BUDGET PROCESS OF ORGANIZATION

After we tried to understand finance and budget basics in last blog, time to understand the budget process of any organization in general. 

The purpose of a budget process is to provide, in a consolidated form, the necessary guidelines for annual budget preparation and approval. This guideline will aid in the preparation of the annual budgeting cycle program that is prepared and circulated by the CFO.

1.    Key Stages of the Budget Process

·       Meeting of senior management chaired by CEO to gain a clear understanding of the strategic intent and direction of the Organization in the next year. Though the budget process is largely driven by the finance department, it is important for it to have the support of the top management in the Organization for it to be taken seriously.

·       Communication from the CEO to the HOD’s – Business Units (BU) heads on the strategic intent and key focus of the budget.

·       The Chief Data Officer – CDO will prepare economic assumptions.

·       HOD's and Business Units (BU's) have the responsibility for developing programs and coordinating the budgets within their area of responsibility. They will prepare performance analysis of past immediate period and develop individual annual business plans indicating clearly the objectives, targets, priorities, actions needed to achieve the targets, expected results/timelines (if any), and resources needed. A consolidated proposal will be submitted to Finance.

·       CFO will prepare a forecast for current period to year-end to form basis of comparison for next budget period.

·       The CFO will obtain management’s key financial and operational targets, review the plans and other submissions, and consolidate the overall Organization master budget.

·       Preparation by Finance of the budget instructions and models to capture the strategic direction from the EXCO meeting. The key information to be prepared by the CFO are as follows:

·       Detailed budget instructions

·       Budget preparation matrix

·       Budget resource matrix

·       Detailed departmental/BU budget model

·       Staff cost budget model

·       Capex BU and consolidation model

·       Guidance notes for budget models

·       Consolidation budget model

·       Budget reports format for management

·       Budget time table

·       Detailed budget instructions sent by the Management Accountant to Budget Holders. The budget instructions will include a time table and the note will emphasise the importance of meeting the submission deadline.

·       Through a separate note, the Management Accountant will send the blank detailed budget models together with guidance notes for the models. Note that models to each department/BU is slightly modified to suite their requirements.

·       BU Budget Holders to gather information and complete the required sections of the detailed budget model.

·       Budget Holders submit their draft budgets to the Management Accountant for review and inclusion of central costs (such as insurance) and allocation of shared costs from support Cost Centres.

·       The MAA sends back the complete models to the Budget Holders after inclusion of allocated shared costs so that they can have a final review of their department’s/BU's overall position.

·       Budget Holders submit the final budgets to the MAA after signed-off budgets by the HOD’s for overall Organization consolidation.

·       The MAA then uses the Income Statement budget to prepare the budgeted balance sheet in consultation with the business units.

·       During this phase, some Income Statement numbers such as interest and Organization charges may change due to budgeting on financing of the business. However, changes to the Income Statement are expected to be minimal.

·       Initially the opening balances used will be those of the latest balance sheet prepared (usually that of 30th September) to give a feel of the budgeted balance sheet position. However, the movement numbers are considered final.

·       The budgeted balance sheet is finalised after the financial year-end when the year-end balance sheet numbers can be used as opening balances in the budget balance sheet. 

·       The master budget is reviewed by the Executive committee (EXCO) for recommendation to the Board.

·       Once the Income Statement and balance sheet budgets are finalised, they are presented to the Board as draft budgets by the CEO and CFO.

·       Review and approval of the overall Organization budgets by the Board. Once the budgets have been signed-off by the Board, they cannot be changed for the rest of the new financial year.

·       Though the environment is not static, Budget Holders are expected to put a lot of thought in to their budgets and thus come up with realistic budgets.

·       Any changes to the environment that significantly alters the key assumptions and parameters used for preparation of the budgets will be used as explanations to the variances between actual and budgets. The reason for not allowing changes to the budgets in between the new financial year is meant to discourage budget holders from requesting for changes at the slightest excuse when they realise they may not meet their budget. It is also meant to ensure budget holders take the budget process seriously knowing their performance will be assessed against the budgets.

·       The budgets are important for operational control and are used as comparatives against actuals in the management accounts.

2.             Budget Consolidation

·       The CFO assisted by the Management Accountant (MAA) will perform the following:

·       Review submissions for consistency with company’s policy framework, objectives, strategies, goals and targets as well as contracts and approved maintenance plans, manpower plans, and capital expenditure plans.

·       Check and confirm that the departmental budgets have been prepared within set parameters and budget guideline earlier provided.

·       Check and confirm appropriateness of budget allocation costs submitted.

·       Seek any points of clarification or agree appropriate amendments of departmental/BU budgets as applicable with the Budget Holders.

·       Check and confirm consistency and accuracy of arithmetic computations where applicable.

·       Compare consistency with performance trends. 

·       Once reasonably satisfied with the departmental/BU budget submission the CFO consolidates all departmental budgets into a draft master budget that will be presented to the  Executive committee for  recommendation for submission to the Board.

·       Although it is the responsibility of CFO to present the draft consolidated budget, the particular division or department/BU is still accountable for figures presented and should defend their budget submission where required.

·       The CFO will engage the departmental/BU heads and agree on revisions so as to align the overall Organization’s Budget.

·       Where necessary, the CFO will make changes to the draft budget as agreed by management. Final acceptance and approval by management should not be later than one month preceding the beginning of the financial year being budgeted for.

·       The CFO then prepares a budget approval motivation paper for presentation to the Board Committee and the Board as applicable. The CFO will present the budget to the Board for approval not later than one month preceding the beginning of the financial year being budgeted for.

Once approved by the Board, the CFO will be responsible for ensuring the budget is uploaded on the accounting system. The upload will be done per budget line. 

 

ORGANIZATION’s FINANCE and BUDGETING

 Being a techie, I always felt understanding finance is supremely impossible. However, some help from experts over last few days made it possible to understand basic finance and budget and purpose behind Enterprise Performance Management.

As an individual, we do this planning and budgeting regularly. We plan some long term goal e.g. buy a home after 5 years.

Then plan annual savings around the long term plan.

Then allocate part of earnings to savings, to monthly expenses etc. 

An attempt to summarise the finance and budget.

1.   POLICY OF ORGANIZATION

Every Organization must prepare and maintain an annual budget, approved by the Board, to guide operations of the Organization for the year. Budgets and budgetary control are important operational control tools used by the Organization to achieve its strategic objectives.

2.   OBJECTIVE AND PURPOSE

To describe the systems and procedures to be followed in the preparation of budgets. The key objectives are as follows:

·       Planning - To assist Management in developing realistic financial plans and establish if the Organization has the resources required to accomplish the planned activities.

·       Funds mobilisation - To mobilise resources by showing projects, sources, results to be achieved, and the surplus or deficit, to form the basis of the Board's approval of funds.

·       Cost control/activity implementation - To control actual implementation costs against budgeted expenditure and enforce discipline in the management of funds.

·       Monitoring and evaluation - To evaluate the level of success at the end of the year.

·       Goal congruence - To ensure harmony and synergy in the achievement of the Organization 's set goals and targets.

3.   ANNUAL BUDGET

The Organization will prepare and have in place a long-term strategic plan approved by the Board (mainly 5-year plans).

The Organization will break its long-term strategic plans in to annual activities by translating the plans in to annual budgets. The annual budget will be approved prior to the year in which it relates to. The Budget year will always coincide with the Organization’s financial year.

The Budget will be consistent with the approved strategic plan. There will be a responsibility/activity based budgeting system for each department/cost centre.

After the budget has been approved by the Board, it will be the responsibility of Head of Division (HOD) to administer/ implement his/her budget properly.

The annual budget will be broken into monthly budgets to facilitate comparison of actual results with the budget.

A monthly management report showing the Organization and departments performance, will be produced by Finance and made available at the end of the twentieth working day of the following month, comprising of:

·       Income statement with budget and prior year comparatives for the Organization - For the month

·       Income statement with budget and prior year comparatives for the Organization - Cumulative for the year to the reporting month

·       Income statement with budget and prior year comparatives for each department - For the month

·       Income statement with budget and prior year comparatives for each department - Cumulative for the year to the reporting month

·       Statement of financial position with budget and prior year comparatives for the Organization

The Executive committee of organization will hold a meeting to review the Organization’s performance (per the report) and respective unit managers/heads will provide explanations for variances and recommend corrective measures where necessary to management. The report will also be used by HOD's to control their expenditures and to identify possible overruns before they occur.

Budget overruns will not be allowed and this will be enforced by the CFO. In cases where they occur, there will be prepared a supplementary budget to be approved by the Board or a high level authorisation by the CEO will be obtained before the related expenditure is incurred as stipulated in the Authorities Manual (AM).

Each department will prepare work programme and budget proposals and submit to Finance  (CFO) / Management Accountant by second week of October for consolidation. The specific budget guidelines will be issued by Finance in the second week of August in line with the strategic plan. These guidelines will give an overall view on the priorities and the objectives to be achieved in the budget year. 

The Organization will adopt a zero budgeting approach that requires the HOD's (Budget Holders) to develop plans of activities in line with the strategic plan and justify allocation of resources.

The HOD‘s will develop goals and targets in form of Key Performance Indicators (KPIs) to be achieved in the concerned budget year. The targets should be provided in an easily understood and measurable framework adopting a Triple Bottom Line (“TBL”) approach and should include:

·       Financial KPIs: These will include the traditional profit measurement metrics of revenues, expense, and Income.

·       Social KPIs: These will include measuring metrics such as governance, fair operating procedures, and labour practices (for example proportion of women in the workforce, average wage rate per category of employees, and number of leave days taken per employee). These KPIs will be largely guided by the Organization’s HR policy.

·       Environment KPIs: These will include tracking of variables such as electricity usage, water usage, and fuel usage. The Organization’s  Corporate Social responsibility policy provides a guiding framework for these environment KPIs

The Capital Expenditure (CE) budget will be co-ordinated by Chief Human Resources and  Administration or delegated authority and it follows similar timeframe.

We will next understand about details of this budget approval process in organization. 

Let's understand EPM Cloud - bundle and pricing

You seldom improve quality by cutting costs, but you can often cut costs by improving quality.

This definitely makes sense for the new improved EPM cloud with lower cost.

When we checked about different EPM cloud components provided by Oracle in last blog:Check here 

It’s time to understand changes made by Oracle to EPM cloud, clarification about pricing.

Till now, we were using a single, value priced solution $125 per use per month.

E.g. clients were using either FCCS, ARCS, PBCS as per the requirement with this rate. So if a client required FCCS, ARCS and PBCS à It would cost $375 per user per month.

Oracle EPM cloud matured in these 5 years and so is licensing, security etc.

There is no more separate “Cloud Service” Naming. The new bundle and pricing model aims to provide more value and integration between business processes.

The new product names:

·       PBCS & EBCS à Planning (Note: Oracle no longer distinguishes between regular and enterprise

·       FCCS >> Financial Consolidation and Close

·       ARCS >> Account Reconciliation

·       EPRCS >> Narrative Reporting

·       PCMCS >> Profitability and Cost Management

·       TRCS >> Tax Reporting

·       EDMCS >> Enterprise Data Management

These products are not sold separately.

There are two kinds of licenses provided by Oracle for EPM cloud.

1)      Standard EPM Cloud

Standard EPM Cloud license consists of two instances à (1) Production instance and (2) Development/Test instance.

 One standard EPM cloud license costs around $250/£198 per user per month.

 A single unique user across all included business process options.

 Minimum Users = 10

 Additional POD will cost additional $250 per user per month.

 Standard Edition includes following cloud services based on busines process.

 ·       Module-based Planning

§  Capital, Financials, Projects, Workforce (2x) and Strategic Modelling (6 cubes total)2 custom cubes (1 hybrid BSO and 1 ASO cube)

 ·       Narrative Reporting

This includes the two most popular tools Narrative Reporting and Management Reporting

·       Financial Consolidation & Close

This includes Supplemental Data Management, Financial Consolidation, Close Management

·       Account Reconciliation

This includes Reconciliation Compliance 

2)      Enterprise EPM Cloud

Enterprise EPM Cloud license consists of two instances  (1) Production instance and (2) Development/Test instance.

One standard EPM cloud license costs around $500/£396 per user per month.

A single unique user across all included business process options.

Minimum Users = 25

Additional POD will NOT cost additional fees.

Standard Edition includes following cloud services based on busines process.

·       Planning

§  Module-based (same as standard)

§  Custom (6 custom cubes + 6 ASO cubes)

§  A framework similar to EPBCS (3 custom cubes, 4 ASO cubes and Workforce ASO cube)

§  Free Form

·       Narrative

§  Includes Disclosure Management

·       Financial Consolidation & Close

§  Includes all features and support for Complex and Custom Calculations

·        Account Reconciliation

      ·        Enterprise edition includes additional            modules

             §  Profitability & Cost Management

             §  Tax Reporting

             §  Enterprise Data Management (up to 5,000 hosted records)

Organizational Pyramid and EPM

 When a new joiner in IT,  in team asked about basic queries related to EPM, I thought it is good time to pen down  basic facts about EPM in any Organization's pyramid on this weekend. 

Where is EPM used in any organization?

What is the purpose of EPM?

Why it is referred as important finance technology? (Why do people get paid more considering it as niche skill? )

Yes, I used to always think of these queries and finally after some learning and experience , got a fair idea about EPM in any organization.

Let’s think about pyramid of any organization, whether it is IT, manufacturing, automobile, financial or any other domain.

Every organization has this pyramid
 

• 1)      Bottom Most Layer contains front end executives. These include day to day business operations. So these are nothing but operating activities of organization.
• 2)      Middle layer consists of integrations of various business activities, hence integration tools like CRM, SCP are included in this layer.
• 3)      Topmost layer is layer of top level executives who are strategic decision makers for organization. This layer include CFO, his/her core team who are responsible for executive decision making, executive learning, executive MBA. This layer executives are responsible for EPM – Enterprise Performance Management.

 Now let us move to EPM layer

 

•      Financial Planning and Analysis Team
• 
  
• Financial planning and analysis (FP&A) is a set of four activities that support an organization's financial health:
• 1) planning and budgeting,
• 2) integrated financial planning, 
• 3) management and performance reporting,
• 4) forecasting and modeling. 
• FP&A solutions enhance the finance department's ability to manage performance by linking corporate strategy to execution. 
• 
  
•      EPM Consultants include both technical and functional consultants - We belong here. 
• From technical perspective, an EPM system such as Oracle EPM is an enterprise software that provides a platform (framework, product, tool…) specified for EPM purpose. Implementation consulting firm will base on that platform to configure, develop specific system that suits with specific company/enterprise/organization.
• 
  

For implementing EPM, there are many vendors and leading one is Oracle EPM contributing to 30% of EPM market.

 Oracle Enterprise Performance Management (EPM) Cloud

Oracle Enterprise Performance Management Cloud Service provides end-to-end business processes to meet the requirements of most organizations and ensure a connected and agile experience across multiple business processes.

1.       Connected Planning      
   
   
2.       Financial Close

3)      Narrative Reporting 

4)      Enterprise Data Management