The budget in colour: A guide to learning and applying the budget using colours

Di Massimo Solbiati, Riccardo Coda e Michele Della Valle

Together with analytical accounting, cost analysis for decision-making, and management reporting, the budget is one of the tools available to the entrepreneur to realise an effective planning and management control process. Since the budget is an action programme expressed in economic terms, its usefulness lies in deciding what to do today in order to achieve tomorrow's objectives, reducing "unmotivated turnover anxieties", activating "experience accumulation" processes, accelerating decisions during control, and relieving the entrepreneur of operational management problems.

The aim of this book is to present the basic techniques for budgeting to both the novice and those who work in the company and question the real usefulness of the 'budget' tool in cost-benefit terms.

A practical case, with a solution also proposed in Excel, a case which starts with the sales budget and ends with the verification of its economic and financial feasibility, provides a practical way of budgeting.

The originality of the didactic technique, based on the use of colours to represent the components of the budget and to give them meaning for each value, facilitates learning and makes reading on a topic such as the budget a pleasure, which is thus also interesting and engaging for those who have not yet experienced it in business practice.

• Lingua: Italiano
• Editore: Michele Della Valle
• Data di uscita: 28 mag 2024
• ISBN: 9791223043585

Anteprima del libro

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Riccardo Coda - Michele Della Valle - Massimo Solbiati

THE BUDGET IN COLOUR

A guide to learning and applying the budget using colours

Translated from the Italian second edition of the book,

‘Il Budget a Colori’

by Andrew Hackworthy and Riccardo Coda

All rights reserved

Copyright © Riccardo Coda, Michele Della Valle, Massimo Solbiati 2024, second edition

Preface

There are many books in the corporate literature devoted to the budget as a planning and control instrument. This one, part of a management accounting series initiated around 10 years ago with a book on accounting¹, has its own specificities consistent with those of the other books in the series, and aims to:

Introduce basic budget concepts to those who know little about it, to individuals in companies lacking a budget system, and to those who wonder if a budget model, taken as a reference in their company, requires a rethink in its contents and how it is used.

Present a budget model using the colour technique, also used in the other books in the series, which helps the assimilation and makes internalising the logic behind the budget more enjoyable. When put it into practice, this approach transforms the budget into a tool for gaining competitive advantage.

The budget is an action plan expressed in quantitative, monetary terms. It serves as a ‘beacon’ that guides entrepreneurs on their path for the upcoming year based on specific scenario hypotheses.

Over time, there have been many criticisms of the budget as an instrument by both scholars and practitioners. However, we believe that these criticisms stem from inherent errors in the chosen reference model or, rather, in its application within the company.

Detractors of the budget raise at least 10 reasons² to undermine it. These reasons are immediately ‘dismantled’ with the arguments set out here in italics. According to them, the budget:

Prevents a rapid response to unforeseeable events: true, but only if understood as a monolithic construction elaborated in the months leading up to the reference year and then no longer revisable in the course of the year.

Is not worthwhile from a cost-benefit perspective and it absorbs around 20% of managers’ time: true, but only if there is a lack of coordination on the part of the controller in tune with the entrepreneur. Coordination helps to avoid dispersing attention on marginal aspects.

Is not aligned with the dynamics of the competitive environment: true, but only if these are not monitored by the controller.

Is not aligned with the strategy: true, but only if it is based on the vision of functional areas and cost centres/departments, rather than on the corporate strategy. The budget should address how to compete with competitors in the various markets in which the company operates. It is an observation that can be shared, but can be overcome when there is a broad understanding of the budget, ensuring that strategy and budget are consistent with each other.

Stifles initiatives and innovation: true, but only if rigid and defined by top management with little sharing.

Protects and hides costs that do not create value for the customer: it depends on how the budget is constructed in reality.

Reinforces command and authoritarianism: true, but only if it is interpreted by the entrepreneur as a ‘dictate’.

Demotivates people: true, but only if the objectives underlying the budget are not defined in a balanced way.

Encourages unethical behaviour on the part of people in order to achieve aggressive targets: true, if the objectives inherent in the budget are difficult to realise or when the assumptions made in the budget no longer correspond to reality during the year and are not revised.

Regarding the last point, it has happened, for example, that in the case of a target in terms of ROI (return on investment = net operating margin/net invested capital) that is too stringent, a manager, with appropriate delegated powers, might sell some assets that are part of the invested capital to achieve the annual ROI target. This action may strip the company of fundamental assets, all in an effort to reduce the ROI denominator!

In conclusion, these criticisms all stem from erroneous budget models or deviant practices, unfortunately present in some companies. However, these challenges, can be overcome.

As it will be argued in Chapter 2 of this book, the budget should not be limited to a complex process of obtaining spending authorisations. A budget lacking a prior drafting of a previously established action plan makes little sense, just as a budget based on a forecast extrapolated from the past loses its meaning. In such cases, the budget becomes cumbersome, a useless though not harmful ritual.

The budget finds its usefulness if it is constantly future-oriented, if it is continually redesigned, and responsive to events. When assumptions clash with realities during the course of the year in which major changes occur, revisions of the budget are not only welcome but also necessary!

Rather than wondering how things have turned out so far in relation to the budget (which offers little value), it is useful to ponder where we will end up if things continue as they are and how to intervene in action programmes. It is also good to recognised that the budget, when dictated by the business situation, should be viewed not only by functional area, but also by a process, alongside activities. For example, considering the process from pre-sales to after-sales activities, with the customer as the focus.

The ‘investment’ budget should then emphasise the strategic nature of the budget itself by highlighting strategic investments aimed at positively influencing the company’s strategic market positioning, as opposed to investments solely required by compliance to regulation. The budget should not be limited to an elaborated economic budget (profit and loss statement) and a capital budget (balance sheet), but should be based on a few but important key performance indicators/ratios (KPIs) to be achieved. For example:

Quality indicators, such as the incidence of production waste;

Financial indicators, such as the ratio of financial debt to net capital;

Growth indicators, such as increased revenues (at the same sales prices and product mix); and

Indicators of profitability success, such as sales profitability (net operating margin/revenues)³.

These reflections go in the direction of offering even a novice in the subject a larger ‘breath’ for understanding the basic techniques for constructing a budget as described in this book. It encourages the reader to approach the content with a ‘critical mind’. Techniques are one thing, their application is another. The application should be customised to each specific business reality - industrial or service - with complexities that manifest themselves in production processes, rather than in those of purchasing or sales. It must also be integrated coherently with the other operational mechanisms, such as the incentive system and the information system, as well as with the management style. Therefore, budgeting techniques, even those illustrated in this book, should never be taken as literally as tax regulations when it comes to application!

Chapters 8 and 9 explain some first features of strategic planning and control and the connections with the budget.

In our opinion, the budget tend to be considered more useful within SMEs (small-medium enterprises) in north European countries rather than in south European countries, where the control process