1. FINANCIAL RESULTS BASED CONTROLS, BUDGETING AND ROLLING FORECASTING
Henri Teittinen
Fall 2017

2. The role and purposes of budgets
Problems with traditional annual budgeting.
Beyond Budgeting.
Rolling Forecasting

3. Traditional budgeting process
The role of long and short term planning.
Annual budgeting

4. Traditional budgeting process
1. Identify the objectives of the organization.
2. Identify potential strategies.
3. Evaluate alternative strategic options.
4. Select course of action.
5. Implement the long-term plan in the form of the annual budget.
6. Monitor actual results.
7. Respond to divergencies from plan.

5. Why do we prepare budgets?
1. Planning (of operations):
To consider how conditions might change and what steps should be taken.
To consider problems before they arise.
2. Coordinating (the activities):
Relationships between operation of other departments and business units.

6. Why do we prepare budgets?
3. Communicating (plans to various responsibility centers and managers):
A clear understanding achieving the annual budget (of the group).
To ensure individuals are made accountable (by the budget).
4. Motivating (managers, and employees, to achieve the budgets, and goals):
Focusing on participation
Providing (challenging) targets.

7. Why do we prepare budgets?
5. Controlling (activities):
Comparing actual with budget.
6. Evaluating (the performance of managers):
Informing managers of how well they are performing in meeting targets.

8. Stages in the budgeting process
1.Communicate details of budget policy and guidelines.
People responsible for budgeting.
2. Determine the factor that restricts output.
Typically sales. Bottle necks.
3. Preparation of the sales budget.
4. Initial preparation of budgets.
5. Negotiation of budgets with higher management.
Priorities, strategy, limits of finance, etc.
6. Co-ordination and review of budgets.
7. Final acceptance of budgets.
8. Ongoing review of the budgets.

9. Problems with traditional annual budgeting?
Articles

10. Rolling forecasting
What is and why do companies need rolling forecasts?
How to forecast?

11. What to forecast (and control)
Input
Trends, discontinues
Process
Models
Output
Raw materials, People
Production, techonology
Products, services

12. Who Needs Budgets? Jeremy Hope & Robin Fraser February 2003, Harward Business Review
A number of companies have recognized the full extent of the damage done by budgeting.
Alternative goals and measures—some financial, such as cost-to- income ratios, and some nonfinancial, such as time to market—move to the foreground. And business units and personnel, now responsible for producing results, are no longer expected to meet predetermined, internally selected financial targets. Rather, every part of the company is judged on how well its performance compares with its peers’ and against world-class benchmarks.

13. Who Needs Budgets? Jeremy Hope & Robin Fraser February 2003, Harward Business Review
In companies using these standards of performance, business units become smaller, more numerous, and more entrepreneurial. Strategy becomes a grass-roots endeavor. The aggregate result of many small teams exploiting local opportunities is a much more adaptive organization.
But that’s not to say these companies abandon their high expectations. They don’t naively assume that everyone who is given more autonomy will improve his or her performance. In fact, they require employees to do something much tougher than meet a fixed target.

14. Who Needs Budgets? Jeremy Hope & Robin Fraser February 2003, Harward Business Review
Instead of adopting fixed annual targets, business units set longer- term goals based on benchmarks such as return on capital. The elements or factors measured are key performance indicators— KPIs—such as profits, cash flows, cost ratios, customer satisfaction, and quality. The criteria of measurement are the performance of internal or external peer groups and the results in prior periods. Two of the important corporate goals at Borealis, a Danish petrochemicals company, have been the reduction of fixed costs by 30% over five years and a decrease in time lost to accidents in its plants. However, the company’s business units and personnel are measured and rewarded on the basis of how well they reduced fixed costs and improved uptime in comparison to best-in-class industry benchmarks.

15. Who Needs Budgets? Jeremy Hope & Robin Fraser February 2003, Harward Business Review

16. Who Needs Budgets? Jeremy Hope & Robin Fraser February 2003, Harward Business Review
Ahlsell
At one time, there were only 14 such centers; now, after a series of acquisitions, there are more than 200. Business-area teams (such as heating and plumbing) within each local unit are now separate profit centers, and they’re fiercely competitive with one another.
Detailed sales plans are no longer made centrally; headquarters communicates only general aims, such as becoming number one in electrical products within two years. The local units have been freed to develop their own approaches in response to local conditions and customer demands.

17. Who Needs Budgets? Jeremy Hope & Robin Fraser February 2003, Harward Business Review
Rolling forecasts are now prepared quarterly by staff members at the head office, who make phone calls to a few key people over the course of a few days each quarter.

18.
Zero-based budgeting, means that every year the budgets need to be compiled as if the programs were being launched for the first time.

19. Case Komas