Budget contract between
Executive board budget committee and
Mr A B - controller, process division.
The company's key measures of success this year are a return on capital employed of 14 per cent minimum and free cash flow in excess of each division's declared accounting profit.
In respect of the process division, this can be achieved by:
A keeping refurbishment and major overhaul spend at a level no greater than current historical cost depreciation;
B reducing operating costs by 3 per cent overall;
C maintaining plant availability at 94 per cent or better.
Charge-out costs for processing will be constant and remain the responsibility of the product division.
You have accepted that these targets, while tight, are achievable and your division has the task of meeting these objectives.
The budgets for A (capital expenditure) should be prioritized and have maximum necessary spend no greater than $970,000.
The budgets for B (operating costs) allow a total spend of $1,940,000.
Availability will be monitored by the product division and their budgets are based on plant availability of 94 per cent.
- Overall objectives and thus goals are clear.
- Very formal - what happens if the 'contract' is not met?
- Does the process division controller have subcontracts with his staff?
Many readers will probably find this too tough - an 8 or even 9 on the scale. What is not clear is how success is rewarded (if it is) or failure is rewarded (if it is).
Budget Memo to General Managers Luxe Hotel Division
It is time to consider drawing up the budget objectives, and the strategy and tactics for achieving these next year.
The outlook for this trade sector is one of sales growth with improved margins, although competition remains fierce.
Overall, the company must consider making an adequate return on assets, although at this stage no precise targets will be given.
Also, due to dividend payment pressures, the divisions must generate adequate free cash flow.
These objectives can be met by tightly controlling capital spend, increasing occupancy and improving margins.
To enable headquarters to set the divisions' budget objectives, general managers are requested to suggest ways in which the above general objectives may be achieved for their respective establishments.
- Consultative in approach - a preliminary stage.
- Overall objectives and thus goals are clear but unquantified.
- Properly collated and analysed, the comments on how to achieve the objectives could yield very useful, practical budget directives.
- Capital spend is restricted, but not maintenance. Is this the intention?
- Presumably general managers and staff understand exactly what terms like 'free cash flow' mean.
I would give A a score of 7 or 8 - it is clear, but the score does depend on how it is implemented; B a score of 8 or 9, again depending on how it is implemented; and C a score of 4, but it was for the consultative stage of a budgeting process - no threats!
- The budgeting process is a well-established means of delivering the essential strategies of sales maximization and cost minimization.
- Are your budget objectives unequivocal?
- Do budget reports and reviews demand committed response?
- Are budget objectives, reports and responses aligned culturally?
- Is your budgeting culture appropriate to the business?
Revision and learning pointers
1 Review your company's budgeting process - is it aligned:
(a) to what the business does?
(b) with the staff involved?
2 Review your company's budget reports - are they appropriate?