Professional Documents
Culture Documents
Budget Definition
The budget of a company is compiled annually. A finished budget usually requires considerable effort and can be seen as a financial plan for the new financial year. While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in the various departments (operations, human resources, IT etc) to contribute their expected revenues and expenses to the final budget. If the actual numbers delivered through the financial year turn out to be close to the budget, this will demonstrate that the company understands their business and has been successfully driving it in the direction they had planned. On the other hand, if the actuals diverge wildly from the budget, this sends out an 'out of control' signal and the share price could suffer as a result. - Wikipedia.com
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Budget Etymology
Middle English bouget, wallet, from Old French bougette, diminutive of bouge, leather bag, from Latin bulga, of Celtic origin; see bhelgh- in Indo-European roots. So a budget is a bag of money.
Management Longenecker/Pringle
4 pages of 684 = of 1% Of 2000 hour work year = 12 hours
We learned 99% of what we know about the budget process on the job. This does not contribute to an influx of new ideas. This is not a hot academic area, but there is some current attention to it. The current thinking is to align budgeting to strategy, disconnect it from a yearly cycle, and to harmonize personal goals with it. Some suggest it should be abandoned.
Budget Goals
Its simple isnt it?
To choose among investment options. To decide who gets how much in their purse. This is based on what the return will be for that allocation/investment. We learned all this in school, right?
Or is it simple? We have an impressive array of quantitative and process-oriented resource allocations systems at our disposal. THIS is what they taught you in school. How often do you use these analytics in the budget process?
Budget Quotes
Budgeting is governing
- Pete V. Domenici, chairman of the Senate Budget Committee Corporate Budgeting is a Joke
Michael Jensen, HBR
The budget must be balanced. debt must be reduced; arrogance must be moderated and controlled. Payments to [suppliers] must be reduced, if [we] dont want to go bankrupt. People must again learn to work.
- Cicero 55 BC
The budget is the Bane of corporate America. It never should have existed Making a budget is an exercise in minimalization. Youre always getting the lowest out of people, because everyone is negotiating to get the lowest number.
Jack Welch
Politics Definitions
Politics - American Heritage Dictionary
(used with a sing. or pl. verb) The often internally conflicting interrelationships among people in a society.
Politics Quotes
Politics is supposed to be the second oldest profession. I have come to realize that it bears a very close resemblance to the first. - Ronald Reagan Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. - Ernest Benn Yes, we have to divide up our time like that, between our politics and our equations. But to me our equations are far more important, for politics are only a matter of present concern. A mathematical equation stands forever. - Albert Einstein
Budget Politics
The budgeting process is so deeply embedded in corporate life that the attendant lies and games are simply accepted as business as usual The best designed systems can be trumped by the power of personality.
It is now commonplace for talented and charismatic managers to spin, manipulate and otherwise cajole senior management into funding their business ideas.
When people get economic with the truth during capital budgeting, the underlying economics get lost.
Budget As Is
Research data suggest that:
5% of the workforce understand their company's strategy 25% of managers have incentives linked to strategy, that 60% of organizations don't link budgets to strategy 85% of executive teams spend less than one hour per month discussing strategy
90% of respondents thought their budget process was cumbersome CFO Magazine If youre involved in the process, no one needs to tell you about the game-playing
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Cheaters Prosper
Typical Comp Scheme
80% of Target Bonus kicks in 120% of Target Bonus Cap This rewards people for what the SAY they will do
Games/Cheats
Sacrifice next year for this year to make 80% Take a big bath this year if you cant hit 80%. This will make next year easier. Push profit into the future to avoid 121% All of these cheat are easy to do
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Magicians
They cover up faults by leaving out facts, or diverting attention. We didn't actually overspend our budget. The health Commission allocation simply fell short of our expenditure. - Frank A. Clark
Lone Agents
Were different. They stonewall and expect special treatment and standards.
Visionaries
If they dont have numbers on their side they appeal to emotions. Breakthroughs, revolutions, cutting edge. Its usually faith-based investing.
Hostage Takers
Require huge investments for huge paybacks. Often risky, but even if not, can starve off other profitable investment options.
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Tie budgeting to strategy, and often. Accept that things will change more often than yearly Do not use ratios (Sales margin, ROA, etc)
This will cause managers to work the numerator or denominator, like selling only the high margin products and backing off on the lower margin to the detriment of total revenue.
Kaplan discusses a diving competition type of measurement. More difficult goals have greater rewards. Team vs. Individual Implement carefully
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Eliminate budgets Set bonuses for multiple years, to eliminate year-to-year gaming Set bonuses for monthly periods Institute Rolling Budgets
Common practice among Japanese firms like Toyota Two to three year duration NPV of future cash flows Basic Financial Statement format infected by focus on earnings, cash is a derivative. Zero in on investment (W/C, assets) and financing rather than Assets liabilities and equity. Emphasize level of free cash flows R&D, process improvements, new markets, intellectual property, etc. are what drive longterm cash flows, not earnings.
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We might come closer to balancing the Budget if all of us lived closer to the Commandments and the Golden Rule Ronald Reagan
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Change is Hard
Expect massive resistance CFOs may resist the most There may be greater uncertainty in quarter to quarter results, but long-run profits will be superior Remember, it has taken many years to weave lying and deceit into the fabric of our businesses; cleansing the fabric will take time as well. Go do good
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Bibliography
Breaking the Budget Impasse
Loren Gary Harvard Management Update, 2003
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