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By Omar Aguilar
At many companies, budgeting drives operational planning when the process should actually operate in reverse. When companies try to use the budget process to drive and control operations, budgeting typically becomes enormously time-consuming, with managers competing for the largest allocations irrespective of actual need. In best- practice companies, budgeting is a relatively simple process that translates operational goals into the resources needed to accomplish them.
The focus of integrated business planning at Texas Instruments is on improving the bottom line while minimizing iterations and processing time. The result is a deeper understanding of key mileposts that show where each business is headed and what it needs to get there. Detail is reduced; overall strategy is encouraged. The first year of this long-range planning provides a baseline for the annual budgeting process. Budget iterations are minimized because the operating units are encouraged to get "smarter" during the budget process.
Similarly, Hewlett-Packard emphasizes analysis and strategic reviews rather than "numbers" while at the same time focusing on process excellence. Although HewlettPackard uses performance-based compensation and a modified Economic Value Added (EVA) model, the success of its planning and budgeting rests largely on the excellence of its processes. Strategic guidelines drive strategic plans that, in turn, drive annual plans with periodic annual updates. Moreover, the company continuously strives to improve planning effectiveness by focusing on cycle time, relevance, systems and technology, predictive accuracy, process accountability, and linkage to product cycle life.
FORECASTING ACCURATELY
Poor planning and budgeting make it almost impossible for companies to accurately forecast t\heir quarterly earnings. Industry analysts would have you think that investors should applaud positive earnings surprises and deplore negative ones. Yet all earnings surprises, positive or negative, are signs that a company's planning and budgeting processes are malfunctioning. Of course, there are times when a company's earnings are pushed up or down by unanticipated economic events, but those should be the exceptions.
The real goals of forecasting are to predict revenues and expenses over a period of time, update plans, and provide management with a vision of the future. So, accuracy is crucial. A company whose earnings are on target quarter after quarter may not be as exciting as one whose earnings yo-yo, but common sense tells us that companies that can forecast their earnings accurately are likely very well managed. Such companies typically keep a close watch on their forecasts; if results start to deviate beyond a specified threshold, they take prompt action.
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