By Alberto Lott, partner at FALCONI
At this time of the year, most companies have prepared their budgets for 2017 and thus have defined their goals for operating results and Investments, among other major indicators for the success of their businesses.
Budget is a greatly important managerial instrument, as it reflects the financial impact of everything that must be performed in a certain period in order for a company to move towards its strategic goals and achieve the expected results.
That is why the budget must be built on consistent analyses, substantiated by facts and data, incorporating the necessary challenges for the company to become more efficient and competitive. Some companies still don’t practice these concepts on a consistent manner and treat their budgets just like projections of results based on past behaviors.
For instance, for the budget of operating expenses, the inefficient practice should be avoided of taking expenses from the previous year and adding the projected inflation for the period, further incorporating predicted expenditures – all without a detailed analysis. Another common practice: the controllership department requests each manager to report how much he or she will spend, acting as a mere consolidator of figures.
None of these approaches actually questions past expenses and the actual needs for the future. Without proper control, the expenses of a company increase by the day. Managers with decision power to approve new expenditures are in every department, and the senior management is not always aware of the decision that are being made and whether the funds are being allocated in a productive manner.
As a result, the company incurs a number of unnecessary expenses that add little or no value to the business and customers, apart from sucking funds that should be applied towards activities generating actual return to the shareholders.
In the current economic scenario, many companies experience difficulties in achieving their revenue goals. In these cases, especially business sustainability will depend upon the development of a more advanced expense management model.
Traditionally, expense management adopts a control framework with a “top down” planning approach, instructing costs to be cut in every department. Each department manages its expenses separately, with a low level of interaction with the others.
At FALCONI, we help our customers build their expense management practice by adopting analysis models and methods that allow for consistent and perennial efficiency gains.
Usually, managers learn to use this knowledge n two improvement cycles, in a structured manner. In the first cycle, the transverse management framework, which defines expense packages grouped by affinity, allows good practices to be shared among departments. Each package is assigned an expert manager in charge of identifying the best practices and conducting the analyses. The purposes are identified by benchmarks both inside and outside the company, leading to where the reduction opportunities are. The focus is on doing the same usual things, but spending less.
In the second cycle, the premise is questioning all expenses. The purpose is to understand why expenditure is made by analyzing all the deliverables in each department, both to internal and external customers. The deliverables are assessed as to their relative relevance, focusing on cost-benefit and efficiency.
Traditionally, the budget construction process is based on the justification for the need of incremental expenses. In the Zero Base Budget (ZBB), instead of using expenses of the previous year as basis, one starts from zero, thus avoiding the inertial growth of expenses.
For instance: a marketing department has several deliveries under is management, such as publicity campaigns, internal newspaper, organization of fairs/events and sponsorship. How much does each of these deliverables actually cost, considering personnel time, occupation and utilities, third-party services and other expenses? How many of these activities are really important and how many can we dispense with?
Each identified deliverable has its cost quantified. Then they are sorted in order of importance by the managers in charge and their customers. This assessment enables the identification of those that can be eliminated, those that must be streamlined and those where productivity must be improved or the process must be innovated.
This makes it clear to see where the expense reduction opportunities are: there are those that are essential to the company operation and those with a lower priority degree. This way, it is possible to direct the focus of the action plans that will guarantee the desired efficiency gains.
By incorporating the identified gains, the budget becomes essential to the management. The creation of regular expense assessment procedures enables managers not to lose sight of challenges and ensures that the results will be as predicted at the end of the year.
Companies adopting this model are obtaining excellent results and becoming more competitive every year. They treat the preparation of their expense budget as an opportunity to actually question the value of each penny spent!
Text published in the January 2017 edition of O Papel magazine.