Accurate Budget Planning

Year-end bud­get plan­ning for the com­ing year ma­kes ever­yone grumpy at many com­pa­nies. The de­sire to de­scribe ever­ything as ac­cu­ra­tely as pos­si­ble leads to mas­sive amounts of data that must be pro­du­ced, made plau­si­ble and pro­ces­sed. The Con­trol­ling De­part­ment puts in over­time. The De­part­ments keep pro­vi­ding more and more num­bers. When the plan ul­ti­mately co­mes about, parts of it are com­ple­tely out­da­ted be­cause ma­te­rial as­sump­ti­ons have al­re­ady chan­ged again. The short­com­ings in this type of ty­pi­cal bud­get plan­ning are quickly ob­vious: it ta­kes too much time, it isn't very ef­fec­tive, and it has a short half-life.

Fin­ding Your Own Way: Sus­tai­nable Plan­ning

Yet there have long been me­thods of ma­king a plan an ef­fi­ci­ent in­stru­ment for ma­na­ging your busi­ness. What you need is to de­ve­lop a cu­st­omi­zed plan­ning stra­tegy. It should go into de­tail only where such de­tail re­ally ma­kes sense, and it should be fle­xi­ble and easy to ad­apt at all ti­mes. But how can you se­pa­rate re­le­vant in­for­ma­tion from ir­re­le­vant in­for­ma­tion? How can you take pro­ject ef­fects into ac­count? How can you in­cor­po­rate in­flu­en­ces from the mar­ket en­viron­ment or the po­li­ti­cal world?

The first task is to ad­dress the exis­ting pro­blems in a struc­tu­red man­ner. For ex­am­ple: The com­pany's stra­tegy is not ta­ken into ac­count in the bud­ge­ting pro­cess. The amount of re­sour­ces used is enor­mous. Or­ga­niza­tio­nal in­ter­faces are not cla­ri­fied. The same sys­tem is used to pre­pare the ideal sce­na­rio. This will al­low you to es­ta­blish fun­da­men­tal pa­ra­me­ters for op­ti­mi­zing your plan­ning pro­cess.

Im­ple­men­ta­tion oc­curs in five steps:

• Es­ta­blish stra­te­gic gui­de­lines: Your com­pany's stra­te­gic goals are bro­ken down into gui­de­lines from the top down for each of the ope­ra­ting units. These could be mar­ket share goals, earnings ra­tios or key ac­count vo­lu­mes, but they could also be stra­te­gic core va­lues for a new line of busi­ness, a new lo­ca­tion, etc. 
• Draw up a ba­sic plan: The ope­ra­ting units pre­pare a ba­sic plan - the "base case" - from the bot­tom up. The fo­cus is on the ques­tion of where there are si­gni­fi­cant gaps bet­ween the cur­rent si­tua­tion and Ma­nage­ment's stra­te­gic gui­de­lines. 
• Plan earnings-cri­ti­cal po­si­ti­ons in de­tail: The ba­sic plan is only fle­shed out with re­spect to earnings-cri­ti­cal po­si­ti­ons and si­tua­ti­ons where si­gni­fi­cant gaps have been dis­co­vered. The key ques­tion is what ac­tions can be ta­ken to achieve the core goals - a key fac­tor in the plan­ning pro­cess, for these ac­tions will be the cen­tral task of ma­nage­ment in the ope­ra­ting units in the com­ing year and the ba­sis for re­por­ting and con­trol­ling.
• Si­mu­late sce­na­rios: What in­flu­ence will ups and downs in the eco­nomy have? What ef­fects will dif­fe­rent ac­tions have? Ques­ti­ons like these can be an­swe­red by si­mu­la­ting va­rious sce­na­rios. This will show how sen­si­tively the com­pany's suc­cess re­acts to chan­ges. 
• Re­ad­just if ne­cessary: As we all know, things sel­dom work out the way they were plan­ned. Purchase pri­ces change; a new law is enac­ted; the start-up of a pro­duc­tion line is de­layed. For plan­ning to be us­eful as a ma­nage­ment tool, it must be ad­jus­ted con­stantly. And it will soon be­come clear whe­ther the com­pany is still on track.

Prac­tical Ex­am­ple of Sus­tai­nable Plan­ning

For­tuna­tely, it is not al­ways ne­cessary to ra­di­cally change the ent­ire plan­ning pro­cess. What is im­port­ant is to ad­just the right pa­ra­me­ters, as shown by this ex­am­ple: A com­pany with more than 80 sub­si­dia­ries es­ta­blis­hed a pro­gram to in­crease pro­fits th­rough 50 pa­cka­ges of mea­su­res, some of which were plan­ned cen­trally and others lo­cally. But to im­ple­ment this using their exis­ting plan­ning pro­ce­dure would have ta­ken fo­re­ver.

In com­pact work­shops with Con­trol­ling, Ma­nage­ment and the Busi­ness Units, po­ten­tial pro­blems in the bud­get plan­ning were first an­ti­ci­pa­ted; their cau­ses were then de­ter­mi­ned and prio­ri­ties were set. The first con­se­quence was that the di­vi­si­ons had to do much less plan­ning at the cost cen­ter le­vel be­cause bin­ding in­struc­tions were im­po­sed from the top down. On the other hand, much more time was spent on plan­ning pro­fit-cri­ti­cal mea­su­res. To do so, lay­ers (the com­pany's own data lay­ers in the plan­ning soft­ware) were spe­cially brought in for mea­su­res to be ta­ken over wide areas. A sim­ple de­vice that is highly ef­fec­tive: on the one hand, the lay­ers made con­crete plan­ning pos­si­ble at the lo­cal le­vel by the in­di­vi­dual units. At the same time, the ef­fect of each mea­sure on each layer could also be seen at the le­vel of the ent­ire com­pany.

In a Nutshell

Many ma­na­gers think that swit­ching to mo­dern plan­ning me­thods is too risky, be­cause it would mean chan­ging a tried-and-true pro­cess. But it's re­ally worth it. Ad­ded va­lue is crea­ted when the plan is an ef­fec­tive tool lea­ding to even grea­ter suc­cess for the com­pany.

A lon­ger ver­sion of this ar­ti­cle by Tho­mas Mun­dus and Si­mon Haas was publis­hed on Ja­nu­ary 5, 2015 in the Frank­fur­ter All­ge­mei­nen Zei­tung un­der the hea­ding "Der Be­triebs­wirt".

To read the ar­ti­cle in Ger­man in the on­line ver­sion of the FAZ, click here.