How to beat the budget blues.docx
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How to beat the budget blues.docx
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Howtobeatthebudgetblues
Howtobeatthebudgetblues
Finance&PerformanceManagementHowtobeatthebudgetbluesByHermanR1>.HeynsandMichaelR.SutcliffIntoday’sturbulenteconomy,strategicplanningthatreliesonindustrial-agebudgetingisboundtofail.Butanumberofcompaniesareusingtechnologytoreplaceoutmodedpracticeswithefficient,flexiblebudgetsystemsthatcanimproveperformanceandboostshareholderreturns.Outlook2002,Number167
ewcorporateundertakingscorporation’sstrategicplanning,aremorelabor-intensiveandthebudgetoftenunderminesit.Fexhaustingthantheannualritualofpreparingthebudget.TheaverageWhatarethebasicflawsinthebillion-dollarcompanyspendsastag-budgetingprocessaswehavecomegering25,000person-daysayearontoknowit?
Canitbereformed?
thebudget,accordingtoastudybyOrshoulditbeeliminatedaltogether,HackettBenchmarking&Research.andifso,replacedbywhat?
Thelargestcompaniesoftentakesixmonthstoprepareabudget.AndoneDuringthefirstquarterof2001acompanyusedtospendtwicethatteamfromtheCentreforBusinessmuchtimeonitsbudget,makingthePerformanceattheCranfieldSchoolprocess,ineffect,anendlessburden.ofManagementintheUnitedKingdomandAccenture’sFinanceCorporationsmightfindtheexpen-&PerformanceManagementserviceditureofallthattime,moneyandlineundertookathoroughrevieweffortacceptableiftheywerecon-ofworldwideplanningandbudget-vinceditproducedarealbenefit.ingpractices.TeammembersButourresearchshowsthatfullystudiedtheextensiveacademicand80percentofcompaniesaredis-otherliteratureavailableonthesatisfiedwiththeirbudgetprocesses;subject;tosupplementthisresearch,indeed,sodispleasedarefinancetheyinterviewedexecutivesfromdirectorsthattheyhavemadebudget8><#004699'>15globalcompaniesinvariousreformatoppriority.industries,includingfinancialser-vices,energy,airline,automotiveThedisillusionmentweencounteredandelectronics.againandagaininourconversationswithexecutivesiscapturedinaTheresearchteam’sgoalwastocommentfromJackWelch,GE’sdetermineplanningandbudgetingrecentlyretiredCEO,whooncetoldbestpracticesandtoseeiftherecolleagueswithhischaracteristicwasevidenceconnectingthemwithforthrightness,“Thebudgetistheincreasedreturnstoshareholders.baneofcorporateAmerica...anOurconclusion:
Thereisastrongexerciseinminimalization.You’recorrelationbetweencompaniesalwaystryingtogetthelowestoutapplyingbest-practiceplanningofpeople,becauseeveryoneisnego-processesandachievingbetter-than-tiatingtogetalowernumber.”Janaverageperformance.Wallander,honorarypresidentofSweden’sSvenskaHandelsbanken,Afixtureofcorporatelifesincetheonceexpressedhisfrustrationwith19thcentury,thetraditionalbudgetthewholeprocessthisway:
“Asis,ofcourse,thatperiodicexercisesoonasyouintroduceabudget,bywhichorganizationsdeterminetheaimbecomestobeatthebudget.”theirupcomingoperatingexpensesandforecastincome.Generally,itDismayatthetopisatop-downprocess:
CorporateSuchsentimentsareeasytounder-headquarterssendsbudgetpacketsstand.Budgetsconsumeanenormoustodivisionsandoperatingunits,shareofmanagementtime.Someaccompaniedbyformstobefilledcompanieshavediscoveredthatman-outandsalesandoperationalfore-agersspendasmuchas30percentcaststobecompleted.Recipientsoftheirtimeonbudgets.Evenmoredutifullycompletetheformsandtroubling,insteadofsupportingareturnthem.Aperiodofnegotiation68.accenture4>>/Outlook
oftenfollows,asheadquartersthecompany’srevenuesby50per-demandsadjustments(sellmore,centanditsprofitsby70percent.Itisamistaketospendless),andoperatingunitsButthecompanyfumbledthecomplainandexplain.Weeks,some-launch.Why?
Becausethestrategicconductbudgetingastimesmonths,afterthosefirstpack-planforintroducingthedruggotetsgoout,thereisanagreement.blindsidedduringthecompany’saseparateprocess.operationalbudgetingprocess.TheSoundsrationalenough,right?
Butbudgetoperativesinsalesthoughtitisn’t.Foradozenreasons,thetheircolleaguesinstrategicplanningconventionalbudgetprocessiswerefartoooptimistic,sotheyflawed.Thebudgetingandplanningreducedthesalesprojectionsbysystemsinuseatmanycompanies50percent.Meanwhile,theproduc-todayweredevelopedforanindus-tionpeoplethoughtthefolksintrialeconomy,whichwasrelativelysalesweredreaming,sotheycutstaticandeasytounderstand.Today’stheprojectionsinhalfagain.economyismuchmoreturbulent;Financethentookalookandattemptstodeveloplong-term,fixedknockedanotherbigchunkoutplansbasedonanoutmodedbusinessofthebudget.modelandsupportedbyobsoleteaccounts-payableproceduresareAsaresult,theproductwaslaunchedboundtofail.withlessthan20percentoftheproductioncapacitythatthestrategicOneofthemostdangerousshort-plannershadindicatedwouldbecomingsofthebudgetprocessisthatrequired.Withinsixmonthsdemanditoftenignores,andconsequentlyforthedrugwassoaring,justassabotages,strategicplanning.thestrategicplannershadanticipated.Sadly,supplytraileddemandbyaConsidertheexperienceofonefactoroffourorfive.Theopportunitypharmaceuticalcompany.Thecom-costtothecompany:
about$10bil-panyhadablockbusternewdruglioninrevenues.inthepipeline.Thestrategicplanconcludedthatwithsufficientpro-Thecompany,moreover,mayhaveductioncapacityandmarketinglostanopportunitytoshowWallsupport,thenewdrugcouldincreaseStreetthatitsstrategicplanningandEndlessburden?
Companiesvarysignificantlyintheirapproachtoplanningandbudgeting,buttheaveragebillion-dollarcompanyspends25,000person-daysayearonthebudgetandfivemonthsonthestrategicplan.UpperquartileMeanLowerquartilePerson-daysperbillion$sales6,07725,00028,592Monthstodevelopstrategicplans356Monthstodevelopfinancialplans346Reportingresource(person-days)6.111.228.6Lineitemsinfinancialplan4090250SOURCE:
THEHACKETTGROUPOutlook2002,Number169
budgetingweresmoothlyintegrated.branchistobeatthecompetition,”Tobesure,nosingleplan,whetherSuchademonstrationmighthavesaysJanWallander,“nomatterit’sFord’sorHandelsbanken’soranyincreasedshareholdervalue.whetherthecompetitionisinternalotherorganization’s,canserveasaorexternal.”WhenabranchmeetstemplatethatothercompaniescanAspartofitsresearch,theCranfield-thatgoalathirdoftheadditionaleasilyadopt.NeedsvarygreatlybyAccentureteamaskedmorethan30profitissplitevenlyamongstaffandindustry,companysizeandothercon-senioranalystsfromsixmajorinvest-addedtotheirpensions.siderations.Whatourresearchclearlymentbanksandratingagenciestoreveals,however,isthatitisamistakediscusshowtheyevaluatethecom-Foritspart,Fordweariedofitstoconductbudgetingasaseparatepaniestheyfollow.Asignificantcon-grindinglyslowforecastingsystem,process.Tobesuccessful,itshouldbesiderationisstrategyformulationandwhicheachyearbeganwithaletterpartofanintegratedprocedurethatexecution;85percentoftherespon-fromtheheadofficethatcascadedincludesstrategicplanning,perfor-dentsratedtheexecutionofcorporatedownthroughtheorganization.mancereportingandtargetsetting.strategyas“veryimportant.”None-Atthebottom,low-rankingman-theless,theanalystsregardtheagersproducedforecasts,whichTheeffectiveintegrationoftheseinformationonstrategicplansandwouldthenbeginalaboriousascent,functionsis,inturn,basedonfourbudgetingprovidedbymanagementlevelbylevel,backupthroughunderlyingprinciples.as“generallyoflowquality.”theorganizationforreviewandapproval.Top-levelexecutivesSpeedIsthere,then,analternativetothatwouldhavetowaitalongtimeFirst,throwthespreadsheetyoucreaky,burdensomeandoftendestruc-beforetheycouldgetalookathavebeenusingoutthewindow.tiveexerciseknownasbudgeting?
criticalinformationliketherangeThelogisticsofspreadsheetbudget-ofvehiclesthatwouldbemarketedingadddaystotheprocess.ThereYes.Somecompanieshaveaban-inthecomingyear.arenewWeb-basedtoolsthatenabledonedthetraditionalbudgetingyoutoreduceadministrativeover-processaltogether.Handelsbanken,Sotheautomakerisintroducingaheadaswellasmanagementtimeforexample,hasreplacedbudgetssystemithasdubbedF@ST(finan-whilestillprovidingtheinformationwithtablesthatcomparetheperfor-cialsatthespeedofthought),inthatforyearshasbeencontainedinmanceofbrancheswithoneanother.whichexecutivesfromtoptobottomaspreadsheet(see“Riseofthedigi-Everymonth,thebankmeasurescancallupandreviewtherevenuetalCFO,”Outlook,January2001).profitabilityperemployeeonaandproductassumptionsastheyarebranch-by-branchbasisandcircu-beingentered.InadditiontothetimeCiscoSystemshaspushedthetrendlatesthedatawidelywithinthesaved,thecostreductionislikelytotowardintegrationastepfurtherorganization.“Theaimforeverybeimpressiveaswell.thanmostcompanieswithitsuseofacommondatabase.Whenthesystemsmakertakesoveranewbusiness,itencouragestheacquiredSuperiorreturnscompanytoadoptitsfinancesys-Companieswiththebestplanningandbudgetingpracticesbuildsubstantiallytems,evenifdoingsomeansreplac-moreshareholdervaluethantheircompetitors.inganewersystemversionwith373%changeinsharepriceovertimeanolderone.UsingacommonIndustryaverageversusbest-practicecompaniessystemthroughoutthecompany280makestheintegrationofdataeasy.221Hen
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