P-Based
Budgeting
by
Tom Pryor
What is the Guinness World Record time for playing a round of golf? Typically it takes me 3 to 4 hours to play 18 holes. The current record holders did not take the traditional approach to achieving the record. They allocated eighty golfers across the course. One person teed off. One of four players waited on the fairway to hit the second shot toward the green, where more people waited to putt. They shot a par 70 in 9 minutes 28 seconds!
How long does it take your organization to prepare the annual budget? How long has it been since you've taken a new approach to the planning process? Using traditional methods, budgets often take 3 to 4 months to prepare, review and implement. But an increasing number of manufacturing, service and governmental organizations are "cutting strokes, saving time and winning" utilizing four techniques I'll call P-Based Budgeting:
Paradigm-Based Budgeting
Traditional budget methods focus on the worker. The P-Based Budgeting focuses on the work.
Instead of using this year's spending level as the foundation for next year's budget, the new paradigm looks at activities and their projected workloads. Activity workloads are also referred to as output measures or activity drivers. For example, if the Purchasing Department performs the activity "Issue Purchase Order", the first step of a Paradigm-Based Budget is to estimate the number of PO's needed next year. The activity workload multiplied by the Cost per Purchase Order goal represents the expense budget for that activity (1,000 PO's X $40.00 = $40,000). A resource budget (i.e. headcount, supplies, space, etc.) is then prepared by the Purchasing Manager to accomplish the $40,000 budget.
Process-Based Budgeting
Traditional budget methods often contain inconsistent workload assumptions between departments. P-Based Budgets focus on synchronizing activity workloads within the business processes that cross departmental boundaries.
One of the challenges confronting planning managers, controllers and CFO's is synchronizing the budget. Functional managers traditionally prepare their departmental budgets independent of one another. Even though they may be using the same sales forecast as a guide, the workload assumptions for activities often vary from department to department. For example, the Purchasing Manager may budget for 1,000 purchase orders next year yet the Receiving Manager is planning for only 700 receipts. If left unsynchronized, budget variances are sure to occur. Process-Based Budgets assign each activity to a business process. Before departmental budgets are submitted, business process managers synchronize the budgeted workload of their process activities, thereby minimizing waste and future variances to plan.
Priority-Based Budgeting
Traditional budget methods cause senior management to classify departments as required or discretionary. P-Based Budgeting provides managers the opportunity to prioritize activities, no matter who performs them.
Every organization has limited resources. Therefore, it is not uncommon for budget requests to exceed budget limits. When limits are exceeded, budget reviewers are often forced to allocate resources based on the perceived importance of each department. This promotes irrational thinking, e.g. Sales is more important than Marketing or Human Resources should get more budget than Finance. P-Based Budgets provide senior management the opportunity to force rank activities, not functions. Primary/Value-Added/Required activities would be ranked above Secondary/Non-Value Added/Discretionary. As a result, Issue Purchase Orders would be ranked as a higher priority than Attend Staff Meetings.
Performance-Based Budgeting
Traditional budget systems focus on expenditures. P-Based Budgeting focuses on outcomes.
"Government must be accountable for results." This statement, voiced repeatedly by politicians and citizens alike, is deceptive in its simplicity. Similar to their private sector counterparts, federal, state and local government managers have been actively asking themselves during the past couple of years, "What are the desired results for each department's budget?" While we traditionally desire a balanced budget, commitment to continuous improvement demands greater accountability, e.g. What can I expect from the balanced budget? Performance-Based Budgeting has five steps:
(1) Identify desired outcome;
(2) select an outcome performance measure;
(3) set a goal;
(4) report results; and,
(5) implement consequences.My state of Texas has fully implemented Performance-Based Budgeting. For example, a desired measurable outcome for the activity Upgrade Road is "Upgrade 1,000 miles of poor roads to satisfactory or excellent". A desired outcome of the Purchasing department might be "Increase the number of certified suppliers by 20%".
WBAP-820 radio in Fort Worth, Texas annually assembles a group of local golfers in an attempt to break the Guinness Record. Their August 14, 2001 outcome was 10 minute 43 seconds. While the team missed the record by 75 seconds, they gave it a good shot. When your next budget cycle comes around, why not take a shot at one or more of the P-Based Budgeting techniques? You may not break a record in the process, but I'll bet your management team will be pleased with the outcome.
For more information on the P-Based Budgeting techniques discussed in this article, we recommend:
- "Using ABM for Continuous Improvement"... the last chapter of this book teaches Activity-Based Budgeting.
- CostMapper™.
- Performance Based Budgeting Workshop... this two and a half day workshop will equip each of your managers to be P-Based Budgeteers!
Send
your comments on this article to Tom Pryor at TomPryor@icms.net.
Call 817-475-2945
to talk to an ABM expert about your ABM needs.
E-mail a friend this article
This
free e-mail is a service of ICMS, Inc.
For more information on ICMS products
and services, call 817-475-2945.
ICMS, Inc.
PO Box 13206 ~ Arlington, Texas 76094
Phone: 817-475-2945
Fax: 817-483-7097
