Posted by: knightbird | June 10, 2013

The Damaging Budget Dance

I had a conversation with my son today about the lack of ability for many executives to think spatially over time and see opportunity where others don’t. This is what I explained to him.

Budgeting is one of the most egregious wastes encountered in the U.S. corporation (and the federal/state governments as well). One of the Alaska Native Corporations has engaged in the Adaptive Planning/Beyond Budgeting practice. Using this model, a 5 quarter rolling forecast is prepared by the Chief Financial Officer. The whole process of issuing budget guidance, staff preparing budgets and submitting to the Executive, then negotiating modifications, is eliminated as a waste of time. Some time ago, I asked one of our subsidiaries to approximate the cost for preparing a budget, and received an estimate of $60,000. If you have 10 subsidiaries, the conservative annual cost of budgeting (minus Executive and board level consideration costs) is $600,000. By eliminating this cost, you have $600,000 additional labor, profit or capital to invest. I brought this concept to the corporation about five years ago. Our lost opportunity cost over five years is approximately $3.0 million.

Another lost opportunity comes with ignoring the tremendous power of lean management for reducing the size of operational costs while increasing output and creating value. I have always estimated (again, I think conservatively) a 30 percent decrease in costs while maintaining or increasing value. If we achieve only 10% of that total, a company with $100 million in revenue has the potential for freeing up $10 million of additional capacity. Over five years, the lost opportunity for this company is $50 million.  Most companies attempt to increase revenue and hope to increase profitability that way. Mining your costs and expenses for value can produce a far greater return than seeking only additional revenue through sales. Think about this. You are more profitable, and more competitive, by becoming curious about all of the tremendous gains available by introspectively examining your value producing capabilities through application of adaptive planning and lean management. If you don’t, rest assured, your competition is. How do you think we will fare in head to head competition with a company that found the $10 million of additional capacity. 

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