Framework

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Budgets need to be adaptive to any new situation. The organizing of budget data is dependent on a framework of relevant variables chosen by the organization. These variables can include statement of work drivers, activities, changing statements of work, and accounting changes. Often, too many drivers are analyzed and included in the budgeting process.

Viewpoint A

Summary: It is necessary to develop and use a framework that allows participants to interact and decide about decisions using relevant data and analysis. The organizing of that data and analysis is dependent on a framework of relevant variables chosen by the organization. A few significant drivers and influences can be easily monitored to permit verification and alteration of the plans and budgets. More...

Viewpoint B

Summary: Budgets need to be adaptive to any new situation and thus require and receive a significant amount of attention. The understanding of the framework around the budget’s environment will provide where this attention should be focused. Budgets are viewed in context of drivers, activities, changing statements of work, and accounting changes within the entity’s current and expected environment. One size does not fit all. More...

Benchmarks, Resources, Recommendations, Implications

Viewpoint A

Because plans and budgets get lots of attention from the members of the organization and its stakeholders, it is necessary to develop and use a framework for those processes that allows participants to interact and decide about decisions using relevant data and analysis. The organizing of that data and analysis, and its creation, is dependent on a framework of relevant variables chosen by the organization. These frameworks are conscious selections by the responsible planners and budgeters as to what is germane to the processes and when and how such information and insight is used. For example, in an organization whose operations depend heavily on the spot price of commodities in trading markets, the planning and budgeting processes will have to be set up so as to take into account that rapidly changing information. For organizations concerned with capital investments, let us say, the prevailing rate of interest will need to be taken into account in the planning and budgeting processes, and those processes will need to be developed so as to channel that variable information meaningfully into deliberations. One way of doing that may be to alter accounting structures to match the evolving environment of the organization. However, if changes are made to accounting structures too frequently, then while the planning and budgeting processes may benefit, it may be difficult for the control and analysis processes, including cost accounting, to generate meaningful trends.

A challenge for organizational members is to select the most significant drivers and influences on their plans and budgets, rather than try to manage all the potentially significant data that might be available. It may be tempting to use a great many drivers and assumptions in planning and budgeting so as to get precise answers, and provide thorough guidance to operational elements. However, if the explanatory power of the organization’s choices is spread over too many drivers and assumptions, then it may not be possible to derive clear direction from any particular change of variables – the “noise” in the system may be too great. A few, significant drivers and assumptions that can be easily monitored to permit verification and alteration of plans and budgets is most likely to permit adaptation to new information. (dz)

Viewpoint B

Inherent structure perceptions are apparent when looking at the budgeting process. Budgets are viewed in context of drivers, activities, changing statements of work, and accounting changes within the entity’s current and expected environment.

Certainly, budgets need to be adaptive to any new situation and thus require and receive a significant amount of attention. The understanding of the framework around the budget’s environment will provide where this attention should be focused. One element to understand is the clear work drivers of the organization and its products/services. It is also important to recognize that these drivers and their levels of influence constantly change and therefore require periodic, if not continuous attention.

However, it is important to determine what is the ideal mix and number of critical drivers that are used to help build and revise budgets. Often, too many drivers are included in the development of a budget, for fear of “letting anything fall through the cracks.” Such over saturation can lead to a bogged down budget process that takes too much time and resources. This is partly because the energy focus can turn to time spent in collecting historical metric data for multiple non-significant drivers, thereby pulling attention away from optimizing resources and real forecast needs.

Additionally, critical drivers are swamped with other noise such as responsibility, accountability, and authority disagreements or miscommunications. In other words, it is important to understand and perhaps document the “who” in addition to the “what”.

In the same concept as the work drivers, one must also consider the right number and level of activities. Again, an ideal set covers the significant landscape of function and service level performed, while remaining lean enough to manage for budgeting purposes. A common perception is that currently budgets have too many activities.

Another framework situation that must be addressed is the presence and impact of accounting structure changes on the budgeting process. Many entities face the opposing desires of changing accounting flow to better align costs to the cost causer versus the desire for stabilization. On one hand, the more efficient the accounting flow can be in truly allocating resource costs to those that drive them, the greater the perception is of accuracy and cost-driver relationship. On the other hand, internal and/or external customers may struggle when the accounting structure changes significantly and/or often. This is because it is harder to understand trends as well as how a dollar that was consumed/budgeted by them under the prior accounting might look under the new accounting. Moreover, cost shifts must be mitigated as a result of accounting structure changes.

Therefore accounting structure changes are a necessary up-front element to understand before embarking on the next period’s budget development. A choice is often faced in proposing such structure changes. The choice is whether the accounting flow structure should lend itself to cost per unit visibility, or instead more towards a cost recovery mechanism.

In conclusion, one size does not fit all. Recommendation is to look at framework for each industry/type (government vs. manufacturing vs. IT vs. service etc) (ss)

Benchmarks

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Resources

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Recommendations

  • A Planning and Budgeting framework must be customized to the environment of the enterprise with careful consideration of products and services, the balance of drivers, structural changes, strategy, and how management wants to run the business.


Implications

  1. Budgets need to be adaptive to new situation
  2. Budgets get lots of attention
  3. Critical drivers are swamped with noise
  4. There are a correct number of drivers/activities
  5. Too many drivers and /or activities
  6. There is a correct number of accounting structure changes
  7. Accounting structure changes are needed in budgeting
  8. Too many annual accounting structure changes

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