Apologies to Winston S
Churchill
This page covers management
accounting, budgeting and forecasting. There are separate pages covering statutory accounting and cashflow forecasting. All of my assignments with the
small to medium sized (SME) sector have required these skills. Some of the
larger organisations have required them, but due to division of labour and
organisational hierarchies, this has been to a lesser extent.
Depending on the requirement
of the client, establishing or operating a process for strategic performance
measurement could be an important aspect of the client's reporting process.
These pages cover the three
main areas:
Also, I have included a
section that describes the meaning of "SMART",
a key requirement for all financial performance measurement capabilities.
Not all organisations commit
themselves to an annual budgeting process. There are some reasons for this (as
well as some drawbacks) and these are explored in alternative devises to
budgetary control. However, in assuming that an organisation wishes to
commit itself to this process, it is one that needs to involve budget holders
(they need to have buy-in if they are expected to stick to the budget), it
needs to have a top-down, side-to-side (chronologically-speaking) and a
bottom-up approach. The process needs to be completed and agreed at all levels
by the start of the organisation's financial year.
Budgets are an interative process. The organisation will go through more
than one round of debate about what its sales and margin is going to be and
what sort of overheads its resources are going to represent. Normally, for a
FTSE100 company, the whole process is complete within 90 days, so normally it
starts about 4 months before the financial year end. This means that the busy period
for senior finance staff starts at the beginning of the budget-setting process
and ends when the auditors leave, which is about 7 months later.
My approach to budgets in the
private sector starts with the five-year budget that was established the previous
year. This sets the benchmark for all of the key lines - sales, margin and
overheads in P&L and inventory, debtors, creditors and cash in the balance
sheet. More detail is added in the annual budget and the timing of the
budgetary predictions is broken down by month (technically known as phasing or
profiling). Normally, I would budget sales and margin by both product and by
sales territory and overheads by the main expense headings used in management
reporting.
All of this needs modelling.
The budget model that I use broadly reflects the format that I use for management
accounts and the balance sheet is articulated from this to calculate the key
balance sheet numbers based on asset turns. There is a discussion of financial modelling elsewhere.
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Management reporting operates
at different levels within an organisation, depending on the strategy of the
organisation. Some examples might include:
The format that I have included on this
website broadly matches the first of these strategies.
The mapping of management
reporting onto organisational structure wmay work as
follows (note that this is not a prescriptive structure - its
only suggestive):
All of this has implications
for not only the way in which budgets are calculated but also the way in which
the accounting application software is set up. This is recognised in the page
on this subject, computer implementation. Not only
must the computer be set up properly, but there must be a robust set of
internal controls to ensure that data is captured completely, accurately and
timely. Without either one of these, garbage-in, garbage-out.
A basic requirement of the
format used is that it should be clear and understandable. Personally, my
preparation of these in Excel excludes colours and lines because the detract the eye and label names must be logical (eg "sales" not "turnover", "accounts
receivable" not "debtors"). The numbers should be accompanied by
a written report and this should highlight significant variances to budget or
forecast or to the trend being experienced, any large or unsual
items (even if in the ordinary course of business) and an outlook.
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The critique of the budgetary
process alternative
devises to budgetary control makes the valid point that with the budget
process taking place at the time that it does and with the speed of both
internal and external change that organisations go through, its quite possible that the budget will be out of
date in quick time. In an assignment for BP Fuels Marketing, the plc asked that the budget for the calendar year 2000 should
assume the price of oil at 1st January was to be $24 and that this was to fall
to $18 by 31st December; in fact it started the year at $27 and never dropped
below $25, but this company-wide error had no impact at all on BP's share
price!
As a fallback,
the forecasting process admits that a budget is probably out of date but then
says that a view of what is likely happen to the end of the year is still an
important consideration for resource allocation and accountability. The format on this website makes an
allowance for this eventuality.
An example of implementing
this device is Oxfordshire County Council In the
public sector, it is important to be able to provide a view of the likely
outturn for the year and to compare this to the budget for the year. The
variance is important because if an body exceeds its
budget without going through the formal process have having an increase
approved, it is contravening the law. At OCC, this was calculated, however the
process for this calculation was not transparent as it was calculated at a top
level and without reference to the cost centre managers who were responsible
for managing the budget. By implementing this format, the cost centre managers
were made responsible for providing the forecast and so were accountable for
the likely outturn overall.
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