practical budgeting

8/7/2019 Practical Budgeting

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Practical Budgeting and

Control TechniquesTarget, Resource Allocation,

Initiative and Budgets


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Achieving Success in the

Information Era To achieve success in the information era,

companies need more than prudent

investment in physical assets and excellentmanagement of financial assets andliabilities

Companies mobilize and create value fromtheir intangible assets as well as theirphysical and financial ones


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Intangible Assets An organizations intangible assets

include:

Loyal and profitable customer relationships

High-quality processes

Innovative products and services

Employee skills and motivation

Databases and information systems


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Measuring Intangible Assets Difficulties in placing a reliable financial value

on intangible assets have prevented them

from being recognized on a companysbalance sheet

These assets are critical for success

Managers have searched for a system thatwould help them measure and manage theperformance of their intangible, knowledge-based assets


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The Balanced Scorecard The Balanced Scorecard (BSC) provides a

system for measuring and managing all aspects

of a companys performance The scorecard balances traditional financial

measures of success, such as profits and returnon capital, with non-financial measures of the

drivers of future financial performance The Balanced Scorecard measures

organizational performance across differentperspectives


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Perspectives

Four different but linked perspectives are

derived from the organizations strategy Financial

Customer

Internal

Learning & Growth


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Balanced Measurements The BSC enables companies to:

Track financial results Monitor how they are building the

capabilities for future growth andprofitability

With customers

With their internal processes

With their employees and systems


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Connecting the Four Perspectives

A strategymap provides a visual representationof the linkages in the four perspectives of the BSC

Financial Perspective Return on Investment

Customer Perspective Customer Loyalty

On-Time Delivery

Internal Perspective

Learning & Growth

Perspective

Process Quality Cycle Time

Employees Process Improvement Skills


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Connections Return on investment (ROI) is a widely

recognized measure of financial success

Repeated and expanded sales from existingcustomers, the result of a high degree ofloyalty among existing customers, could be

one driver of this financial measure


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Connections Analysis of customer preferences may

reveal that on-time delivery (OTD) of orders

is highly valued by customers The company must excel at internal

processes to achieve exceptional OTD


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Connections Short cycle times and high-quality production

processes are two drivers of on-time delivery

The company must have skilled productionworkers, well-trained in process improvementtechniques

A measure of employees skill and capabilitiesin process improvement is used in theLearning & Growth perspective


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Strategy and the BSC A BSC tells the story of the business unit's

strategy

A BSC identifies and makes explicit thehypotheses about the cause and effectrelationships between:

Outcome measures in the Financial andCustomer perspectives

Performance drivers of those outcomes in theInternal and Learning & Growth perspectives


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Vision and Mission Before determining the objectives and

measures, an organization shouldalready have a visionand missionstatement

High-level statements that can then

be translated into detailed objectivesand measures


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Vision A concise statement that defines the mid

to long-term (3 - 10 year) goals of the

organization

The vision should be external and market-oriented and should express, often in

colorful or visionary terms, how theorganization wants to be perceived by theworld:


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VisionThe City of Charlotte will be a model of

excellence that puts its citizens first. Skilled,

motivated employees will be known forproviding quality and value in all areas ofservice. We will be a platform for vitaleconomic activity that gives Charlotte a

competitive edge in the marketplace. We willpartner with citizens and businesses to makeCharlotte a community of choice for living,working and leisure activities


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Mission Statement A concise, internally-focused statement

of how the organization expects tocompete and deliver value to customers

It often states the reason for theorganizations existence, the basic

purpose towards which its activities aredirected, and the values that guideemployees activities:


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Mission StatementThe mission of the City of Charlotte is to ensure the

delivery of quality public services that promote thesafety, health and quality of life of its citizens. We

will identify and respond to community needs andfocus on the customer through:

Creating and maintaining effective partnerships

Attracting and retaining skilled motivated

employees Using strategic business planning


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Putting Vision in Action

The Vision and Mission set the general directionfor the organization

They are intended to help shareholders,customers, and employees understand what thecompany is about and what it intends toachieve

Companies start to make the statementsoperational when they define a strategyof howthe vision and mission will be achieved


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What is Strategy? Strategy is aboutselecting the setofactivities in whichan organization willexcel to create asustainabledifference in the marketplace

Differentiation arises from both the

choice of activities and how they areperformed (Porter)


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Building the Balanced Scorecard

The role for the BSC is to provide

needed specificity that makes vision,mission and strategy statementsmeaningful and actionable foremployees


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Financial Perspective

The ultimate objective for profit-maximizingcompanies

Financial performance measures indicatewhether the company's strategy,implementation, and execution arecontributing to bottom-line improvement

A companys financial performance can beimproved in two ways:


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Financial Perspective Companies generate revenue growth by:

Selling new products

Selling to new customers Selling in new markets

Increased productivity occurs by:

Lowering direct and indirect expenses Utilizing their financial and physical

assets more efficiently


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Customer Perspective Identify the targeted customer segments in which

the business unit competes and the measures ofthe business unit's performance in these targeted

segments This perspective typically includes several

common measures of the successful outcomesfrom a well-formulated and implemented

strategy: Customer

satisfaction

Customer retention

Customer acquisition

Customer profitability

Market share

Account share


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Customer Perspective

A strategy identifies specific segments

targeted for growth and profitability

Companies must also identify the objectivesand measures for the value proposition itoffers customers


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Customer Perspective The value proposition is the unique mix of product,

price, service, relationship, and image offered to thetargeted customers

Defines the companys strategy

Communicate what the company expects to do for itscustomers better or differently from its competitors

Value propositions used successfully by differentcompanies include:

Best buy or lowest total cost

Product innovation and leadership

Complete customer solutions


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Internal Perspective Means by which the organization will:

Produce and deliver the value proposition for

customers Achieve the productivity improvements for the

financial objectives

The Internal perspective identifies the criticalprocesses at which the organization must excelto achieve its customer, revenue growth, andprofitability objectives


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Internal Perspective Organizations perform many different

processes, which may be classified into four

groupings: Operating processes

Day-to-day processes by which companiesproduce their existing products andservices and deliver them to customers

Customer management processes

Processes by which companies expand

relationships with targeted customers


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Internal Perspective Innovation processes

Processes by which companies develop new

products, processes, and services,

Regulatory and social processes

Processes by which companies ensure that

they meet or exceed regulations on businesspractices


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Learning & Growth Perspective

Identifies objectives for the people, systems, andorganizational alignment that create long-term growthand improvement

Define the employee capabilities, skills, technology,and organizational alignment that will contribute toimproving performance in the measures selected in thefirst three perspectives

Identify investments needed to improve the skills ofemployees, enhance information technology andsystems, and align people to the companys objectives


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Identifies how executives mobilize theirintangible assets to drive improvement in

the internal processes most important forimplementing their strategy

Examines each of the processes they

selected in the Internal perspective


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Determine the factors that enable that processto be performed in an outstanding manner so

that it can contribute to the success of thecompanys strategy:

Employee capabilities, knowledge, and skills

Information systems and databases

Employee culture, alignment, and knowledge-sharing


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Using BSC to Implement

Strategy BSC was originally developed to improve

performance measurement, but

organizations learned that measurementhas consequences far beyond reporting onthe past

The BSC concept evolved during the1990s from a performance measurementsystem to a new strategic management

system


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Objectives Concise statements that articulate what the

organization hopes to accomplish

Action phrases

Tell the story of the strategy through thecause-and-effect relationships

Extensive (3-5 sentence) description of eachobjective


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Objectives Typical objectives found in each of the four BSC

perspectives include:

Increase revenues through expanded sales toexisting customers (Financial perspective)

Become service oriented (Customer perspective)

Achieve excellence in order fulfillment throughcontinuous process improvements (Internal

perspective)

Align employee incentives and rewards with thestrategy (Learning & Growth perspective)


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Measures Provide specificity and reduce the

ambiguity that is inherent in word

statements Specifying exactly how an objective is

measured will give employees a clear

focus for their improvement efforts Once the objectives have been

translated into measures, managers

selecttargets for each measure


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Targets and Initiatives Targetsestablish the level of performance

or rate of improvement required for a

measure Should be set to represent excellent

performance

Should, if achieved, place the company asone of the best performers in its industry

Initiatives are the short-term programsand action plans that will help achieve the

stretch targets established for its measures


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Strategy Brochure based on the

balance scorecardCorporate goals Target Initiative

Shareholders Financially strong

To deliver strong andconsistent financialperformance

Cash flow as %

of revenue

Continued to reduce

departmental unit costswith gap closure

Optimized traffic mix,yields and third partyrevenues

Improves the

performance of theairlines capital assets


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Account management/

selling strategic initiativeObjective Measurement Target Action

program

Exceed Marketgrowth

Profitabilitygrowth

Sales growth

Margin growth

Marketgrowth+2%+ 5points in 3years

Perceived value

for moneyRelationships atmultiple levels

Customer survey

Contacts withtargeted sponsors

Rated 1 by

75%100%

Focus group

programAccountpenetrationprogram


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Account management/selling strategic initiative

Objective Measurement Target Action program

Maximizeretention

Develop regionalmarkets

Identifyprofitability newmarkets

Win/lose rate

Potential revenue insales pipeline

Potential customersarrive first

Surprises

Exceed 60%in targetedsegments

increase by30%

Critical opportunitysales support

Reference sellprogram

Develop

marketing skillsDevelop customerdatabase

Percent of strategic

skills availablePercent of customerswith key attributesknows

100% in 2

years

80% in 2years

Selling skills

program

Customer database

Sales learningsystem


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KPI Scorecards

Some organizations identify key performanceindicators (KPIs) and classify them into the four

BSC perspectives KPIs typically are common measures, such as

customer satisfaction, quality, cost, employeesatisfaction, and morale

Companies may expand their compensationsystem to reward executives for a broader set ofperformance than simply short-term financialresults based on KPIs


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BSC in Nonprofits and Government

Organizations The BSC is especially well-suited for nonprofit and

government organizations (NPGOs)

Their success has to be measured by theireffectiveness in providing benefits to constituents

Since nonfinancial measures can assessperformance with constituents, the BSC provides

the natural performance management system forNPGOs


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NPGOs and Strategy Many NPGOs encountered difficulties in

developing their initial BSC, finding that

they didnt have a clear strategy Many NPGOs place their mission objective

at the top of their scorecard and strategymap Cannot use the standard BSC architecture

where financial objectives are the ultimate,high-level outcomes to be achieved


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5 Principles for BecomingStrategy-Focused

Organizations achieved their strategic alignment and focusin different ways, at different paces, and in differentsequences, but they generally followed a common set of

five principles:1. Translate the Strategy to Operational Terms

2. Align the Organization to the Strategy

3. Make Strategy Everyones Job

4. Make Strategy a Continual Process5. Mobilize Leadership for Change

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