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Management Consulting

Accurate Budget Planning

Budget planning often ends in a flurry of hectic activity. Planning takes too long; it's too detailed and too lengthy. But there are much more efficient ways of going about it.

Year-end bud­get plan­ning for the coming year makes eve­r­yone grumpy at many com­pa­nies. The desire to describe eve­r­y­t­hing as accu­ra­tely as pos­si­ble leads to mas­sive amo­unts of data that must be pro­du­ced, made plau­si­ble and pro­ces­sed. The Con­trol­ling Depart­ment puts in overtime. The Depart­ments keep pro­vi­ding more and more num­bers. When the plan ulti­ma­tely comes about, parts of it are com­p­le­tely out­da­ted because mate­rial assump­ti­ons have already chan­ged again. The short­co­mings in this type of typi­cal bud­get plan­ning are quickly obvious: it takes too much time, it isn't very effec­tive, and it has a short half-life.

Fin­ding Your Own Way: Sus­tainable Plan­ning

Yet there have long been methods of making a plan an effi­ci­ent instru­ment for mana­ging your busi­ness. What you need is to deve­lop a custo­mi­zed plan­ning stra­tegy. It should go into detail only where such detail really makes sense, and it should be fle­xi­ble and easy to adapt at all times. But how can you sepa­rate rele­vant infor­ma­tion from irre­le­vant infor­ma­tion? How can you take pro­ject effects into acco­unt? How can you incor­po­rate influ­en­ces from the mar­ket environ­ment or the politi­cal world?

The first task is to address the exis­ting pro­b­lems in a struc­tu­red man­ner. For example: The com­pany's stra­tegy is not taken into acco­unt in the bud­ge­ting pro­cess. The amo­unt of resour­ces used is enor­mous. Orga­niza­tio­nal inter­faces are not cla­ri­fied. The same sys­tem is used to pre­pare the ideal sce­na­rio. This will allow you to estab­lish fun­da­men­tal para­me­ters for opti­mi­zing your plan­ning pro­cess.

Imp­le­men­ta­tion occurs in five steps:

  • Estab­lish stra­te­gic gui­de­li­nes: Your com­pany's stra­te­gic goals are bro­ken down into gui­de­li­nes from the top down for each of the ope­ra­ting units. These could be mar­ket share goals, ear­nings ratios or key acco­unt volu­mes, but they could also be stra­te­gic core values for a new line of busi­ness, a new loca­tion, etc. 
  • Draw up a basic plan: The ope­ra­ting units pre­pare a basic plan - the "base case" - from the bot­tom up. The focus is on the ques­tion of where there are sig­ni­fi­cant gaps bet­ween the cur­rent situa­tion and Mana­ge­ment's stra­te­gic gui­de­li­nes. 
  • Plan ear­nings-criti­cal posi­ti­ons in detail: The basic plan is only fles­hed out with respect to ear­nings-criti­cal posi­ti­ons and situa­ti­ons where sig­ni­fi­cant gaps have been dis­co­ve­red. The key ques­tion is what acti­ons can be taken to achieve the core goals - a key fac­tor in the plan­ning pro­cess, for these acti­ons will be the cen­tral task of mana­ge­ment in the ope­ra­ting units in the coming year and the basis for repor­ting and con­trol­ling.
  • Simu­late sce­na­rios: What influ­ence will ups and downs in the eco­nomy have? What effects will dif­fe­rent acti­ons have? Ques­ti­ons like these can be ans­we­red by simu­la­ting various sce­na­rios. This will show how sen­si­ti­vely the com­pany's suc­cess reacts to chan­ges. 
  • Read­just if necessary: As we all know, things sel­dom work out the way they were plan­ned. Purchase pri­ces change; a new law is enac­ted; the start-up of a pro­duc­tion line is delayed. For plan­ning to be use­ful as a mana­ge­ment tool, it must be adjus­ted con­stantly. And it will soon become clear whe­ther the com­pany is still on track.

Practi­cal Example of Sus­tainable Plan­ning

Fort­u­na­tely, it is not always necessary to radi­cally change the ent­ire plan­ning pro­cess. What is important is to adjust the right para­me­ters, as shown by this example: A com­pany with more than 80 sub­si­dia­ries estab­lis­hed a pro­gram to inc­rease pro­fits through 50 pac­ka­ges of mea­su­res, some of which were plan­ned cen­trally and others locally. But to imp­le­ment this using their exis­ting plan­ning pro­ce­dure would have taken fore­ver.

In com­pact work­shops with Con­trol­ling, Mana­ge­ment and the Busi­ness Units, poten­tial pro­b­lems in the bud­get plan­ning were first anti­ci­pa­ted; their cau­ses were then deter­mi­ned and prio­ri­ties were set. The first con­se­qu­ence was that the divi­si­ons had to do much less plan­ning at the cost cen­ter level because bin­ding instruc­ti­ons were impo­sed from the top down. On the other hand, much more time was spent on plan­ning pro­fit-criti­cal mea­su­res. To do so, lay­ers (the com­pany's own data lay­ers in the plan­ning soft­ware) were spe­cially brought in for mea­su­res to be taken over wide areas. A simple device that is highly effec­tive: on the one hand, the lay­ers made con­c­rete plan­ning pos­si­ble at the local level by the indi­vi­dual units. At the same time, the effect of each mea­sure on each layer could also be seen at the level of the ent­ire com­pany.

In a Nuts­hell

Many mana­gers think that swit­ching to modern plan­ning methods is too risky, because it would mean chan­ging a tried-and-true pro­cess. But it's really worth it. Added value is crea­ted when the plan is an effec­tive tool lea­ding to even grea­ter suc­cess for the com­pany.

A lon­ger ver­sion of this arti­cle by Tho­mas Mun­dus and Simon Haas was pub­lis­hed on January 5, 2015 in the Frank­fur­ter All­ge­mei­nen Zei­tung under the hea­ding "Der Betriebs­wirt".

To read the arti­cle in Ger­man in the online ver­sion of the FAZ, click here.


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