Budgets & Global Companies

Objectives

1. Understand how budgets can be use to measure performance.

2. Understand that costs are investments not liabilities.

3. Understand how a good definition of processes and activities can help you save some money.

Develop Budgets

“For many managers, the annual budgeting process is like putting on a straitjacket”

Develop Budgets

How are budgets usually seen? Workload Unnecessary Necessary but unwanted

A Systematic Method of allocating financial, physical and human resources to achieve strategic goals.

Develop BudgetsBest Practices

1. Link Budget to Strategy

2. Tie Incentives to performance

3. Reduce Budget Complexity

4. Design budgets that accommodate for change

Link Budget to Strategy

Fujitsu Computer Products of America1. The executive team determine strategic and

Tactical Issues2. Filters he information down to product-line and

sales managers3. They create forecasts and tactics to support the

corporate objective.4. Results are measured to ensure they conform to

the original target.5. If forecasts and tactics fall short, they make

corrections.

Tie Incentives to performance

3M Company The managers are evaluated based on how much

their division’s performance improves upon its prior actual results.

Accept the reality: people do play with budgets

What companies gain: More realistic budgets Stronger entrepreneurial efforts Greater satisfaction with the compensation system

Reduce Budget Complexity

Handelsbanken Before 1970: 1500 people at head office 30 Years Later: 300 people at head office

Two big enemies: the artistic view of the budget and its cycle

Reports Time

Design budgets that allows change

Borealis A/S: A Danish Petrochemical Company

The cyclical nature of product prices and raw materials

Rolling Forecasts that look 5 Quarters ahead Reduction the processing time down to 4 days

each Quarter Gain reforecast capability in a crisis

The Nature of Cost

“Most companies operate on the following maxim: costs are bad; profits are good”

The Nature of CostsBasic Principles

1. Costs are investments not liabilities

2. The Vicious Cycle of Cutting Costs

3. Costs are the result of action: The Value Chain

The Value Chain

The Goal: creating value for buyers that exceeds its costs.

Value Activities: activities that creates a product valuable to its buyers. Primary activities Support activities

The Value Chain: disaggregates a firm into its strategically relevant activities in order to understand the behavior of costs.

Saving Money

“Economic results are directly proportionate to revenue, while costs are directly proportionate to transactions and activities”

Saving MoneyBest Practices

1. Dismantle bureaucracy

2. Manage processes and flow

3. Manage fix costs through directional goals

Dismantle bureaucracy

Toyota: over one-year period employees had made eighty thousand improvement suggestions…and the plant had implemented 99% of them!!!!

Handelsbanken: operating with the devolved management model.

The worst enemy of an initiative is bureaucracy.

Manage processes and flow

Manage processes and flow

Dell: continuously finds ways to cut costs as it continues to improve operating processes ($3.3 billion in two years).

“We manage the supply chain end-to-end, from order to delivery…over the past five years Dell has reduced its supply chin costs by 60%.”

Jeffrey Clarke, product group vice president

Taiichi Ohno defined capacity as work plus waste.

Manage fix costs through directional goals

“If we can make fewer mistakes and turn more of our resources into value-adding outcomes, then I’m sure we’ll all be happier.”

John Wilton, World Bank CFO

Summary

“Few realize that most cost budgeting systems protect costs and hide waste”

Objectives

1. Understand how budgets can be use to measure performance.

2. Understand that costs are investments not liabilities.

3. Understand how a good definition of processes and activities can help you save some money.