KAIZEN BUDGETING

Thasni M K Chitra k Raseem K

What is kaizen??
Kaizen,in Japanese, means continuous improvement , that is changing for the better The word kaizen denotes a principle In the business world, kaizen refers to a systematic quality improvement tool used first in manufacturing before gaining popularity in other areas of business.

 Business owners can apply the kaizen philosophy to any area of operations to continuously improve quality standards and reduce costs. The underlying principle behind the term is that even small and insignificant looking decisions, when effectively taken in business, can bring relatively larger output in terms of efficiency, productivity and thus profitability. Those companies which wish to adopt Kaizen decision making in business should effectively understand Kaizen budgeting

KAIZEN BUDGETING ???

Definition A budgeting approach that projects costs on the basis of future improvements, rather than current practices and methods. The key point is that the budget cannot be achieved unless improvements are made.

 Involves setting budget goals in accordance with future plans for operational improvement, rather than basing budgets on current cost structures. Kaizen budgeting forces managers to make solid commitments to reduce costs during the budget period.

Production Costs
Kaizen budgeting looks forward rather than backwards when it comes to production costs. A kaizen budget takes the end result of cost-cutting initiatives, like process re-design, into account to set financial goals. Production managers can use kaizen budget figures as a guide when planning for operations, encouraging them to remain innovative and committed to reducing costs and meeting budget goals. Kaizen budgeting can also account for new economies of scale in anticipation of higher production volumes, or for new cost structures due to anticipated changes in suppliers or purchasing costs.

 Kaizen budgeting is useful for manufacturing companies, or businesses that rely on regular daily processes to produce a product. Kaizen budgeting can put managers' heads in the right place; managers can become intimately knowledgeable about their company's processes and consistently budget responsibly quarter to quarter. Kaizen budget figures for inventory loss and other inventory-related expenses acts as an external motivation for managers to implement meaningful change in their departments to address these issues.

Advantages

Advantages contd..
Kaizen budgets continually reduce the allowances for the expenses of inventory loss like wastage, theft, errors etc the over time, forcing managers to implement tighter and more effective loss control policies to keep up with the budget's shrinking figures. Kaizen budgets can set goals for energy expenses and other utilities which are lower than current expense amounts. This can encourage managers to find ways to save energy in their departments or be less wasteful with utilities.

Advantages contd..
Reducing overhead expenses through kaizen budgeting can boost profit margins while having positive effects on the environment by using less water, electricity or fuel.

Disadvantages
Kaizen budgeting can be more of a gamble than traditional budgeting techniques, as there is no historical basis for ambitiously altered budget items. Kaizen budget goals can be easier to meet in earlier stages than in later stages, introducing challenges to departments which have done all they can to reduce costs as budget amounts continue to tighten.

Disadvantages Contd..
If the business fails to meet the goals set by kaizen budget items, its entire cost structure can become skewed. Because of this, it can be helpful to develop traditional budgets alongside kaizen budgets, but this can introduce new expense and time requirements to the budgeting process.

1. Dependence on Communication and Analysis A key component of kaizen budgeting is the identification of flaws in a system or areas in which a system can be improved. Because kaizen budgeting relies on frequent small tweaks to cut costs, managers must micro-manage processes. Managers must also identify each and every problem with a process. That requires a total breakdown of communication barriers between managers and employees. Kaizen budgeting also requires managers to consistently identify flaws and improve employee actions. Both of these requirements can be difficult to reproduce quarter after quarter, and make no allowance for outside factors that affect businesses.

Limitations

2. While kaizen budgeting may help consistently cut costs for several quarters, a barrier will be reached eventually. All costs of running a business can only be cut so much, but kaizen budgeting focuses on many small changes. Like whittling a piece of wood, there are only so many ways to pare down day-today operations using kaizen budgeting.