Here are some of the things you should do:
1. Do not panic.
budget is not rocket science, says Chris Jackson. Basically difficult to know what is the rocket science, but when we see from psychology point of view, we can know that the main poin is we have to use health mind, when we face the problem especially when setting the budget
2. Put strategy first.
The plan flows from the strategy, which is broken down to goals and targets for each bit of the business.
3. Forget last year.
'You need to be continually questioning the shape of the business,
4. Devolve and challenge
If you want people to meet their budget, they need to have ownership. Every manager should ask all those who spend money how much they need, and to justify it. You'll end up with departmental and company budgets that everyone has signed up to.
Another think that we have to consider is (mind set about the budgeting)
Size doesn't matter
Think downside
Keep on checking
Senin, 24 Maret 2008
CRASH COURSE IN... SETTING THE BUDGET
Abstract (Summary)
The FD tells you that operational spending was 20% over budget last year and capital expenditure went through the roof. But there has been a splurge on office carpets and sofas lately as departments resolve to use it rather than lose it. And as the bean-counters set about next year's figures, there is a line of Oliver Twists outside your door. Here are some of the things you should do: 1. Do not panic. 2. Put strategy first. 3. Forget last year. 4. Devolve and challenge.
» Jump to indexing (document details)
Full Text (484 words)
Copyright Haymarket Business Publications Ltd. Apr 2007
[Headnote]
The FD tells you that operational spending was 20% over budget last year and capital expenditure went through the roof. But there's been a splurge on office carpets and sofas lately as departments resolve to use it rather than lose it. And as the bean-counters set about next year's figures, there's a line of Oliver Twists outside your door. What to do?
Don't panic. Setting a budget is not rocket science, says Chris Jackson, head of the finance and management faculty at the Institute of Chartered Accountants. 'It's really just putting numbers to a business plan.'
Put strategy first. The plan flows from the strategy, which is broken down to goals and targets for each bit of the business. 'You should brainstorm the optimal way to meet your objectives without attaching any pound notes to begin with,' says accountant and trainer Anne Hawkins (www.leanmeansbeans.com). 'If you put the money first, you miss a huge chance for blue-sky thinking.'
Forget last year. It might be a useful reference point, but cutting the pie in the same proportions each year is a recipe tor maintaining the status quo. 'You need to be continually questioning the shape of the business,' says Hawkins.
Devolve and challenge. If you want people to meet their budget, they need to have ownership. Every manager should ask all those who spend money how much they need, and to justify it. You'll end up with departmental and company budgets that everyone has signed up to.
Raise the bar. Budgets are about setting stretch targets as well as allocating resources, says Jackson. 'It's down to the judgment of management to reconcile the tension between what's ambitious and what's realistic.'
Size doesn't matter. Too often, the bigger your budget, the more important you are. Promote a cultural shift so that brownie points are gained for doing more with less. 'You want everyone to think about the best way to allocate resources rather than getting the biggest slice,' says Hawkins.
Think downside. Risk analysis should go hand-in-hand with budget management. Every department should state the assumptions on which their bid is made, and consider threats and opportunities. 'The more transparency and clarity the better,' says Jackson. Building contingency into the budget is line, but ensure it's done consistently; don't add a margin at every layer.
Keep on checking. A budget is not to be put away in a drawer tor 12 months. Review where you are against the budget as regularly as possible, and take prompt action to reset budgets and reallocate resources when you need to. Effective budget management helps an organisation to meet its strategic objectives without a financial crisis.
Do say: "Let's look at how we can improve on last year's performance while freeing funding for other parts of the business.'
Don't say: 'Anyone in this department who hasn't spent every penny of their budget by April 5 will be shot.'
Alexander Garrett
The FD tells you that operational spending was 20% over budget last year and capital expenditure went through the roof. But there has been a splurge on office carpets and sofas lately as departments resolve to use it rather than lose it. And as the bean-counters set about next year's figures, there is a line of Oliver Twists outside your door. Here are some of the things you should do: 1. Do not panic. 2. Put strategy first. 3. Forget last year. 4. Devolve and challenge.
» Jump to indexing (document details)
Full Text (484 words)
Copyright Haymarket Business Publications Ltd. Apr 2007
[Headnote]
The FD tells you that operational spending was 20% over budget last year and capital expenditure went through the roof. But there's been a splurge on office carpets and sofas lately as departments resolve to use it rather than lose it. And as the bean-counters set about next year's figures, there's a line of Oliver Twists outside your door. What to do?
Don't panic. Setting a budget is not rocket science, says Chris Jackson, head of the finance and management faculty at the Institute of Chartered Accountants. 'It's really just putting numbers to a business plan.'
Put strategy first. The plan flows from the strategy, which is broken down to goals and targets for each bit of the business. 'You should brainstorm the optimal way to meet your objectives without attaching any pound notes to begin with,' says accountant and trainer Anne Hawkins (www.leanmeansbeans.com). 'If you put the money first, you miss a huge chance for blue-sky thinking.'
Forget last year. It might be a useful reference point, but cutting the pie in the same proportions each year is a recipe tor maintaining the status quo. 'You need to be continually questioning the shape of the business,' says Hawkins.
Devolve and challenge. If you want people to meet their budget, they need to have ownership. Every manager should ask all those who spend money how much they need, and to justify it. You'll end up with departmental and company budgets that everyone has signed up to.
Raise the bar. Budgets are about setting stretch targets as well as allocating resources, says Jackson. 'It's down to the judgment of management to reconcile the tension between what's ambitious and what's realistic.'
Size doesn't matter. Too often, the bigger your budget, the more important you are. Promote a cultural shift so that brownie points are gained for doing more with less. 'You want everyone to think about the best way to allocate resources rather than getting the biggest slice,' says Hawkins.
Think downside. Risk analysis should go hand-in-hand with budget management. Every department should state the assumptions on which their bid is made, and consider threats and opportunities. 'The more transparency and clarity the better,' says Jackson. Building contingency into the budget is line, but ensure it's done consistently; don't add a margin at every layer.
Keep on checking. A budget is not to be put away in a drawer tor 12 months. Review where you are against the budget as regularly as possible, and take prompt action to reset budgets and reallocate resources when you need to. Effective budget management helps an organisation to meet its strategic objectives without a financial crisis.
Do say: "Let's look at how we can improve on last year's performance while freeing funding for other parts of the business.'
Don't say: 'Anyone in this department who hasn't spent every penny of their budget by April 5 will be shot.'
Alexander Garrett
TIE YOUR CAPITAL BUDGET TO YOUR STRATEGIC PLAN
TIE YOUR CAPITAL BUDGET TO YOUR STRATEGIC PLAN
INTRODUCTION
“Commonly the managers just concern about their responsible, they hadn’t considered what might happen with the capital budget to the strategic plan”
Capital assets decision are the most irrevocable long-range activities
But the irony is this decision process has become one of management’s most mechanical activities
DEFINING THE STRATEGIC PLAN
The strategic plan must be a living document
“The product is the plan; the written document is the interaction that takes place among the employees and management to develop the plan”
Focus first to the customers,à then on the business’s capabilities to meet those needs with its product and service
Operating mangersà makes plan happen
Staff mangers are à supporting
BUILDING THE PLAN
Begins with the a corporate mission statement
It is identifies; 1. Guidelines for targeting the corporate market
2. Guidelines the corporate organizational features
MANAGING THE ASSETS
As you develop the strategic plan, you’ll need to look at your fixed assetà managing capital assets must be a prime consideration.
There are three stages:
Acquisition (when operating management determine the plant activities are inadequate to support corporate needs for growth or corporate citizenship)
Maintenance (second stage, “if an assets doesn’t have a long-term strategic fit, get rid of it while it still has value”)
Disposition (of assets rarely gets proper attention)
The goal here is to ensure the assets will be fully utilized and support management’s strategic vision.
IS THE PROGRAM EFFECTIVE?
“Identify” is the y point, means that you have to identify the key measurements that will keep the program viable and effective.
THE CAPITAL BUDGETING
There 4 interdependent step:
defining and communicating firm’s long range and strategic plans and goals
developing a system that permits the orderly gathering and ranking of investment proposal
determining the accuracy of the estimates that will be used in the estimated rate of return calculation
determining and assigning level of risk probabilities to each investment proposal
EFFECTICVE IMPLEMENTATION IS KEY
the driving force is its effective implementation
develop strategic plan assumption à merge information to various functional plan and link it to short and long termàconsolidated the data in to corporate plan
“the capital budgeting program provides a foundation for the overall strategic plan”
INTRODUCTION
“Commonly the managers just concern about their responsible, they hadn’t considered what might happen with the capital budget to the strategic plan”
Capital assets decision are the most irrevocable long-range activities
But the irony is this decision process has become one of management’s most mechanical activities
DEFINING THE STRATEGIC PLAN
The strategic plan must be a living document
“The product is the plan; the written document is the interaction that takes place among the employees and management to develop the plan”
Focus first to the customers,à then on the business’s capabilities to meet those needs with its product and service
Operating mangersà makes plan happen
Staff mangers are à supporting
BUILDING THE PLAN
Begins with the a corporate mission statement
It is identifies; 1. Guidelines for targeting the corporate market
2. Guidelines the corporate organizational features
MANAGING THE ASSETS
As you develop the strategic plan, you’ll need to look at your fixed assetà managing capital assets must be a prime consideration.
There are three stages:
Acquisition (when operating management determine the plant activities are inadequate to support corporate needs for growth or corporate citizenship)
Maintenance (second stage, “if an assets doesn’t have a long-term strategic fit, get rid of it while it still has value”)
Disposition (of assets rarely gets proper attention)
The goal here is to ensure the assets will be fully utilized and support management’s strategic vision.
IS THE PROGRAM EFFECTIVE?
“Identify” is the y point, means that you have to identify the key measurements that will keep the program viable and effective.
THE CAPITAL BUDGETING
There 4 interdependent step:
defining and communicating firm’s long range and strategic plans and goals
developing a system that permits the orderly gathering and ranking of investment proposal
determining the accuracy of the estimates that will be used in the estimated rate of return calculation
determining and assigning level of risk probabilities to each investment proposal
EFFECTICVE IMPLEMENTATION IS KEY
the driving force is its effective implementation
develop strategic plan assumption à merge information to various functional plan and link it to short and long termàconsolidated the data in to corporate plan
“the capital budgeting program provides a foundation for the overall strategic plan”
CAPITAL BUDGETING DECISSIONS OF SMALL BUSINESS
CAPITAL BUDGETING DECISSIONS OF SMALL BUSINESS
(Morris G. Danielson and Jonathan A. Scoot)
INTRODUCTION
“This paper analyze the capital budgeting practices of small firm”
· Small firm (≤500 employees)à produces 50% private US GDPà employ 60% of private sector labor force.
· All industries requiring substantial capital investmentàcapital investment in small business also important.
· Several reason (different criteria to evaluate project):
may balance wealth maximization
lack of personnel resources
face capital constrainà making project liquidity a prime concern
· methodology:
ü data collected from NFIB (secondary data)
ü Result include the information about types of investment firm makes (replacement versus expansion)
ü Tools: DCF analysis, payback period (evaluate project), Cash flow projection, Capital budgeting, and tax planning activities (planning), and the last one is use the owner willingness.
· Survey: small and large firm evaluate project differently, lack of sophistication contributes to these result, most class investment is “replacement”, and investment in new product are the most important classes.
· The result in this research, suggest that optimal method of capital budgeting analysis can differ between large and small firm.
I. CAPITAL BUDGETING THEORY and SMALL FIRM
· “Basic theory” Brealey and Myers (2003): “invest in all positive NPV project and reject those with negative NPV” à concern with maximize shareholder wealth à yet small firm often operate in environment that do not satisfy the assumption underlying the basic capital budgeting model.
· Discuss the potential problem in detail and explain why discounted cash flow analysis is not necessarily the one best capital budgeting decision tool for every small firm.
A. Capital budgeting Assumption and the small firm
· Capital Budgeting theoryà primary goalà maximize firm value
· Three :
1. Shareholder wealth maximization may not be the objective of every small firm
2. Many small firms have limited management resources and lack expertise in finance and accounting.
3. Capital market imperfection, which constrain the financing option for small firms.
B. Cash Flow Estimation Issue
“DCF analysis is less valuable when the level of future cash flows is more uncertain”
There are also reasons why a small firm may not use DCF analysisi to evaluate replacement decision.
Small firm do not satisfy the theoryà natural for small firm to evaluate profect using different technique than a larger one.
II. DESCRIPTION of DATA
· Using the survey data
+ Long history in finance literature
- measure mangers belief not their auction
Not be representative the defined population
May misunderstood by some participant
· Data from NFIB in April and May 2003
III. SURVEY RESULT
· Using NFIB survey à address 3 question:
whether the investment and financing activity of small firm conform to the assumption underlying capital budgeting theory
look at the overall planning activities of small firm
provide evidence
· Identify significant differences between average responses.
· Using a multinomial logit to evaluate how the choice of investment evaluation tools is related to a set of firm characteristics.
A. Investment Activity
These results suggest three reasons for a small firm might not to follow the prescription of capital budgeting theory:
1. It is noteworthy that replacement activity is the most important type of investment for almost sample firm.
2. The result suggests that many small firms place internal limits on the amount they will borrow. Thus, many firm cannot separate investment and financing decisions, contrary to capital budgeting theory
3. The results suggest that the personal financial planning considerations of business owners may affect the investment and financial decisions of small firm.
B. Planning Activity
· Many small firm don’t have a formal planning system
· Firm with the highest growth rate are more likely to use each these planning tools
· Newer firm likely to use business plan
· The smallest firm are less likely to make cash flow projections
· Planning activities strongly related to the educational background of the business owners.
C. Project Evaluation Method
· Using gut feel, payback period, the accounting rate of return, DCF (the most theoretically correct method).
· The result is different with (Graham and Harvey (2001)), approximately 75% of their firm evaluate projects using estimates of projects NPV or IRR
· “It is therefore not surprising that their firm use more sophisticated method of project analysis.
D. Multivariate Analysis
· Use the multinomial logit (are represented that affect the decision tools most frequently used to assess the financial viability of a project) to jointly identify factors influencing the choice of a project evaluation tools.
· The result *** see on the paper***
IV. SUMMARY
· Firm with fewer than 250 employees analyze potential investment using much less sophisticated methods than those recommended by capital budgeting theory
· Many small-business owners have limited formal education, and their firm may have incomplete management teams
· Reason: àMany small business do not operate in the perfect capital market that capital budgeting theory assumes
àMany of investment that small firms make cannot easily be evaluated using the DCF techniques recommended by capital budgeting theory
MANY SMALL FIRM FACE CAPITAL BUDGETIGN CHALLENGES THAT DIFFER FROM THOSE FACED BY LARGER FIRMS.
(Morris G. Danielson and Jonathan A. Scoot)
INTRODUCTION
“This paper analyze the capital budgeting practices of small firm”
· Small firm (≤500 employees)à produces 50% private US GDPà employ 60% of private sector labor force.
· All industries requiring substantial capital investmentàcapital investment in small business also important.
· Several reason (different criteria to evaluate project):
may balance wealth maximization
lack of personnel resources
face capital constrainà making project liquidity a prime concern
· methodology:
ü data collected from NFIB (secondary data)
ü Result include the information about types of investment firm makes (replacement versus expansion)
ü Tools: DCF analysis, payback period (evaluate project), Cash flow projection, Capital budgeting, and tax planning activities (planning), and the last one is use the owner willingness.
· Survey: small and large firm evaluate project differently, lack of sophistication contributes to these result, most class investment is “replacement”, and investment in new product are the most important classes.
· The result in this research, suggest that optimal method of capital budgeting analysis can differ between large and small firm.
I. CAPITAL BUDGETING THEORY and SMALL FIRM
· “Basic theory” Brealey and Myers (2003): “invest in all positive NPV project and reject those with negative NPV” à concern with maximize shareholder wealth à yet small firm often operate in environment that do not satisfy the assumption underlying the basic capital budgeting model.
· Discuss the potential problem in detail and explain why discounted cash flow analysis is not necessarily the one best capital budgeting decision tool for every small firm.
A. Capital budgeting Assumption and the small firm
· Capital Budgeting theoryà primary goalà maximize firm value
· Three :
1. Shareholder wealth maximization may not be the objective of every small firm
2. Many small firms have limited management resources and lack expertise in finance and accounting.
3. Capital market imperfection, which constrain the financing option for small firms.
B. Cash Flow Estimation Issue
“DCF analysis is less valuable when the level of future cash flows is more uncertain”
There are also reasons why a small firm may not use DCF analysisi to evaluate replacement decision.
Small firm do not satisfy the theoryà natural for small firm to evaluate profect using different technique than a larger one.
II. DESCRIPTION of DATA
· Using the survey data
+ Long history in finance literature
- measure mangers belief not their auction
Not be representative the defined population
May misunderstood by some participant
· Data from NFIB in April and May 2003
III. SURVEY RESULT
· Using NFIB survey à address 3 question:
whether the investment and financing activity of small firm conform to the assumption underlying capital budgeting theory
look at the overall planning activities of small firm
provide evidence
· Identify significant differences between average responses.
· Using a multinomial logit to evaluate how the choice of investment evaluation tools is related to a set of firm characteristics.
A. Investment Activity
These results suggest three reasons for a small firm might not to follow the prescription of capital budgeting theory:
1. It is noteworthy that replacement activity is the most important type of investment for almost sample firm.
2. The result suggests that many small firms place internal limits on the amount they will borrow. Thus, many firm cannot separate investment and financing decisions, contrary to capital budgeting theory
3. The results suggest that the personal financial planning considerations of business owners may affect the investment and financial decisions of small firm.
B. Planning Activity
· Many small firm don’t have a formal planning system
· Firm with the highest growth rate are more likely to use each these planning tools
· Newer firm likely to use business plan
· The smallest firm are less likely to make cash flow projections
· Planning activities strongly related to the educational background of the business owners.
C. Project Evaluation Method
· Using gut feel, payback period, the accounting rate of return, DCF (the most theoretically correct method).
· The result is different with (Graham and Harvey (2001)), approximately 75% of their firm evaluate projects using estimates of projects NPV or IRR
· “It is therefore not surprising that their firm use more sophisticated method of project analysis.
D. Multivariate Analysis
· Use the multinomial logit (are represented that affect the decision tools most frequently used to assess the financial viability of a project) to jointly identify factors influencing the choice of a project evaluation tools.
· The result *** see on the paper***
IV. SUMMARY
· Firm with fewer than 250 employees analyze potential investment using much less sophisticated methods than those recommended by capital budgeting theory
· Many small-business owners have limited formal education, and their firm may have incomplete management teams
· Reason: àMany small business do not operate in the perfect capital market that capital budgeting theory assumes
àMany of investment that small firms make cannot easily be evaluated using the DCF techniques recommended by capital budgeting theory
MANY SMALL FIRM FACE CAPITAL BUDGETIGN CHALLENGES THAT DIFFER FROM THOSE FACED BY LARGER FIRMS.
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