MANY North-east companies are failing to meet their budget for the current financial year because they don’t have proper control processes in place.
And according to leading Aberdeen Project Excellence consultant, Dr Clive Randall, some are blaming cost for not having the adequate processes and procedures.
Dr Randall, who is a partner in the Project Excellence division of Aberdeen-based Facilitators International, warns that many businesses don’t even realise their procedures are lacking.
“The reasons are clear. They include a lack of good budgeting process, lack of proper process to develop and manage contingency, lack of budget management training, and a lack of project and operational controls processes, to name but a few.
“Other organisations are victims of a rapidly-changing market or poor client behaviour. The list goes on.”
He says large organisations operating successfully in a highly-competitive environment have the best forecasting and control processes, because a mistake costing just a few per cent of their margin can make the difference between profit and loss.
However, he adds that organisations with very large margins tend to have the worst control processes, their margins are regularly eroded by larger percentage points, but “they still make an acceptable level of profit so don’t get concerned”.
Dr Randall believes better processes for forecasting, planning and controlling, more of a focus on controls, and an improved understanding of the principles behind it can help companies meet their commitments.
And he has the following advice to help firms achieve their targets:
- Do zero-based budgets on a proportion of the costs centres every year, tying budget line items to actions and deliverables.
- Work an iterative process with management to make it clear what the budget pays for and what it doesn’t.
- Train both the budget holders and senior management in the principles of budgeting, including what it what means to be a budget holder.
- Ensure there are resources in the organisation trained in management accounting, not simply financial accounting.
- Make sure the reports produced are clear and well understood.
- Link together cost and planning functions.
- Develop simple cost models to help forecast budgets based on predicted activity levels.
- Look at costs probabilistically to generate contingency based on named risks and re-forecast it as necessary through the period.
- Identify potential ‘train wreck’ allowances or, if these are too ‘life changing’, then have planned scenarios to cope.
Dr Randall says: “Oil companies used to look to their major contractors for good controls processes, which meant they didn’t need such strong processes themselves.
”However, today the majority of contracts with the major contractors are paid their costs and a fixed element of profit.
“In this environment, where it is harder for a contractor not to make a predictable profit, who needs to have the strongest controls in place?“
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