CASE STUDY: 1
Traditional Forecasting
Many organizations seek to mitigate some of the traditional budgeting problems noted above by implementing some form of forecasting. This allows managers to update budgeted numbers with actual results for the periods that have already occurred. The forecasts are used to predict what will happen in the future, often seeking to confirm whether predetermined annual targets will still be met.
While financial managers think of forecasting in terms of periodic forecasts, operating managers are constantly adjusting plans, including sales estimates, which are converted to operating plans for production and inventory control levels. Most of these planning efforts are conducted in numerous discrete systems supporting different functional areas. A great deal of effort is required to integrate and reconcile these different views of the future.
Financial forecasts are performed on a preset schedule, typically quarterly or monthly.
According to David Axson, author of “Best Practices in Planning and Management Reporting” 4. Axson explains that these process cycle times are extended due to:
- The difficulty in getting timely information;
- The high level of details required taking significant time to forecast each item; and
- The fact that much of this data is developed in a series of disconnected spreadsheets making integration a time-consuming process.
Many companies use a purely financial process that is disconnected from its specific business drivers-a mere financial accumulation of trends. These companies often determine their monthly forecasts by subtracting the actual results to date from their annual targets and then dividing the remaining gap by the months remaining. They then view the monthly result to see if it is even possible to attain, All their forecasting work focuses on achieving the predefined annual targets, even if the underlying assumptions that went into creating those targets are now Incorrect.
The level of detail used often mirrors the annual plan. Some planners forecast at the same level of detail that is used for actual reporting, This can result in tremendous efforts in calculating variances and the related explanation process.
These misconceptions often turn traditional forecasting into merely a different pc version of the problems with traditional budgeting. Let’s examine why.
For many organizations, forecasting is a mechanical process that adjusts future run rates upward or downward as necessary so that the predetermined annual targets are still met.
They ignore the fact that targets were set based on various assumptions. What happens when the annual targets are held but their underlying basis proves incorrect? The great quality guru W. Edwards Deming noted that “if you pay people to hit targets, they often will, even if it destroys your company.”
Q1) Explain the process of cycle times given by David Axson.
CASE STUDY: 2
Methodology:
Jimmy Carter, who introduced ZBB for resources allocation and control in government explains, “In ZBB, the budget is broken into units called DPs which are prepared by managers at each level. These packages include an analysis of purpose, cost, measures of performance and benefits, alternative courses of action and consequences of not performing the activity. Then all packages are to be ranked in order of priority. After several discussions between department heads and the chief executive, the rankings are finalized, and packages upto the level of affordability are approved and funded.”
In more specific terms the ZBB methodology as well as the sequential stages in its introduction may be outlined as follows:
- Defining the Decision Units (DUs) within the firm: A DU is a tangible activity or group of activities for which a single manager is responsible for successful performance. The DU concept is akin to that of the responsibility center. A traditional cost center, a group of people or even a project may be a DU.
- Defining objectives of each DU : In clear and specific terms and in conformity with the enterprise, objectives and goals.
- Identifying activities in the form of DPs: The term D P focuses on the analysis of each activity in the manufacturing process according to the incident of the relevant cost and the importance of that activity in the overall cost structure of the organization. Thus, in essence DPs not only refer to the costs but also the benefits of an activity of process.
- Ranking of alternative DPs in the order of decreasing benefit to the organization, using cost-benefit analysis technique. This problem can be reduced by concentrating on marginal priority packages. This is because ultimately all the packages presented for funding would generally fall into three categories: (1) those with a high priority and high probability of funding; (2) those with a marginal priority and which may be funded or not funded depending on the resources available, and (3) those with a low priority and low probability of funding.
- Forwarding the ranked DPs to the next higher organizational units, for review, merger with other comparable DPs and for re-ranking (as the DPs are consolidated and re-ranked, the perspective and objectives are broadened). The consolidation and re-ranking should preferably be done by a committee comprising all managers whose DPs are being considered and a chairman selected from the next higher organizational level.
- Finalization of the budget proposal as well as preparation of budgets for each DU have to be finally approved by the top management. Before according approval, the top management is guided, on the one hand, by the principle of allocating resources to the OPs showing higher benefit to cost ratios, and the question of affordability, on the other.
Q1) Explain the stages in specific terms of ZBB Methodology.
CASE STUDY: 3
Capital Expenditures:
Another approach to deciding on capital expenditure investments is to assign a priority to each investment proposed. We tend to limit the priority scale to values, as follows.
- Absolute Must. Includes security, legal, regulatory, end-of-life equipment; typically externally mandated, that is, you really have little or no choice. Simply stated, if you are under very tight capital expenditure and/or expense budget constraints, the cutoff is drawn here.
- Highly Desired/Business-Critical. Includes short-term “break even” (less than six months), significant short-term “return to top or bottom line” less than months), and mega projects already in progress.
- Wanted. Valuable, with a longer return term (more than 12 months). Typically, these projects get funded only if there is capital money remaining, if resources are available, and if revenue projections are fairly secured.
- Nice to Have. Given available bandwidth in people and money, there is a good return on these projects, but typically the ROI has more intangibles. Unlikely to be funded in this budget year; might go up the priority list in subsequent budget years. It is important to have some projects in this priority, as it helps to better calibrate the higher priorities.
Expenses
The following items constitute what is most typically referred to as “the budget.” The major categories of budget expenses are:
Personnel
- Salaries and benefits (including hiring fees and bonuses)
- Training and education
- Travel
- Morale
- Staff-related depreciation
- Temporary help/consultants
- Miscellaneous (space, telecom, and so on)
Hardware
- Depreciation
- Maintenance
- Repairs
- Leases
Software
- Depreciation
- Maintenance
- Customer support
- Updates
- Repairs
- Leases
Services
- Leased lines
- Oursourced network services
- Security services
- Applications service providers (ASPs)
- Miscellaneous (transport, courier, periodicals, and so on)
Q1) Explain the needs of Capital Expenditure investment.
Q2) Give any two difference between hardware and software.
CASE STUDY: 4
Divorce the Forecasting Process from the Target Setting and Performance Appraisal
Forecasts must not be seen by senior managers as a tool for questioning or reassessing performance targets. If managers see that forecasts have an impact on their reward and incentive plan, they will be reluctant to present an unbiased picture.
Use Forecasts to Support
Leading organizations
Q1) Explain the difference between choosing the Right Forecasting on frequency and horizon.