This is the third in a series of blogs that will help your organisation to improve its budgeting process. In the last blog I covered the first area of improvement and that was to define the purpose of the budget. In this blog I will look at the second area that needs attention – associating budgets with business processes. Budgets are typically made up of financial measures that are either targets to be achieved (as in the case of income), or resources that can be consumed (e.g. expenses) that departments can spend in achieving those targets. Given that only the resources to be consumed can be directly controlled, then the allocation of budgets need to be associated with the volume and quality of work that those expenses enable. Businesses generate value through the arrangement of business processes (sales, production, customer service, etc.), as shown in the following graphic:
These processes can be split into:
- ‘Core processes’ that typically consist of linked activities that directly relate to generating revenue; delivering products/services; supporting customers; and developing new products/services.
- ‘Support processes’ such as those conducted by HR, IT, Finance, etc., who purpose is to ensure the smooth running of the organisation’s core processes.
Below is a graphic that shows an example of a relationship between resources, workload and outputs generated.
It is only by considering outcomes and how they support business goals, can budgets be truly assessed for worth. We will look in a future blog on how these relationships can be used to create budget content. Interestingly, many organisations pay staff based on their performance against budget. For this to drive the right behaviour, then the figures being used must combine work activity, with resource consumption and outcomes generated.
- Define measures for each department that record work performed and the quality of that work.
- Where possible, split out departmental expenses to the different types of work performed and any outputs that each work type generates..
- Report budget expenditure for each department along with work performed and output generated.
- Don’t reward people based solely on their ability to keep expenditure within budget. This leads to sandbagging and actions that could well jeopardise future organisational value.