Learning objectives

Chapter 5 After studying this presentation you should be able to:

5.1 communicate the role of planning and budgeting
for improved profit performance and value creation
Planning — budgeting
5.2 apply the planning and budgeting process to
and behaviour consider the impact of alternative courses of action
on profit, assets and cash flow
5.3 identify the various planning and budgeting
approaches used in cost centres
5.4 compare traditional and contemporary approaches
to budgeting

The role of planning and budgeting for

Learning objectives
improved performance and value creation

After studying this presentation you should be able to: • Testing alternative actions:
5.5 reflect on the behavioural implications of • Resource allocation decisions have significant
budgeting financial impacts.
5.6 critique the Beyond Budgeting approach to • Where choices are available, an understanding of the
management control. implications of planning and budgeting processes are
required.
• Financial and non-financial impacts of decisions must
be considered.
• Impacts must also be considered strategically in
relation to competitor and market-based responses.

Impact of likely actions on profit, assets and

Strategic budgeting cycle
cash flow management

• Non-financial considerations need to be converted or

evaluated in terms of the final financial impact.
• For each alternative course of action, the impact of key
variables on the financial position of the organisation
needs to be considered.
• The link between the key variables in each of the
budgeted financial statements are critical.
 Impact of likely actions on profit, assets and
Strategic budgeting framework
cash flow management

• Sales/revenue estimation:
• key planning variable
• sets the level of activity
• is linked to other key variables.

Impact of likely actions on profit, assets and Impact of likely actions on profit, assets and
cash flow management cash flow management

• How sales/revenue is estimated varies, but will involve a • Operating expenses:

mixture of: • will be impacted by new decision alternatives.
• existing and past history of sales/revenue and
product/service mix • Impact will be influenced by:
• nature of sales initiatives and impacts • nature of the expense item
• consideration of external market through competitive • the expected change in sales level
analysis • planned changes to discretionary cost items.
• review of macroeconomic conditions.

Impact of likely actions on profit, assets and Impact of likely actions on profit, assets and
cash flow management cash flow management

• New investment: • The operating cycle:

• longer term assets will be funded by capital budget • relates to relationship between inventory, sales,
• may be regulatory in nature accounts receivable and collection of cash
• may be to maintain existing operations • speed of conversion determines liquidity of the
• could be strategic. organisation
• Each type of investment will:
• directly influence cash flow projections and asset • coherent inventory and accounts receivable policies
levels help to maximise liquidity.
• indirectly influence the statement of profit or loss.
 Planning in cost centres Planning in cost centres

• Cost centres are organisational units where ‘cost’ is the • Engineered cost centres:
focus. • relationship between inputs and outputs are readily
• Managers of cost centres are responsible for and measured
evaluated on the management of cost. • variances are identified and managed
• Ease of measuring outputs determine whether cost • more suitable for environments where either
centres are referred to as: standard products are produced or services are
• engineered cost centres repetitive.
• discretionary cost centres.

Planning in cost centres Planning in cost centres

• Discretionary cost centres: • Incremental budgeting attempts to assist the planning

• planning is more difficult as relationship between process and involves making an alteration to expenditure
inputs and outputs are difficult to identify. budget for cost centre from previous year.
• Does little to enhance accountability.
• Increasing last year’s budget discourages managers
from looking for improvements in efficiency and
effectiveness.
• Alternative method is to receive lower funds for
unspent budget.
• Likely to result in wastage and dysfunctional practices.

Contemporary approaches to budgeting Contemporary approaches to budgeting

• Program budgeting: • Zero-based budgeting:

• expenditure planned around programs and projects • justification for budgetary expenditure as if no prior
• requires justification for expenditure, hence enhances information available
accountability. • focus is on outcomes, often resulting in reduced
wastage, better performance of value-adding activities
and quality improvements
• however, it is time-consuming. But becoming the new
norm due to economic/financial downturn.
 Contemporary approaches to budgeting Contemporary approaches to budgeting

• Rolling budgeting: • Activity-based budgeting:

• prepared monthly or quarterly to reflect planning • uses activity cost pools and related cost drivers to
changes through the next 12 to 18 months anticipate costs
• incorporates current information including significant • identify key product cost drivers and budget would be
changes in business strategy, operating plans and the structured around these activities
economy • allows for the identification of resource consumption
for each activity.
• allows for quicker management response.

Contemporary approaches to budgeting The behavioural implications of budgeting

• Kaizen budgeting: • Managers and employees compete for scarce resources.

• sets targeted cost reductions across time, anticipating • Issues of power struggles, blame shifting and game
market price reductions across the life of a product playing frequently occur.
• cost reductions and quality improvements are • When power = resources under control, then allocation
explicitly embedded in the budget. becomes primary concern.
• How should allocations be done?
• Setting priorities becomes a political activity.

Key budgeting issues The behavioural implications of budgeting

• Overcoming issues:
• focus on achievement of outcomes
• foster cooperation
• organisation-wide participation
• joint determination of budget allocation formula
• use of multiple budgets
• move away from budgets?
 The 12 principles of the Beyond-Budgeting
Beyond Budgeting
model (1/2)

• Beyond Budgeting offers a contemporary management

model based on principles that encourage employee
empowerment.
• Core focus includes:
– extreme decentralisation
– relative performance evaluation
– rolling forecasts.

Source: Beyond Codex Network 2008, ‘Putting an end to “command and control”: 12 principles to defining the 21st century organization’,
www.betacodex.org.

The 12 principles of the Beyond-Budgeting Beyond Budgeting in practice: managing

model (2/2) without budgets

• The key to managing successfully without budgets:

• radical decentralisation and accountability without
influence from central
• transparent accounting and reward systems
• relative performance evaluation
• high levels of trust
• strong commitment to customer focus.

Source: Beyond Codex Network 2008, ‘Putting an end to “command and control”: 12 principles to defining the 21st century organization’,
www.betacodex.org.

Beyond Budgeting Beyond Budgeting

• Radical decentralisation and accountability: • Accounting and reward systems:

• authority needs to be devolved • develop and use performance indicators that are
• allows for quick customer response widely accepted and trusted
• contribution to strategic operational planning • bonuses not required, salary commensurate to role
• have profit responsibility
• individuals held strictly responsible for their • accounting systems must provide consistent and
performance in executing team plan reliable information quickly and easily accessible.
• individuals held accountable for items and cost under
direct/indirect influence.
 Beyond Budgeting Beyond Budgeting

• There must be: • Relative performance evaluation:

• timely reporting of information • direct comparison with peers
• performance reports that only measure what • employee evaluation based on commitment towards
people can influence customers
• information reflecting critical performance • ability of employee to ‘fit’ is important
variables linked to strategy • employees encouraged to be actively involved in:
• reporting of trends – setting their own targets or goals
• information about charges from services utilised. – continuously improving.

Summary Summary

• Communicate the role of planning and budgeting for • Reflect on the behavioural implications of budgeting.
improved profit performance and value creation. • critique the Beyond Budgeting approach to management
• Apply the planning and budgeting process to consider control.
the impact of alternative courses of action on profit,
assets and cash flow.
• Identify the varying planning and budgeting approaches
used in cost centres.
• Compare traditional and contemporary approaches to
budgeting.