Effective Budgeting & Beyond Training Course

Effective Budgeting and Beyond

Budgeting has been used for more than 250 years as a means of planning resource requirements and matching revenue with costs. Many companies still use budgeting to the same ends, to plan revenues and control costs. Budgets also give them a way of measuring and controlling both organisational and managerial performance.  

World-class organisations incorporate budgeting within their strategic planning and management framework and it is in this context that budgets provide a powerful tool implement the strategic priorities that will achieve long-term corporate goals.

The 21st-century finance function

The role of the finance function has changed dramatically over the last 30 years and this is reflected in the stated objectives of this course, which include

• The development of strategic thinking, decision-making and strategic analysis and management skills to develop the organisation’s mission and objectives and carry out strategic analysis and decision-making 
• To understand the relationship between financial planning, forecasting, and budgeting and the integration of the strategic management process with the budgeting cycle 

To operate an effective planning and control system finance professionals can no longer work ‘in a vacuum’, relying purely on financial and accounting skills; the course also addresses other skills and some key issues:

• The relationship between vision and business strategy 
• Defining strategic and operational objectives
• Selecting targets for advanced performance measurement
• The evolving role of the CFO and the finance team 
• Creating and delivering value to key stakeholders
• What is the vision and force that drives your organisation?

Whether it’s a private or public sector organisation the answer to that question is likely to be broadly the same: creating and delivering value to key stakeholders.

This goal is central to the purpose of most organisations. Stakeholders are people and institutions with an interest in the organisation’s performance.  Different stakeholders will have their own concept of what defines ‘value’ for them.  

For commercial organisations value is usually expressed in terms of profit and cash and how this value is distributed to the owners of the organisation, in other words, the providers of capital and finance to the organisation.  

In companies financed by share, capital value is delivered to the shareholders in the form of dividends and in the increased value of their shareholding (together referred to as Total Shareholder Returns, or TSR).

Creating and articulating the organisation’s vision

In their research into the most resilient organisations that had all lasted for more than a hundred years, Collins and Porras found that these great organisations think of themselves in a fundamentally different way from average companies. 

In a world that is constantly changing the instinctive response of many companies is to ask “how should we change?”  But these visionary companies distinguish their core values and enduring purpose, which are timeless, from their operating practices and business strategies, which change in response to changes in circumstances.

 Core values are the organisation’s enduring fundamental guiding principles: not to be confused with its operating methods nor compromised for financial gain.  In many cases, a visionary company distils its core values to a simple ideal that provides the guiding principles for the organisation in all of its activities. Sam Walton epitomised this concept with Wal-Mart’s number one value: 

“put the customer ahead of everything else…”

Core purpose

Core purpose is the organisation’s fundamental reason for existence, beyond just making money; purpose is how visionary companies answer the question: ‘why do we exist?’  The company’s purpose does not have to be unique, it may be the same as that of other companies: the role of purpose is to inspire and motivate, not to differentiate.

Preserve the core ideology but be prepared to change

Core ideology alone cannot make a visionary company: if the organisation stands still and refuses to change the world and the company’s competitors will just pass it by as they themselves embrace change.  To meet the challenge of a changing world the visionary company must be prepared to change everything about itself, other than its most basic beliefs – its core ideology.

In the most successful companies, a core ideology is combined with a relentless drive for progress that brings about change and forward momentum. The drive for progress is an internal force that constantly pushes the company forward.

Big Hairy Audacious Goals (BHAG’s) 

All organisations have goals, business strategy is designed to achieve these long-term ambitions, but there is a difference between setting a goal and committing to a huge challenge. World class companies use bold and ambitious goals as a powerful means by which to stimulate progress in their organisations and as a way to capture the imagination and motivate their people.

A Big Hairy Audacious Goal (BHAG) is clear and compelling and serves as the focal point for organisational efforts; it reaches out to everybody in the organisation with an idea that needs little or no explanation.

A BHAG can be measured against lesser challenges with these kinds of questions:

• Does it stimulate progress?
• Does it create organisational momentum?
• Does it capture people’s imagination and excite them?
• Does it get people to throw their creative talents towards its achievement?
• Does it fit with our core ideology?

Strategy in action - understanding your business model

Every successful company operates an effective business model that ^[2] delivers value to real customers in a profitable way using its key resources and processes.

The four interlocking components of the business model work together to create and deliver value to customers and shareholders:

1. Customer value proposition (CVP): is the way that value is created for the customer. By understanding the fundamental problem to which the customer needs a solution and the processes involved in providing a solution, the company can design its offering to the customer. 

2. Profit formula: is the way in which value is created for the company and its shareholders whilst delivering value to its customers; the components of the profit formula are

• Revenue model  =  price  x  volume
• Cost structure = cost of the key resources needed for the business model; direct and indirect costs and the structure that provides economies of scale and strategic capability
• Margin model that describes margin needed to generate acceptable profits at projected levels of sales within the fixed cost structure
• Net asset turnover model describing optimum levels of investment in operating assets and working capital and how they support sales 

 3. Key resources: assets, people, technology, logistics, branding etc. needed to deliver the value proposition to the targeted customer

4. Key processes: the internal processes and activities that take place inside the business and drive the company’s value chain. 

Customer value proposition (CVP)

Successful companies find a way to create value for customers, in other words, a way to help customers get an important job done. When the “job” can be defined in all its dimensions, including the full process for how to get it done, the customer offering can be designed. The more important the job is to the customer, the lower the level of customer satisfaction provided by current offerings, and the better that the company’s offering is in doing the job, the stronger the CVP.

Customer value is defined by the customer

The most important attribute of a customer value proposition is precision: the extent to which it matches the precise needs of the customer and delivers the precise mix of benefits sought by the customer.  Companies commonly define a CVP based on what they think customers value, but value can only be defined by the customers themselves and this is elusive and changing.

The term “value” has become a management and marketing buzzword and is frequently used to refer to a specifically targeted or bundled price.  But the real essence of value is represented by the trade-off between the benefits the customer perceives to have received from the product or service and the price paid for it.

Customers do not decide to buy a product based purely on low price.  They buy according to customer value: that is the difference between the benefits they perceive they have received from the product minus the price that they perceive they will have to pay. So the higher the benefits perceived by the customer and the lower the price perceived by the customer, the greater the customer value will be and the greater the probability that customers will select the product.  The components of customer value change, as does the relative value that customers place on each of the components. This can make it extremely difficult to maintain a persuasive customer value proposition: something that is proving a perplexing problem for the largest competitors in the UK supermarket sector, for example.

Profit formula

The profit formula describes the way in which value is created for shareholders whilst delivering value to its customers. Value is created for shareholders in the form of dividends and share price growth, referred to as Total Shareholder Return (TSR).

Dividends payments are, to a large extent, under the control of the company, and depend on profit and the availability of cash. Publicly traded share prices are affected by a multitude of factors and it is somewhat more difficult for the company to directly influence share price. But research shows that over the long-term share price growth is highly correlated with improvements in return on investment. The key components of the profit formula are also those that drive return on investment.