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Product Details
| ISBN-13: | 9780470920459 |
|---|---|
| Publisher: | Wiley |
| Publication date: | 02/01/2012 |
| Series: | Wiley Corporate F&A , #562 |
| Edition description: | 6th ed. |
| Pages: | 864 |
| Product dimensions: | 7.30(w) x 10.10(h) x 1.40(d) |
About the Author
Read an Excerpt
Handbook of Budgetting
John Wiley & Sons
Copyright © 2003
William R. Lalli
All right reserved.
ISBN: 0-471-26872-0
Chapter One
INTEGRATING THE BALANCED
SCORECARD FOR IMPROVED
PLANNING AND PERFORMANCE
MANAGEMENT
Antosh G. Nirmul
Balanced Scorecard Collaborative, Inc.
1.1 OVERVIEW. The balanced scorecard is a management tool developed by Drs.
Robert Kaplan and David Norton in the early 1990s. Since that time, the scorecard
has become a standard management practice adopted by large and small organizations
throughout the world. The balanced scorecard is based on the simple premise
that people and organizations respond and perform based on what is measured. Often,
this is described as, "People respond to what is inspected, not expected." Measurement
becomes a language that communicates clear priorities to the organization.
Since the primary goal of any organization (commercial, governmental, or non-profit)
is to create value for its stakeholders, and since the strategy is the way the
organization intends to create value, the measurement system should be closely
linked to the strategy. The balanced scorecard provides a measurement system that
translates the strategy into operational terms through a series of causal relationships
defined around four key perspectives (see Exhibit 1.1):
1.Financial perspective. For commercial organizations, the financial perspective
defines the value created for the shareholders. For noncommercial organizations,
the expectations of the financial stakeholders are defined.
2. Customer perspective. The targeted customers and the value they receive
from the organization are defined in the customer perspective. The value
expectations of the customers are typically developed around the standard
attributes of cost, quality, service, and time.
3. Internal perspective. The key processes at which the organization must excel
are defined in the internal perspective. Often these processes are grouped
into a few key themes such as operation excellence, customer intimacy, and
innovation.
4. Learning and growth perspective. The key capabilities of the organization in
terms of people, skills, technology, and culture are defined in the learning and
growth perspective. These organizational attributes are the foundation for
future strategic success.
By specifying and measuring the organization's key priorities within these four perspectives
a balanced view can be obtained. One element of this balance is the traditional
mix of financial and nonfinancial factors, but the other, more innovative
balance is in the timing of strategic impact. In terms of fostering long-term sustainable
success, each of the four perspectives has a time specific impact that contributes
to the concept of balanced management. Even though the overall goal may be financial
or shareholder value, each of the other perspectives contributes differently to the
outlook for that goal.
The financial perspective measures financial performance for a past period (last
quarter, last year, etc.). The customer perspective measures the value delivered to
and the overall satisfaction of the customers, which will have a short-term future
impact on the financial performance. The internal perspective measures the ability
of the organization to execute its processes, which will have a short-term future
impact on customer value and a medium-term impact on financial performance. The
learning and growth perspective measures the development of organizational capabilities,
which will have a short-term impact on operational execution, a medium-term
impact on customer satisfaction, and a long-term impact on financial
performance.
By analyzing and measuring the strategy across all four perspectives, organizations
achieve balance between the leading and lagging indicators of performance as
well as between financial and nonfinancial factors. The combination of these multiple
dimensions of balance allows a more holistic understanding of the organization's
strategic execution and ultimate strategic success. Management should be able
to use the scorecard results to obtain a snapshot of the current performance and a
forecast of future strategic performance for the organization. This snapshot should
highlight any key issues and be a valuable tool in steering the business through the
allocation of resources and prioritization of strategic initiatives.
1.2 ELEMENTS OF A BALANCED SCORECARD. The primary elements of a balanced
scorecard are the strategic objectives, performance measures, execution targets,
and strategic initiatives (see Exhibit 1.2). These elements must be clearly
defined and properly aligned among the four perspectives to create a useful management
tool. Once aligned, the combination of these elements should be able to tell the
story of the strategy in a clear and common framework. A well-defined framework
will become a standard strategic language that can be used throughout the organization
to better understand and manage strategy.
(a) Strategic Objectives. The strategic objectives are short statements of the
strategy that are used to highlight the key priorities of the organization. Specifying
the objectives is the first and most strategically important step in designing a balanced
scorecard. The objectives should be designed to reflect a midterm version of
the strategy, typically the priorities over the next three to five years. The strategic
objectives should highlight the most important priorities for the organization to focus
on during this time period. These objectives are typically formatted in a verb-adjective-noun
format similar to activities (see Exhibit 1.3 for examples). To show
the emphasis on the customer's expectations, objectives for the customer perspective
are generally specified in the words of the customer. The formatting of customer
objectives is represented as the key attributes of the organization's products and services
that represent value to the customer.
The definition of the strategic objectives is an area that clearly separates the balanced
scorecard as a strategic management tool versus a simple key performance
measure framework. The identification of the priorities of the organization across
each perspective requires a well-developed strategy that is understood by the organization.
Senior management involvement is especially critical during the definition of
the objectives. To define strategic objectives an organization must understand the following
questions:
Financial. What is the primary financial outcome for the organization? What
are the key financial levers necessary to achieve that outcome?
Customer. Who are my primary customers or customer groups? What attributes
differentiate my products or services to these customers? What is most
important to the customer?
Internal. What areas of my internal processes must excel to satisfy the customers?
How do these processes link together to meet specific customer needs?
What is the internal focus of my organization: operational excellence, innovation,
customer knowledge, and so on?
Learning and growth. What skills and capabilities are necessary to execute the
strategy in the future? What type of people and culture will enable the organization's
success? How should we manage technology and information to leverage
these assets for tangible results?
Only after the organization has clearly articulated its strategy through the strategic
objectives can the subject of performance measures be properly addressed. A large
organization can typically expect to define between 20 and 25 strategic objectives for
a clearly articulated strategy. More than 25 objectives would indicate a lack of clear
priorities for the organization. Fewer objectives can be sufficient if they are defined
specifically enough to communicate the strategy effectively.
The definition of the strategic objectives should highlight areas of inconsistency in
the strategy. An organization cannot seek to be all things to all customers. The
strategic objective process is designed to highlight the most important outcomes that
define value for the shareholders and customers, as well as the few key processes and
organizational attributes that contribute most to that value. The objectives will not
cover every activity performed by the organization, but should be used to highlight
those that will be most critical over the strategic horizon.
(b) Performance Measures. As a measurement framework, the balanced scorecard
is often judged by the quality of the performance measures. Performance measures
serve to further clarify the priorities of an organization by directly identifying
the most important priorities for strategic execution. The performance measures identify
how the organization will judge success. Most organizations already have some
type of indicators defined throughout the various levels of the business. The issue in
defining the scorecard is to identify the most important measures that will reflect the
execution of the strategy.
The performance measures on a balanced scorecard are often compared to the
dashboard on an automobile. While the driver of the car looks at only a few key metrics
(speed, fuel level, etc.), the car itself monitors hundreds of other pieces of information.
In our case, the executives of the organization use the scorecard as the key
performance information they need to monitor and steer the business, while other
more operational metrics are looked at within the business. The other operational
metrics can be brought forward to the executives only when there is an unusual
problem. Major changes (intended or not) in performance and execution should be
visible through the scorecard measures.
There are a number of different types of performance measures that can be used
on a balanced scorecard (see Exhibit 1.4). The choice of specific performance measures
is a very individual decision for the organization. There is no template set of
scorecard measures that will be appropriate for any strategy. There are, however, a
few guidelines that can assist an organization in choosing appropriate measures:
Choose at least one measure for each strategic objective.
Total measures should be around 25 for a large organization.
Choose quantitative rather than subjective measures where possible.
The goal of these guidelines is to create the most useful set of measures possible. Any
strategic objective that cannot be described by a measure should call into question the
validity of that strategy. Experience with senior management has shown that using
more than 25 indicators makes it very difficult for executives to understand and focus
on the results. The clearest measures are those that result in a specific and understandable
number (e.g., dollars, number of employees, etc.). Generally, more subjective
measures like indices and survey results are more difficult to measure,
communicate, and understand. While it is impossible to create a scorecard with only
objective measures, the balance should be toward more numerical and less subjective
indicators.
Another key factor to consider when choosing measures is the frequency of data
reporting. The organization cannot expect to have executive discussions on scorecard
results each quarter if your data are available only on an annual basis. The choice of
measures should correspond to the frequency of desired reporting. Most organizations
review their scorecard performance and strategic focus on a quarterly basis. In
this case, at least 75% of your measures should be available at that frequency.
(c) Execution Targets. The setting and communication of targets are key steps
necessary to operationalize a scorecard. While the measures communicate where
management focus will be, the targets communicate the expected level of performance.
For example, while a measure such as customer retention shows a strategic
focus, the difference between a 90% target and a 60% target represents a major shift
in strategy. The setting of appropriate targets can be a difficult and painful process.
An important distinction in setting targets is the difference between standard performance
targets and stretch targets. Stretch targets are typically used in areas of new
or enhanced strategic focus and are meant to move the organization in new directions.
Typically these targets are multiyear in nature and their implementation approach is
not fully defined when they are initially set. A target such as doubling revenue in
three years for an established organization is something that would require significant
changes. Often the precise steps needed to reach that target are not yet defined. The
use of a stretch target forces innovation and change in an organization.
Obviously, an organization cannot set 25 stretch targets and hope to achieve all of
them. Most execution targets will be more traditional incremental advances that
reflect successful execution of the strategy. The choice of where to use the stretch
versus incremental targets strongly defines the emphasis in the strategy. While stretch
targets create inspirational goals for the organization, incremental targets supplement
those goals with core areas that need continual focus for sustained success.
The key point in choosing appropriate execution targets, whether stretch or incremental,
is evaluating the capabilities of your organization and resources. Incremental
targets should be clearly reachable given the available resources and capabilities. The
setting of unreasonable targets undermines employee faith and accountability in the
performance management process. While the achievement of stretch targets may not
be easily envisioned initially, they should come into clearer focus as the time period
for the stretch goals is crossed. Every stretch target should have a measurable time
period attached and should be updated throughout that time frame. Typically, stretch
targets would be set at a maximum of 20% of the total measures, with 80% of targets
remaining as incremental improvements.
(d) Strategic Initiatives. Strategic initiatives are actions or projects that represent
the primary path through which organizations create new skills, capabilities, or infrastructure
to achieve strategic goals. In this definition strategic initiatives are different
from projects or actions that simply create incremental improvement over or maintain
the existing skills, capabilities, or infrastructure of an organization. For example, in a
financial organization, a project to build a new online ability to process self-service
customer transactions could be a strategic initiative, while a project to improve the
interface of existing online tools or extend the online services would be considered an
incremental upgrade of existing capabilities.
Continues...
Excerpted from Handbook of Budgetting
Copyright © 2003 by William R. Lalli.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Foreword xv
Preface xvii
Part One: Introduction to the Budgeting Process
Chapter 1: Integrating the Balanced Scorecard for Improved Planning and Performance Management 3
Overview 3
Elements of a Balanced Scorecard 5
Use of Strategy Maps 11
Scorecard Cascading 12
Bringing It All Together 13
Integrating the Scorecard with Planning and Performance 14
Balanced Scorecard and Annual Planning 15
Continuous Strategic Management with the Scorecard 22
Summary 24
Chapter 2: Strategic Balanced Scorecard–Based Budgeting and Performance Management 25
Introduction: Why Most Companies Fail to Implement Their Strategies 25
Why a few Companies Produce Exceptional Results 26
Measure your Strategy with Balanced Scorecard 34
Balanced Scorecard-Based Budgets 37
Performance Management 38
Summary 39
Chapter 3: Budgeting and the Strategic Planning Process 41
Definition of Strategic Planning 41
Planning Cycle 42
Strategic Planning Process: A Dynamic Cycle 44
Situation Analysis 46
Business Direction/Concept 58
Alternative Approaches 61
Operational Plan 62
Measurement 66
Feedback 66
Contingency Planning 68
Problems in Implementing Formal Strategic Planning Systems 69
Summary 70
Chapter 4: Budgeting and Forecasting: Process Tweak or Process Overhaul? 71
Introduction 71
Survey Methodology 72
Findings: Budgeting Process 72
Findings: Forecasting Process 86
Report Summary 89
Developing a Road Map for Change 90
Chapter 5: The Budget: An Integral Element of Internal Control 93
Introduction 93
The Control Environment 94
Planning Systems 96
Reporting Systems 98
Summary 102
Chapter 6: Relationship Between Strategic Planning and the Budgeting Process 103
Introduction 103
How to Plan 103
The Audience for Whom the Plan Is Designed 104
Strategic Business Planning and Its Role in Budgeting 105
Planning Differences among Small, Medium, and Large Organizations 106
Components of Strategic Planning 107
Management and Organization 108
Market Analysis 110
Formulation of Marketing Strategies 111
Operations Analysis 112
Summary 114
Chapter 7: The Essentials of Business Valuation 115
Introduction 115
Understanding the Valuation Assignment 117
Research and Information Gathering 120
Adjusting and Analyzing the Financial Statements 123
Three Approaches to Valuing a Business 125
Income Approach 125
Market Approach 132
Asset Approach 135
Making Adjustments to Value 136
Reaching the Valuation Conclusion 141
Chapter 8: Moving Beyond Budgeting: Integrating Continuous Planning and Adaptive Control 145
Introduction 145
Annual Budgeting Trap 146
Why Some Organizations Are Going Beyond Budgeting 147
Beyond Budgeting: Enabling a More Adaptive Performance Management Process 148
Climbing the Twin Peaks of Beyond Budgeting 152
Beyond Budgeting: Enabling Radical Decentralization 153
Chapter 9: Moving Beyond Budgeting: An Update 161
Introduction 161
Beyond Budgeting Round Table (BBRT) 162
Guardian Industries Corporation 163
Part Two: Tools and Techniques
Chapter 10: Implementing Forecasting Best Practices 169
Introduction 169
Budgeting versus Forecasting 170
Implementing Forecasting Best Practices 170
Forecasting Best Practices: Process 171
Forecasting Best Practices: Organization 174
Forecasting Best Practices: Technology 176
Conclusion 178
Chapter 11: Calculations and Modeling in Budgeting Software 181
Introduction 181
Why Companies Use Budgeting Software 181
Calculations in Accounting Systems and Spreadsheets 183
Budgeting Software 184
OLAP Databases 186
Modeling and Budgeting 188
Processes 189
More Complex Budgeting Calculations 190
Conclusion 192
Chapter 12: Cost-Accounting Systems: Integration with Manufacturing Budgeting 193
Introduction 193
Decision Factors in the Selection Process 194
Cost-Accounting System Options 195
Costs Associated with a Product 195
Labor Cost 196
Variable Costing and Budgeting 197
Full Costing and Budgeting 217
Cost-Accumulation Procedures 219
Valuation: Actual versus Standard 221
Actual Costing 223
Actual Costing, Budgeting, and Cost Control 226
Standard Costing 226
Variance Reporting 231
Variances and Budgeting 236
Manufacturing Overhead 236
Manufacturing Overhead, Budgeting, and Cost Control 247
Chapter 13: Break-Even and Contribution Analysis as a Tool in Budgeting 249
Introduction 249
Break-Even Analysis 249
Price/Volume Chart 254
Contribution Analysis 255
Cost–Volume–Price and the Budgeting Process 261
Chapter 14: Profitability and the Cost of Capital 263
Introduction 263
A Market Gauge for Performance 265
Coping with the Cost of Equity 266
Building Company-Wide Profit Goals 268
Building Divisional Profit Goals 270
Information Problems and Cost of Capital 276
Summary 276
Chapter 15: Budgeting Shareholder Value 279
Introduction 279
Long-Term Valuation 281
Economic Value Added 285
Complementary Measures of Valuation 290
Budgeting Shareholder Value 293
Summary 296
Chapter 16: Applying the Budget System 297
Introduction 297
Initial Budget Department Review of Divisional Budget Packages 299
Divisional Review Meetings 302
Budget Consolidation and Analysis 303
Preliminary Senior Management Review 303
Final Revision of Operating Group Plans 304
Second Budget Staff Review of Operating Group Plans 304
Revised Consolidated Budget Preparations 305
Final Senior Management Budget Review Sessions 305
Operating Groups’ Monthly Submissions 306
Effective Use of Graphics 306
Summary 306
Chapter 17: Budgets and Performance Compensation 307
Introduction 307
Measures of Executive Performance 308
Structuring Reward Opportunities 316
Pitfalls of Linking Incentives to Budgets 317
An Optimal Approach 320
Adjusting Operating Unit Targets 324
Budgets and Long-Term Incentive Plans 326
Summary 328
Chapter 18: Predictive Costing, Predictive Accounting 329
Internet Forces the Need for Better Cost Forecasting 329
Traditional Budgeting: An Unreliable Compass 330
Activity-Based Costing as a Foundation for Activity-Based Planning and Budgeting 331
Budgeting: User Discontent and Rebellion 331
Weary Annual Budget Parade 333
ABC/M as a Solution for Activity-Based Planning and Budgeting 334
Activity-Based Cost Estimating 335
Activity-Based Planning and Budgeting Solution 336
Early Views of Activity-Based Planning and Budgeting Were Too Simplistic 337
Important Role of Resource Capacity Causes New Thinking 337
Major Clue: Capacity Exists Only as a Resource 339
Measuring and Using Cost Data 340
Usefulness of Historical Financial Data 341
Where Does Activity-Based Planning and Budgeting Fit In? 344
Activity-Based Planning and Budgeting Solution 345
Risk Conditions for Forecasting Expenses and Calculated Costs 350
Framework to Compare and Contrast Expense-Estimating Methods 352
Economics 101? 355
Chapter 19: Cost Behavior and the Relationship to the Budgeting Process 357
Introduction 357
Cost Behavior 357
Break-Even Analysis 360
Additional Cost Concepts 365
Differential Cost Concepts 368
Maximizing Resources 370
Estimating Costs 373
Summary 375
Part Three: Preparation of Specific Budgets
Chapter 20: Sales and Marketing Budget 379
Introduction 379
Overview of the Budget Process 379
Special Budgeting Problems 384
Pertinent Tools 389
Unique Aspects of Some Industries 392
Summary 394
Chapter 21: Manufacturing Budget 395
Introduction 395
Concepts 400
Changing to a Cost-Management System 402
Problems in Preparing the Manufacturing Budget 407
Three Solutions 410
Technique 410
Determining Production Requirements 411
Step 1: Developing the Plannable Core 413
Step 2: Obtaining Sales History and Forecast 413
Step 3: Scheduling New and Revised Product Appearance 415
Step 4: Determining Required Inventory Levels 416
Step 5: Establishing Real Demonstrated Shop Capacity 418
Step 6: Publishing the Master Schedule 424
A Total Quality Program—The Other Alternative 425
Inventory and Replenishment 431
More on the Manufacturing Budget 434
Determining Raw-Material Requirements 434
Determining Other Indirect-Material Costs 436
Determining Direct-Labor Costs 437
Establishing the Manufacturing Overhead Functions and Services 440
Quality Control Economics Review Questions 447
Plant Engineering Buildings and Equipment Maintenance Review Questions 449
Floor and Work-in-Process Control Review Questions 450
Summary 451
Chapter 22: Research and Development Budget 455
Relationship of Research and Development and Engineering to the Total Budgeting Process 455
Problems in Establishing Research and Development and Engineering Objectives 459
Developing a Technological Budget 465
Preparing a Departmental Budget 481
Managing a Budget 484
Coordinating Project Budgets 490
Chapter 23: Administrative-Expense Budget 493
Introduction 493
Role and Scope of the Administrative-Expense Budget 493
Methods Used for Preparing the Administrative-Expense Budget 498
Factors that Impact the Administrative-Expense Budget 502
Unique Issues Impacting the Administrative-Expense Budget 503
Tools and Techniques for Managing the Administrative-Expense Budget 504
Summary 506
Chapter 24: Budgeting the Purchasing Department and the Purchasing Process 507
Description and Definition of the Process Approach 507
Role of Process Measures 512
Process Measures 513
Creating the Procurement Process Budget 517
Chapter 25: Capital Investment Review: Toward a New Process 519
Introduction 519
Context of the Revised Capital-Investment Review Process 520
Benchmarking Capital-Investment Review Best Practices 523
Revised Capital-Investment Review Process: Overview 527
Implementation: What Bonneville Learned in the First Three Years 541
Summary 544
Chapter 26: Leasing 545
Introduction 545
Overview of the Leasing Process 546
Possible Advantages of Leasing 549
Possible Disadvantages of Leasing 550
Types of Lease Sources 550
Lease Reporting 552
Lease versus Purchase Analysis 560
Financial Accounting Standards Board Rule 13 Case Illustration 564
Negotiation of Leases 565
Selecting a Lessor 566
Lease-Analysis Techniques 566
Lease Form 572
Summary 579
Chapter 27: Balance-Sheet Budget 581
Introduction 581
Purpose of the Balance-Sheet Budget 582
Definition 582
Responsibility for the Budget 583
Types of Financial Budgets 587
Preparing Financial Budgets 588
Preparing the Balance-Sheet Budget 591
Adequate Cash 620
Financial Ratios 620
Analyzing Changes in the Balance Sheet 628
Chapter 28: Budgeting Property and Liability Insurance Requirements 635
Introduction 635
Role Risk Management Plays in the Budgeting Process 637
Types of Insurance Mechanisms 638
Role of Insurance/Risk Consultants 639
Use of Agents/Brokers 639
Self-Insurance Alternatives 640
Identifying the Need for Insurance 643
Key Insurance Coverages 645
Identifying Your Own Risks 650
How to Budget for Casualty Premiums 653
Summary 656
Part Four: Budgeting Applications
Chapter 29: Budgeting: Key to Corporate Performance Management 659
Future of Budgeting 659
Adding Value to the Organization 660
Corporate Performance Management 661
Developing a Budget Process Focused on Implementation of Strategy 662
Role of Technology 666
Overcoming Organizational Resistance 669
Planning and Controlling Implementation of a New System 670
Conclusion 675
Chapter 30: Zero-Based Budgeting 677
Introduction 677
Problems with Traditional Techniques 678
Zero-Based Approach 679
Zero-Based Budgeting Procedures 680
Decision Package 681
Ranking Process 687
Completing the Profit and Loss 689
Preparing Detailed Budgets 692
Summary 695
Chapter 31: Bracket Budgeting 697
Introduction 697
Application of Bracket Budgeting 698
Premises to Profits? 699
Developing a Tactical Budgeting Model 700
Bracket Budgeting in Annual Planning 719
Consolidating Income Statements 720
Summary of Benefits 720
Summary 722
Chapter 32: Program Budgeting: Planning, Programming, Budgeting 723
Introduction 723
Description of Program Budgeting 724
History 728
Framework of Program Budgeting 734
Program Structuring 747
Types of Analysis 751
Installation Considerations 759
Summary 763
Chapter 33: Activity-Based Budgeting 767
Introduction 767
Traditional Budgeting Does Not Support Excellence 768
Activity-Based Budgeting Definitions 771
Activity-Based Budgeting Process 774
Linking Strategy and Budgeting 775
Translate Strategy to Activities 780
Determine Workload 781
Create Planning Guidelines 783
Identify Interdepartmental Projects 783
Improvement Process 787
Finalizing the Budget 787
Performance Reporting 788
Summary 790
Part Five: Industry Budgets
Chapter 34: Budgeting For Corporate Taxes 793
Introduction 793
Taxation of C Corporations 794
Personal Holding Company Tax 799
Net Operating Loss Utilization 799
Charitable Contributions 800
Taxation Budget 802
Federal Corporate Tax 803
Purposes 804
Tax Return 804
Chapter 35: Budgeting in the Global Internet Communication Technology Industry 805
Overview 805
Essentials from Earlier Chapters 806
Freemium Strategies 808
Volunteer Services 809
Enterprise Risk Management 811
About the Editor 813
About the Contributors 815
Index 825