MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 4.pdf (kỹ thuật PR)

80 Motivation and the Budget Exhibit 4.9 Financial Managers’ Dilemma: Assumptions and Injections (continued) 12 C–E Much of our employees’ intuition is not captured by the accounting measurements. 13 C–E Accounting measurements are not intuitively reliable. 14 D–E All facets of the organization are measured by the accounting system. 15 D–E The cost world measurements are not consistent with our intuition. 16 D–E The cost world measurements do not guide us correctly. 17 D–E The cost behavior implicit in the cost world measurements is not realistic. With respect to the ﬁfth assumption, from a control point of view the journal and ledger structure of a modern double-entry accounting system relying on a journal and ledge structure is rightfully highly regarded for the one function it performs really well—it reliably, comprehensively, and inexpensively collects, processes, and summarizes many small pieces of ﬁnancial data into predeﬁned reports. In our discussion of cost control in a throughput world (see Chapter 3), we saw that budgeted costs are in control if they bear a desired relationship to revenues, whereas actual costs are in control if they do not exceed budget limitations. If we accept this reasoning, then the assumption that budgetary control means reducing existing cost levels is false. However, since declaring this assumption false required us to have a different understanding of the term budgetary control, we might want to look for an injection also. A policy that cost reductions are neither rewarded nor speciﬁcally encouraged was previously suggested as an injection for this purpose (see Exhibit 3.3). The reader is encouraged to consider the remainder of the potential injections. Accounting, often called the language of business, forms the backbone of the formal communication system within a proﬁt-oriented organization. The decisions and culture of an organization will be reﬂected in the way it accounts for its operations.28 As the culture of an organization moves from a cost world to a throughput world orientation on the far side of the complexity divide, the ﬁnancial manager will need to be proactively involved in rethinking and restructuring the ﬁnancial reporting system. The ﬁnancial manager plays a critically important role in this respect. Establishing a Budgetary Revision and Reporting Process 81 ESTABLISHING A BUDGETARY REVISION AND REPORTING PROCESS Signiﬁcant improvement can be achieved only by dealing with Archimedean constraints. At the same time, sometimes it is necessary to increase spending, either as an increase in operational expenses or as a capital expenditure, in order to elevate a constraint. The budget must be revised in a timely manner to take advantage of such desirable opportunities. Constraints and Necessary Conditions Some capital and operational expenditures may be proposed that, even though they do not have the promise of an Archimedean constraint, are required to satisfy a perceived necessary condition for the organization. Failure to satisfy some necessary conditions may lead to signiﬁcantly increased costs without associated throughput effects (e.g., damages resulting from a lawsuit). In other cases, failure to satisfy necessary conditions may jeopardize the organization’s operating strategy, as in the case of unmet environmental standards resulting in the complete shutdown of the organization. The physical operating environment, governmental action (laws and regulations), power groups (such as labor unions or special interest groups), market forces and competitive pressures, and management (through organizational policies)—all have the ability to impose necessary conditions. A constraint is anything that prevents an organization from achieving better performance relative to its global goal of greater proﬁtability. Necessary conditions certainly ﬁt this deﬁnition of a constraint. Necessary conditions may be either satisﬁed or unsatisﬁed. A satisﬁed necessary condition is simply a special type of constraint that does not have associated positive throughput effects. Our planning techniques, tied to the organization’s constraints, must include the constraints that appear as necessary conditions. The proﬁt effects of our actions are determined by the relationships between revenues and costs. At best, efforts targeted at cost reduction are likely to be choopchicks; at worst, they can have devastating side effects regarding the erosion of trust, creating unanticipated constraints by destroying protective capacity29 and luring management into the easy thought that cost cutting can lead to continuing long-run proﬁt improvement. Our planning techniques, then, should emphasize revenue enhancement as opposed to cost reduction. Sometimes, however, revenue enhancement also involves spending. Expenditures made speciﬁcally for elevating identiﬁed constraints are likely to have short payback periods, implying high rates of return. Expenditures made for purposes other than elevating constraints or satisfying necessary conditions, even though they may be desirable from the 82 Motivation and the Budget point of view of individual members of the organization or customers, do not support the global goal of the organization. Therefore, as was suggested in Chapter 3, the planning techniques used by an organization should justify any increases in operational expense and inventory/investment based on projected throughput effects and speciﬁcation of the constraint being elevated or necessary condition being satisﬁed. Since neglecting control of future expenditures can easily derail a POOGI, we discuss how future cost control in the constraints accounting environment is obtained through the budgetary process. The decision process resulting in budget revisions is vitally important in controlling future expenditures in a constraints accounting environment. POOGI Budget Committee If a POOGI Bonus plan, as described in the ﬁrst part of this chapter, is in effect, then all members of the organization will have a proprietary interest in the POOGI. Therefore, it is recommended that a POOGI Budget Committee having wide representation of the various personnel constituencies be established. The POOGI Budget Committee has two purposes: (1) to recommend budget increases to management when appropriate; (2) to allow committee members to serve as the primary validating communication contact between the OE budget and the employees. When examining proposals to increase the budgeted expenditures, the committee should review and verify the following ﬁve items to ensure that the organization is following the steps of a POOGI.30 1. The proposal should be written and contain cash ﬂow estimates of amount and timing. 2. Every proposal should address a speciﬁed active tactical or strategic constraint or a necessary condition.31 3. Conscious exploitation decisions have been made. 4. Appropriate subordination to the exploitation decisions takes place in the area requesting the budget increase. Obviously, appropriate subordination cannot occur if exploitation decisions have not been made and communicated. 5. Potential erosion of protective capacity has been considered in the proposal. The purpose of the POOGI Budget Committee is neither to create the original budget nor to ensure that the budget is “balanced.” Rather, its purpose is to ensure that operational decisions having new ﬁnancial consequences are made in a manner that is consistent with the process of ongoing improvement. The POOGI Budget Committee is advisory to man- Establishing a Budgetary Revision and Reporting Process 83 agement and is part of a larger budgetary process. The committee recommendations are approved—or not—at the appropriate managerial level, and that approval becomes the actual authority for the ﬁnancial management function to modify the budget. The ﬁnancial management function may also be involved in preparing or reviewing the cash ﬂow analyses for the proposals before the POOGI Budget Committee reviews them. Somewhere in the organization it is necessary to assign responsibility for declaring current constraints. Since the ﬁrst task of the POOGI Budget Committee is to see whether proposals address constraints, this committee is also a reasonable place to assign the tactical identiﬁcation conﬁrmation function. A department requesting a budget increase to elevate a constraint is making two very important claims—that it holds an Archimedean constraint and that it knows how to elevate it in a manner consistent with the strategic plan. This is where decoupling of operational expense from throughput becomes applicable. We do not make expenditures because the revenues are there; rather, we only increase expenditures with a speciﬁed bottom-line effect. The communication purpose of the POOGI Budget Committee cannot be overemphasized. As stated, the purpose of the POOGI Bonus is to obtain congruence between global organization goals and individual employee goals. This congruence is realized in the following way: • Individual employees are given an extraordinary reward, which recognizes their participation as an integral part of the organization, when measurable improvement is made in movement toward the goal of the organization’s owners. • The extraordinary reward is large enough to attract and maintain the employees’ attention. • The amount of extraordinary reward is signiﬁcantly inﬂuenced in a positive way by elevating Archimedean constraints and in a negative way by failing to control future expenditures. Employees participating in the POOGI Bonus plan are vitally interested in seeing the effects of their subordination efforts reﬂected in their bonuses. They are also very interested in the negative effect of increased expenditures in reducing the amount of the bonus. By having a broad personnel base represented on the POOGI Budget Committee, information about the identity of current tactical and strategic constraints, actions being taken to address (exploit, subordinate, and elevate) the constraints, and credible explanation of cost increases can be transmitted to the remainder of the workforce. All employees should have real representation on, and access to, the committee. In an organization that has responded to the need for goal congruence, the POOGI Budget Committee becomes the tangible evidence of empowerment. 84 Motivation and the Budget Empowerment Conﬂict Employee empowerment may create conﬂicts similar to those illustrated by the evaporating cloud shown in Exhibit 4.10. The objective is to create and, once created, maintain a process of ongoing improvement (POOGI). In order to create and maintain a POOGI, employees must see the empowerment as genuine. All employees need to feel that their efforts are valued. If the announced empowerment is just a sham, employees will feel a betrayal of trust rather than fair treatment. Remember: motivation comes from the perception of fair treatment and an entrepreneurial spirit associated with the relative amount of the bonus rather than from the absolute monetary amount of the bonus. Employees at all organizational levels look for signs that goal congruence exists among the four employee groups.32 Since employees want to believe that the next management level is taking their input seriously, the POOGI Bonus Committee’s recommendations must be respected. After all, empowerment implies authority. Overriding the committee decision would indicate that the empowerment is a sham. Some employees are closer to the working situation, and their intuition about real capacity usage is often correct. They have the best feel for shopﬂoor operations. In order to maintain a POOGI, however, management’s authority must be preserved. Things will tend to fall apart without a clear chain of command. Not all employees want decision-making authority, but there is a need to assign responsibilities. A successful organization must maintain its focus. There simply comes a time when it is necessary to proclaim that the “buck stops here.” In order to preserve management’s authority, managers must often override the POOGI Budget Committee. Many assumptions underlie this relationship. Managers want to demonstrate that they are in charge. Some Exhibit 4.10 A Empowerment Cloud B Employee empowerment is seen as genuine. Create and maintain a POOGI. D POOGI Budget Committee decision is respected. conflict C Preserve authority of management. E Management often overrides POOGI Budget Committee. Establishing a Budgetary Revision and Reporting Process 85 managers may have individual goals that are not congruent with the global goal of greater bottom-line proﬁtability. For example, recognizing the typical relationship that base pay increases with the number of people supervised, some managers might be interested in empire building. Managers who have not yet made the paradigm shift to the throughput world are likely to believe that existing expenditure levels must be rigorously controlled through cost reduction efforts or full cost recovery through each sale. It may be believed that management has better intuition than the POOGI Budget Committee, but note that the Committee will include both line and ﬁnancial management representation also. Finally, not all managers believe in empowering other employees, and some may think that the POOGI Budget Committee will not act responsibly. Clearly, the potential for conﬂict exists. On one hand, management wants to respect the POOGI Budget Committee’s decisions, but on the other hand, management often wants to override the Committee’s recommendations. The assumptions underlying the arrows must be examined, and one of the assumptions invalidated when this situation arises. Reporting Budget Revisions The budget is the physical centerpiece of a budgetary process for planning and control. It is a detailed, written plan showing the ﬁrm’s plans for the period covered and the probable effects this plan will have on the ﬁrm.33 We use the term budget in a general sense, referring collectively to an annual proﬁt plan, projected (or pro forma) cash ﬂow statement, operating budget, or other similar document. However, readers should ﬁt the discussion into their speciﬁc environments. In relatively simple organizations, the budget, as we describe it, is probably the primary planning and control document. However, if the focus of the constraint management implementation is a single proﬁt center of a more complex organization, then the budget as described herein will be internal to the proﬁt center and some sort of interfacing document with the larger organization will be necessary. In this latter case the terminology corporate requirements may be substituted where we refer to generally accepted accounting principles (GAAP). The budget revision process within constraints accounting is different from the more familiar annual budgeting cycle. In the conventional annual cycle, the setting is one of waiting for a window of time to come around before requests for budget increases may be made. Major changes to the budget and operating plans are made only once a year. The managerial objective, vis-à-vis the conventional budget, is to have the year end with actual earnings as close as possible to initial expectations. The operating environment of constraint management, however, exhibits a sense of urgency. In the constraint management environment new 86 Motivation and the Budget expenditures are authorized, and the budget is revised, as quickly as possible when opportunities to elevate Archimedean constraints are identiﬁed. Since elevation of an Archimedean constraint is always accompanied by a substantial increase in bottom-line proﬁts, the anticipated earnings change signiﬁcantly as often as constraints are elevated. The changing earnings expectations can make it difﬁcult for people reviewing the actual earnings reports to interpret whether the operating performance is good. Therefore, it is necessary to have a reporting model that will sort out where the actual operations stand vis-à-vis the budget on any given day. Prospective Budget A hierarchy for analyzing the continually changing perspective of prospective (future expected) earnings during the year is provided in Exhibit 4.11. Exhibit 4.11 Hierarchy for Prospective Earnings Analysis Original Forecast The budget prepared at the beginning of the year. Prospective Budget Necessary Condition Revisions Changes made to the budget in response to satisfying necessary conditions. Throughput Opportunity Revisions Changes made to the budget in response to opportunities for constraint elevation. Updated Forecast Best estimate of what performance profit should be. Forecast Revisions Changes in estimates of uncontrollable external factors. Budgeted GAAP Adjustment Difference between Constraints Accounting and GAAP earnings (or cash flow) statement. GAAP Forecast Best current estimate of externally reported earnings. Establishing a Budgetary Revision and Reporting Process 87 Most organizations prepare an operating budget on an annual basis. When this operating budget has been approved at the appropriate level (president, chief executive ofﬁcer, board of directors), it serves as speciﬁc instructions to middle-level managers and gives spending authorization for those items approved in the budget. The budget also sets the initial expectations for the operating performance for the year. This is the best estimate of what will happen during the year and its effect on the bottom line of the organization. This will also be the basis for providing forward-looking information to security analysts and other interested external parties. This budget is termed the original forecast in Exhibit 4.11. As the year progresses, the actual operations will turn out to be different from the budgeted operations.34 Exhibit 4.11 highlights four general types of variation that may occur during the year. First are the necessary condition revisions. These revisions are made to the budget in order to accommodate newly identiﬁed necessary conditions. Since the organization has already adapted to its necessary conditions,35 revisions of this type should occur relatively infrequently and probably indicate a fundamental change in the operating environment of the organization. Thus, the identiﬁcation of an emerging necessary condition should also be accompanied by managerial appraisal of the potential consequences of the new necessary condition. Second are the throughput opportunity revisions—the changes made to the operating budget in response to opportunities for constraint elevation. Each of these budget revisions represents a speciﬁc improvement opportunity. That is, each is expected to result in an identiﬁable increase in proﬁtability for the organization. Throughput opportunity revisions are not the only actions taken for improvement in the organization, just those that require additional funds. Many improvements can routinely be made that do not require additional funds. Such routine improvements take place throughout the organization within the existing budget limitations. They do not require additional funds and will appear as part of the operating results for the period. When the original forecast has been adjusted for the necessary condition and throughput opportunity revisions, the result is an updated forecast. The updated forecast is the best current estimate of what the performance proﬁt should be for the budget or scheduling period. The updated forecast is the amount shown in the budget column of the Constraints Accounting Earnings Statement illustrated in Exhibit 3.6 and reproduced here as Exhibit 4.12. The updated forecast is the base point for internal reference. The expenditure portion of the updated forecast provides the responsibility budget to which the organization’s managers adhere. For internal purposes, differences between the updated forecast and actual operations are accounted for as variances and explained in the retrospective budget (discussed below). 88 Motivation and the Budget Exhibit 4.12 Earnings Statement in a Constraints Accounting Format Constraints Accounting Earnings Statement For Month ended November 30, 20X2 Actual Throughput Contribution (T) Section: Constraints: Internal: Welder Labor Class D External: Market Total Throughput Contribution Budge t Variance Favorable / Unfavorable $ 716,380 $ 632,700 373,869 560,764 $ 83,680 186,895 F Note A U Note B 239,200 239,200 $1,329,449 $1,432,664 0 $103,215 Note C U Note D Operational Expense (OE) Section: Greater of actual or budgeted OE Performance Profit 648,000 $ 681,449 648,000 Note E Note F In some cases, the organization may provide forward-looking information to external parties. Third, forecast revisions may be made for some budget items. These revisions represent changes in expectations due to changes in the external macroeconomic environment within which the organization operates. Fourth, the constraints accounting principles used in calculating the performance proﬁt are somewhat at variance with GAAP. Therefore, it will be necessary to adjust the earnings by the reconciling amount when providing forward-looking estimates for external parties such as security analysts. The reconciled earnings are the GAAP Forecast, the best estimate of forward-looking externally reported earnings. Retrospective Budget The prospective budget relates to expectations only and does not tell us about what actually happened. To see how actual operations compared to the expectations, a retrospective budget is needed. A retrospective hierarchy for earnings analysis is portrayed in Exhibit 4.13. The retrospective analysis starts with the updated forecast shown in the prospective analysis of Exhibit 4.11. This is the original expectation adjusted for responses to newly emerging necessary conditions and new throughput opportunities. The updated forecast is the best estimate of what the performance proﬁt should be and is adjusted for recurring operating variances. Recurring operating variances appear in the variance column of Exhibit 4.12. The recurring operating variances differ from variances reported in traditional accounting systems in two ways. First, since changes in antici- Establishing a Budgetary Revision and Reporting Process Exhibit 4.13 89 Hierarchy for Retrospective Earnings Analysis Updated Forecast Best estimate of what performance profit should be. Retrospective Budget Recurring Operating Variances Variations from planned throughput contributions, unfavorable total OE variance, and forecast revisions. Performance Profit Operating results summarized in a manner consistent with constraints Other (extraordinary) Variations GAAP Reconciliation GAAP Earnings pated costs have already been incorporated into the updated forecast, no variable expense adjustment is made as is done when using a conventional ﬂexible budget. The updated forecast replaces the ﬂexible budget in legacy budgeting systems. Second, if operational expenses are less than the updated forecast, then we do not want to emphasize cost performance and no variance is reported. In this case, any variance would be favorable and would appear as a reconciling item in the reconciliation to the GAAP statement. Finally, since the retrospective budget does not formally include the forecast revisions, they are also included in recurring operating variances. The result of adjusting the updated forecast for the recurring operating variances is the performance proﬁt. This is the same performance proﬁt as shown in Exhibit 4.12. Exhibit 4.11 then shows an adjustment for other (extraordinary) variations. This is just a place to put anything that has not been accounted for previously. Note that items included here bypass the performance proﬁt used for calculating the POOGI bonus. Nonoperations-related investment income is an example of an item that might be classiﬁed as an other variation. If a POOGI Bonus plan is in effect, then the bonus amount added to

MANAGEMENT DYNAMICS Merging Constraints Accounting to Drive Improvement phần 4

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