Budget
Category: Strategy Implementation
Useful operational tool
As already said, this is not a theoretical exercise. This is the tool that will be used by all the operational areas to project their activity in the future, and then to check that they effectively realise what they planned.
This is also the tool a head-office uses to monitor the overall activity during one budget exercise (usually one year). It is by checking that the profit centres keep in line with their budgets that the top management can have a clear view of the trend.
A interactive annual exercise
The format of the budget is a standard one, established by the head-office. The format is usually send to the profit centres at the end of one year, for the following budget year, or at the beginning of this budget year. Demands, request and explanations go with the format. It could be asked, for instance, to tend to a decrease of some expenses, or to show benchmark specific ratios Each profit centre prepares its budget, then discuss it with its reporting line (regional group, commercial department at the head-office, for instance). Once discussed, all the budgets are consolidated and presented at the top management. Depending on this global view, judged good and realistic enough or considered as too slow to show certain changes, it could be asked to some profit centres o review their expectations.
An exercise by branch and product line
The condition to have a real operational budget supporting the implementation of a strategy is to have the various budgets fitting the characteristics of the profit centres, either branches or product line activities, as well as those of the head-office support functions. Obviously, the total of all the budgets should be equal to the final budget of the bank.
Regular comparisons, analysis
Each month, after the accounting departments produce the final monthly figures, the last actual results are compared with the figures of the past (same period of last year) and to the expectations. If the differences are significant, the managers should analyse the reasons of these differences. This is the way the managers use the budget to monitor their activity.
They could decide, from this analysis, to take corrective actions and organise their teams to do so.