structure costs o Financial capability Success = pre-steering of liquidity o Income statement o Balance sheet o Return on investment Liquidity o Per year o Per month o Per day
Budgeting in hard times The main questions should be:
1. How will we come out of this crisis stronger then we went in ? 2. Can budgeting help us find the right way ?
Modern Budgeting
Do we need budgeting ?
In smaller companies we dont need budgeting as a special process of planning and steering
If there are no business units

(for instance a car workshop but not a combination of 5 car workshops)
If the company has less than 50 employees

(then you usually have a simple structure with one or two chiefs, one assistant and perhaps 5 foremen)
In these cases as far as there is a good leadership the chief and

his tax consultant plan the year and discuss the operational figures monthly
Do we need budgeting ?
In bigger and more complex companies we need clear goals and a flexible steering system to meet the goals.
We need space fore utility innovations both for the customer and the
company.
We have to fulfil what we promise the customers. Therefore we need reliable processes and a frame for cooperation
inside of the company and with our partners. This frame for planning and steering is that what we call budget.
What are the most important functions of budgeting ?

We

Deploy strategy Support decision finding Address corresponding responsibility for results and costs Coordinate business units Enable flexibility Give space for innovation Design the cooperation inside the company and with our partners by agreement
These points give us a standard to evaluate our own budgeting

Controllers task: Systematical work with goals

The controller assures
sufficient flexibility of budget in order to adapt the
companys goals personal objectives
to the market changes
Coherence of measures
Coherence of measures =>
Controllers task: Put succeeding questions

Dont forget: key performance indicators (KPI) based on key performance questions (KPQ)
It is essential to tell the story of budget: What are the main intentions you will fulfil ?
Modern Budgeting
The classic way An example for a budget time schedule

Annual Plan (Budget) January Actual figures
1. Forecast
2. Fore-cast
3. Fore-cast
March
June
October
January December
1. Draft budget top - down
2. Draft budget
Annual Plan (Budget)
1. Fore-cast
Bottom - up
Business units
The classic way Main content of a budget Budgetary accounting (generally and per cost centre) o Sales volume sometimes in combination with flow charts of amounts
and average prices
o o o o o o o o
Turnover Costs (main cost types) Head counts Output Planned balance sheet Planned profit & loss account Financial budget Liquidity budget
Tools used in budgeting
The classic way Main challenges of the classic budgeting The classic budget is based on data from the past o The budget is not connected with the strategy o If the future is too volatile such kind of budget becomes obsolete before
the accounting year starts The classic budget is too detailed o We often start already the 1st draft with concrete orders or objectives per article and per every cost centre in every business unit o On the one hand: The increase in data does not lead to an increase in information quite on the contrary o On the other hand: The increase in data leads to inflexibility it is very difficult to adapt this kind of budget to a changing environment o But if we have to adapt the budget, we also have to change so many things that we quickly lose our goals out of sight o So the budgeting process leads to high costs (1 man-day per employee), but not to an adequate benefit (decreasing marginal benefit)
The classic way Main challenges of classic budgeting The classic budget is combined with incentives o The coordination of business units and their alignment to the common
companys goals is normally incompatible with the incentives for the business unites managers o Therefore the budgeting process often comes down to a hide-andseek between centre and business units The classic budget isnt integrated in the whole steering system o The budget is an important, but not the only one steering tool o Other parts of planning are often planned separately (e.i. R&D, HR, CRM, SCM, CSR, RMS) o The utility of the budget depends on the behaviour of the leading persons, companys culture and a lot of context factors (e.i. market dynamics)
The classic way Is beyond budgeting an alternative ? Beyond budgeting defines 12 principles o Organize a new leading culture o Stop the inefficient budgeting process o There are only relative goals in comparison to the market o No obligatory plans, no detailed rules, no central coordination There are three essentials for every company o We need space for utility innovations both for the customer and the
company
o o
We have to fulfil what we promise to the customers We need reliable processes and a frame for cooperation inside of the company and with our partners
It is not so important, how we call it but we have to guarantee it !!!
Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing ones business is not enough 7. Conclusion: Its a question of culture
The principles of modern budgeting

Modern budgeting
is based on the future and thus can support the companys strategy is part of a middle-term planning to give space for utility innovation is embedded in a portfolio of tools for a systemic support of decision
making is a dynamic framework based on common values and corporate policies which will be concretised per month or quarterly to address the corresponding responsibility for results and costs is using dynamic targets within the business units in order to provide flexibility for meeting the companys goals in a volatile environment is aligned with the coordination of business units by agreement along the companys value chain, not by incentives is connected with how to meet the future goals and what decisions are to be made not with explaining why the past was as it was
Based on the future

Budget Decision dimension Strategic 0 1 2
Middle term planning 3 4 5 years
Long term planning
Prediction Operational Analysis dimension Structures Trends Facts 0 1 2 3 4 5 years Time dimension
Dispositional
Planning Cube
Space fore utility innovations

high level
Southwest airlines
Initiatives Strategic
pricing Sales potentialities Target costing R&D-Project HR-Project PR-Project Investment
Average airlines journey by car
low level Quickness Hubs Lounges Friendly Catering Frequent Select service on board connections places Source: between middle Kim/Mauborgne, Blue Ocean Strategy (2005) sized towns Price
Middle term
planning
Annual
budget
Embedded in a portfolio of tools
observe
Trendscouts Utility innovation SWOT Market research Development of inhabitants Climatic development
test
Business model Strategic House Corporate policy Structure of sales
create
Product potentialities Strategic pricing Sales potentialities Target costing
act
HR and product development
react
Plan of initiatives
accept
Reporting balanced scorecard Corner stones of the plan Integrated system of planning (Finance, Liquidity, HR, R&D, CRM, SCM, CSR) and risk management
Borders of influence
R&Dcapacities Performance capacities Finance capacities
Created as a flexible frame for flexible targets

Middle term planning 2014 2013 2012 2011 2010 Corner stones and several years projects / investments 2010 Annual planning Integrated system with (only) frames for the business units Quarterly planning III / 2009 Rolling forecast to visualise market changes IV / 2009 I / 2010 II / 2010 III / 2010 IV / 2010 I / 2011 Monthly planning 07 / 2009 08 / 2009 09 / 2009 Details of the cooperation between the business units and that with external partners in order to meet the companys goals
Coordination by agreement not by incentives The kind of agreements depends on the companys culture Service level agreements based on internal transfer prices Minutes of planning conferences Monthly budget documents based on actual forecast ... Separately organised incentives, i.e. Different ways up o Leading career o Professional career o Change agent (project leader) Individually adjusted reputation o Member of the strategic team o Lecturer at renowned conferences o Special education o Award for excellent performance
Modern Budgeting Agenda 1. Controllers' definition of budgeting 2. What to do in hard times? 3. Main principles of budgeting 4. The classic way 5. Modern budgeting 6. Knowing ones business is not enough 7. Conclusion: Its a question of culture
Knowing ones business is not enough The controllers business is to manage the economic measures,
instruments and methods
Budget is one of the basic instruments.
What else do controllers need in order to be professional?
o o o o
They have to go to the people; the controllers working place is not the computer They have to speak the peoples language; the people are the controllers customers They have to show in their behavior, that they fully agree with the companys goals and the budget frame to meet them They have to inspire people by helping them find their own role in the company and to develop themselves
Controllers profession The formula of success:

S = Q * A (Succes = Quality * Acceptance) 0 0 0 1 = = = = 0 1 0 1 0,8 * * * * * 0 0 1 1 0,8
0,64 =
Modern Budgeting
Conclusion budgeting is a question of culture

Process and structure simple Represent organisation Modern Budgeting Represent value creating Budgeting by professional controllers seeing the people behind figures
Source: White paper ICV special group Modern Budgeting (2009)
flexible integrated Clear intentions Content
dzikuj bardzo
Modern Budgeting Appendix
Selected tools
But dont forget: A fool with a tool is still a fool !
Appendix The companys strategy (I. business model)

The long term companys goal: e.i. increasing rate of turnover and profit What kind of potentialities do we need and should we develop in order to meet our goals? What is our customers core need ? do the right things How should we use our available potentialities to meet our goals?
do the things right
What is our unique selling proposition Does our (USP) ? core competency meet the customers need ? Who is our customer ?
sales potentiality ?
margin potentiality ?
Appendix Companys strategy (II. Strategic house)
BSC translates strategy into action What are the most important steps to be taken now in order to realise the business model that meets our goals?
Appendix Companys strategy (III. Reporting balanced scorecard)
Appendix Strategic product analysis
Appendix Strategic pricing

1. Which prices are your target customers paying for market alternatives ?
Most customers spread of prices

Observe 3 types of alternative products / services: The same form Different form but the same function Different form and function but the same objective
Pricing on l higher leve Pricing on middle level Pricing on lower level
High protection by law Hard to imitate Bounded protection by law Low protection by law Easy to imitate
2. Which price level corresponds with the context of your product / service ?
Appendix Sales potentiality

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Internationaler Controller Verein eV

Dr. Walter Schmidt

Consultant for applied strategy and communication:

Internationaler Controller Verein eV

Lecturer Humboldt University of Berlin

What is budgeting? This ?

1) Schffer-Poeschel, Stuttgart, 2005

Intangibles are the base for your competitive abilities

Dont cut costs that earn profit

Budgeting in hard times The main questions should be:

If there are no business units

If the company has less than 50 employees

In these cases as far as there is a good leadership the chief and

What are the most important functions of budgeting ?

These points give us a standard to evaluate our own budgeting

Controllers task: Systematical work with goals

sufficient flexibility of budget in order to adapt the

companys goals personal objectives

to the market changes

Coherence of measures =>

Controllers task: Put succeeding questions

The classic way An example for a budget time schedule

1. Draft budget top - down

Annual Plan (Budget)

Tools used in budgeting

It is not so important, how we call it but we have to guarantee it !!!

The principles of modern budgeting

Based on the future

Middle term planning 3 4 5 years

Long term planning

Space fore utility innovations

Average airlines journey by car

Embedded in a portfolio of tools

R&Dcapacities Performance capacities Finance capacities

Created as a flexible frame for flexible targets

Budget is one of the basic instruments.

What else do controllers need in order to be professional?

Controllers profession The formula of success:

Conclusion budgeting is a question of culture

flexible integrated Clear intentions Content

Modern Budgeting Appendix

Appendix The companys strategy (I. business model)

do the things right

Appendix Companys strategy (II. Strategic house)

Appendix Companys strategy (III. Reporting balanced scorecard)

Appendix Strategic product analysis

Appendix Strategic pricing

Most customers spread of prices

Pricing on l higher leve Pricing on middle level Pricing on lower level

Appendix Sales potentiality

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