Finance Training Courses for Managers ...   helping to deliver financial & business performance

Newsletter No.1

Managers Budgets Going to Zero!

In recent times many businesses have experienced the "costs" of simply implementing aggressive "cost cutting " measures as a strategy for solving business performance problems. Cost cutting without careful consideration of business strategy and the long-term view is relatively easy to implement and is the "lazy man’s" approach to budget management and control. In fact, many companies have ended up with medium to long-term damage to their business infrastructure and market positioning as a result of such strategies e.g. budget cuts to the sales and marketing budgets that save money today but lead to reduced future sales and market share.

Zero Based Budgeting

It is true that business is getting tougher and that managers need to continue to reduce their costs and do more with less but the answer lies in improved budget forecasting, management and control.

In today’s business environment boards are critical of managers that:

• don’t meet their budgets
• use incremental or a "soft budgeting" e.g. last years budget + 3-5%
• claims approach to budget their budget submissions.

The increased emphasis on business performance and manager accountability for
financial matters has resulted in a trend that favors the Zero-based approach.

In the past, many organisations used an incremental approach that involved the use of past budget information as an integral part of the Budget construction process. While last year’s budget is a relevant reference point, Zero-based Budgeting means that managers start with a "clean sheet of paper" each year and are required to build budget estimates based on forecast business conditions.

Zero-based budgeting requires managers to develop detailed budget construction methodologies that relate to the various inputs and business activities involved. Understanding cost structures, cost drivers and the use of detailed budget forecasting worksheets are now essential requirements for the development of sound and reliable budget forecasts.

Customised in-house Training Programs available...   FREE eMail brochure

Financial KPIs

A new way of dancing for Managers

Traditionally the performance criterion for many line managers has been based around managing operational expenditure (OPEX) budgets. While managers diligently “watched” their expenditure levels in relation to the set budget, little connection was often made to the financial performance of the business as a whole.

One of the most limiting factors of traditional financial Key Performance Indicators (KPIs) has been a lack of reference to Revenue and Profitability. Many businesses today have addressed this issue by introducing Business Unit Structures with managers’ accountability extending to Revenue, Expense and Net Profit performance. However for many other organisations the implementation of Business Units has not been a practical option and has left them with the question of how to implement sensible performance measures for line managers that reflect total business performance.

Expense to Sales KPIs

Expense to Sales KPIs can greatly assist line managers to manage and control their budget performance within the overall business context.

This type of KPI also ensures that each expenditure group does not take up a
disproptionately larger slice of the Sales pie.

This type of KPI can be used in addition to profitability KPIs such as: EBIT Margin
and Gross Profit Margin.

Expense to Sales KPIs – An Example (Fictitious Numbers Only)

Customised in-house Training Programs available...   FREE eMail brochure

Business Cases

Win the budget battle with “Bullet-proof” BUSINESS CASES

Having a great idea and a worthy project is simply not enough to gain budget approval.

Long gone are the days when managers can gain budget approval for the expenditure of large sums of limited financial resources purely based on the “qualitative” and “from the heart” merits of any new initiative. Proposals for any substantive project, whether they involve investments in physical assets such as new equipment or in less tangible assets such as skill development, cultural change or other workplace improvement are now being assessed on a business case basis.

When is a business case warranted?

As general rule any significant initiative that is not part of the regular operating budget will normally require the preparation of a business case. For many organisations a minimum threshold is set as part of financial management policy e.g. initiatives requiring investments in excess of $50,000.

Objectives and Scope

Clearly identify the objective and scope of the proposal What problem is it addressing? What is included? What is excluded?

Consultations

Consult with other business units to identify needs, to avoid duplication and to build strategic support for your project.

Identify the impact of your proposal on other business units. For broader initiatives consult with other managers to gain support. When appropriate work towards the development of a joint project.

Alignment with Business Strategy

Clearly align the project with corporate plan objectives and when possible make the link to specific KPIs. For projects in the public sector, this will involve the identification of outputs, specific performance measures and alignment with outcomes as determined by the government of the day.

If there are no specific KPIs that relate to your project, be proactive and identify some meaningful and measurable KPIs that align with the business strategy.

Contemplate the “do nothing” option

Ensure that you consider the “do nothing option” i.e. what are the costs to the organisation if the project is not implemented now. If the answer is little or no cost then the project is doomed to stall at the first hurdle.

Timeframes and Key Milestones

Identity a timeframe for the project including key milestones. If possible, stage the project over a number of financial years and consider submitting a pilot project. A successful pilot can then be used to build confidence and support for sustainable long-term implementation of the whole project.

Assess the risks

Risks often translate into additional financial costs to the business; this is particularly the case for higher risk activities such as IT and software related projects. It is therefore essential that at least a basic risk assessment is included in the business case. Identify key risk factors, their associated potential price tags and risk management strategies to minimise the risks.

Include the “financials”

Financial information should include a budget for the first 3 years of the project plus a monthly budget for the first financial year. It is vital that operating expenditure is clearly separated from capital expenditure items.

Prepare a cost/benefit analysis

Purely commercial initiatives normally will include projected annual revenues less projected operating expenditure and projected profit (surplus). The profit result (or operating result) in turn should be expressed as percentage of the total capital expenditure to provide a return on investment number.

In a business driven climate non-revenue producing projects can be particularly vulnerable unless a credible cost/benefit analysis is prepared. For such projects, a cost/benefit analysis should attempt to “quantify” the “qualitative” benefits of the initiative.

For example:

NOTE: In financial terms, a cost saving or cost offset produces the same result as revenue on the “bottom-line”

And finally, be prepared to compete vigorously with other business units vying for the same limited resources you are chasing. Use your bullet-proof business case to not only defend your proposal but to sell its benefits and gain budget approval.

Customised in-house Training Programs available...   FREE eMail brochure