#effective budget control techniques
By Gill Den Hartog
I hope you like sailing because budget controlling might just be the same: you don’t go from to start to finish in a straight line, as you constantly have to adjust to the wind – or company waves and market storms.
Before sharing with you a few tips on budget control techniques, I’d like to be straight: budget control is not about control, it’s about anticipation. If you would like to avoid a roller coaster-surprise budget and enjoy a sea cruise-type, the main question to keep in mind every working day is : How predictable is my budget next month ?
You might think that when you have control of your budget, you can better predict how it will go. Not at all, it’s indeed the opposite : the more our budget is predictable, the more control we will have on it.
First let’s #review the techniques of budget control we find in most handbooks, which are usually :
- Direct supervision and observation : traditional, « grocery shop » method (DSO);
- Financial statements : balance sheet and ratio (FS);
- Budgetary control committee : opex, capital and revenue, large entities (BC);
- Break-even analysis : no profit / no loss point, for Sales mostly (BE);
- Return-on-investment : performance comparison between 2 time points, also good for inter-entities comparison (ROI) ;
- Management by Objectives : delegating to a #finance team, each member having objectives, required for bigger business (MBO) ;
- Management Information System : #automatic computerize program collecting and compiling the finance data and analysis ; for medium-bigger business with well-established processes (MIS) ;
- ERT / CPM techniques : Critical Path Method derived from project management, practical to optimise time or costs on a defined budget (ERT).
(from Kalyan citylife blog by Gaurav Akrani)
Each controlling method above can already provide a little bit of budget predictability, as clarified in the table below :
Return on Investment
Management by objectives
ERT / Critical path method
Now to #keep your budget predictable at any point in time, no matter what or how many method used in your business, you need answers to these 3 questions :
- Is the budget on target or not ?
- Will it be on target next month (or not) ?
- Why will it be on target next month (or not) ?
As you can guess the last question is the crucial one. Because most of us don’t have a degree in crystal ball reading, here is what you need to develop effective budget predictability.
Budget projections : your map
Your budget is normally composed of many different items : for example several divisions (chemicals, transport, aerospace, life sciences), or it can reflects various operational levels (resources, projects, facilities, travel & hotels, field operations), can include several countries or be composed of stock exchange values – but each item will developp during the year on its own path, sometimes interacting with others, sometimes not.
It’s key to generate a projection of cost evolution of each item independantly showing :
- The next month result in amount and ratio
- The estimated variation from year target, in amount and ratio
In pharmaceutical R&D the budget related to research can only include 25 projects (without usual opex costs like resources, travel etc). Beyond the Finance statements or the ROI, you need to know for each project which one will remain within its target and which one won’t, in advance. Just as well, the break down of every cost category is necessary, and projection of each category cost (per country cost center if needed) is also key to anticipate your budget risk.
Sailing is safer with a good map to decide on directions, and that’s what your projections are, a map. This will require a some preparation time at the beginning of the year, sometimes even creating your own excel panel if your company system doesn’t provide the projections your need – but not only will it make your budget much safer until year end, it will also allow you quicker decision-making and potential savings.
When Steven Spielberg filmed War of the Worlds in 2005, he had 73 days only available for shooting, half of the normal time required for such movies. To avoid wasting any time or budget, Spielberg used the technique of „pre-visualisation“, basically preparing the day before the filming of next day on a computer program anticipating every scene‘s lights, camera angles, sound checks etc. On the shooting day everything had been already simulated. The movie finished in time and within budget, generating over 704 mio revenue.
Anticipation also needs to involve every person who is responsible for an item of your budget – and potentially they all need to answer for their part the 3 budget-predictibility questions seen above. Ultimately you want to change the all-too-familiar statement : « We had a problem with Land of Oz budget last month, we need to know what happened. » – into : „Land of Oz budget could be off target in 3 months, what can we do to prevent this?“
Together with projections, alerts and indicators are the second key element on your dashboard.
Key performance indicators : your radar
When you sail you look at the sea ahead and at your maps, but periodically you need to also check the radar. While projection helps to visualise the future, you also need to have a glance at present and past status – at this level key performance indicators are not a « nice-to-have », they are simply a must.
I would say there’s Heaven and there’s Hell, and in-between there are KPIs. Choose your indicators well and you will enjoy budget paradise, people will praise you and you’ll make new friends. Choose them poorly and your budget will be on road to hell and damnation, everyone will hate you, cancel your lunch and you’ll end up alone.
With KPIs we must apply 2 basic principles :
- Data for each KPI has to be easy to collect and reflect a real budget target
- Each KPI has to allow or support a decision-making process
If you can’t satisfy A or B, the KPI has to be modified or removed. In case you can spend a month without one indicator, or if an indicator doesn’t help you on budget decision, it’s wasting your time on data collection and analysis.
Your budget KPIs set should be minimal, between 2 and 6, not more, and have to be easy to read, understanding-at-first sight. In the 2 examples below the information provided is concise and directly useful ; there’s a lot of data and calculation behind, but no confusion on the result.
(courtesy from Klipfolio.com)
Breaking down your budget by category or cost centers will also help to set the adequate KPIs, or set a KPI on some specific categories only which requires closer monitoring.
In 1962 when Kennedy requested a budget for the Apollo program, the first estimate provided was a global 7 bn. James Webb, administrator at that time, had estimated 20 bn, which was seen as unrealistic. In 1969 a new estimate resulted in 24 bn after a break-down structure was done including : Apollo spacecraft, Saturn I and IB launch, Saturn V launch, Launch vehicle engine, Mission support, Tracking and data acquisition, Ground facilities, Installations operation. While the Apollo space craft cost alone was 8 bn, there was also a good 6.5 bn to be monitored for facilities, installation, mission support and data tracking.
When your projections and your KPIs are compiled into one sheet or screen, they become your budget dashboard.
Final step : your dashboard
The dashboard is a live document which should be adjusted to the needs and targets of the current year. It should consolidate at least : the budget total, the percent variation from last total, the difference from monthly / yearly target in amount and in percent, a color alert related to the target range, and the time left to reach the target.
A good dashboard usually generates constructive questions, support decision-making and help understanding by others. But above all it brings you a unique advantage : a fact-based confidence on how best to sail your budget to its target.