Jean-Paul Nicolaï, CEO
Arnaud Bruneton, Senior Manager
In periods of crisis, budgets are rarely respected. Pleasant or unpleasant surprises make budget revisions necessary. More generally, good management practices require constant updates of budget planning, reflecting not only the most recent realized figures of the business, but also the most up-to-date information available on the fundamentals of the business activity. To that end, reporting and management planning can greatly benefit from a statistical approach.
We propose two simple improvements to current management processes. They are meant to reinforce decision-making during budget preparation. Most important, they help to ensure better financial reporting and better management throughout the year.
Budget creation and monitoring may be considered along the following broad lines:
> Budget development based on explicit hypotheses regarding the context and factors exogenous to the company using currently available information (current orders, as well as growth in demand, currency movements, etc.); > Budget-centered dialogue between different local units and the group finance department; > Determination of necessary and possible investment allocations related to business activity; > More generally, selection of the scenarios retained by the company (pricing policy, recruitment and marketing plans, etc.), possibly contingent on certain exogenous developments anticipated over the coming year; > Apportionment and monitoring of central budgets on a monthly basis, even if certain indicators are weekly or daily; > During the financial year, comparison of business activity figures with those of the budget, analysis and explanation of discrepancies observed on a monthly basis, local unit steering by central management; > Updating in midstream to a new budget plan according to actual results and newly available information; indeed, certain companies are sometimes satisfied with simply making an in-year budgetary revision; > Financial reporting to shareholders and within the company.
In this process, even though identifying unit as well as company performance is essential, it is often poorly done. Moreover, budget information is not always exploited for the purpose of liquidity and financing management.
Two articles to facilitate management without getting caught up in excessive management control:
“Cash at Risk: Managing Liquidities”
A solid economic (and accounting) vision in budget management enables management of the company. The latter, however, is conducted within the constraints of financing. Specific analysis should therefore be devoted to financing flows. The first article in this month’s newsletter presents the principles of liquidity management using risk measurements. Cash at Risk, which benefits from the example of banks’ all-too-frequent misuse of VaR, helps to ensure a better link between a company’s economic reality and its budget management. For, during periods of crisis, liquidity is at the heart of a company’s survival. It is also an essential function indicating or, indeed, providing the room for maneuver for true company management.
“Business Reporting Differentiating Exogenous Shocks and Performance”
The second article deals with company reporting.
Examining firms’ quarterly or annual financial reports often reveals foreign currency effects, sometimes the impact of raw material price variations.
Except for in very qualitative terms, assessments touching on the overall economic situation and its impact are rarely indicated, preventing any clear identification of the consequences of company management decisions and thus of the company’s intrinsic performance. Generally, only comparison with other companies in the same sector, or with the sector in its entirety, provides a measurement for over- or under-performance.
Likewise, although more and more companies have become aware of their vulnerability to weather conditions (the impact of temperature, sun, rainfall, etc., on their business activity), none calculates the impact in its reporting.
In what follows we offer several easy-to-implement budget-based methods for taking better advantage of business reporting. These methods open the door to company management truly attuned to performance and risk
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