Balanced Scorecard Converted into an Operating Plan

Have the strategic objectives on your Balanced Scorecard been converted into an operating plan?
A. No. We haven’t embraced the Balanced Scorecard concept.
B. We have a sales forecast / budget.
C. Our operating plan is linked to our strategic plan.
D. Our process improvement plans and high-level strategic objectives have been converted into an operating plan.
E. Our process improvement plans and high-level strategic objectives have been converted into an aligned rolling operating plan.
[Score:  A=0, B=1, C=2, D=3 and E=4]
Why is this question important?

Companies need to translate their strategy into detailed operating plans:

  1. develop sales forecasts for next several periods (quarters, months)
  2. translate ‘high-level’ sales plans into detailed sales and operating plans – specifying volumes and product / service mix for both sales and direct costs
  3. related detailed forecasts for required resources – employees involved in sales, production, distribution, service delivery … and other required resources in administrative, indirect, operating and administrative overheads …
  4. develop supporting capital expenditure budgets
  5. combine all into forecasted Profit & Loss Statements and Statements of Affairs

Plan_Operations-4

A

Plan_Operations-5

Operational Review Meetings

When you compare your actual results against the budget forecast, it provides you with valuable information about your performance. Therefore, budgets are both planning tools and performance evaluation tools.

Budgets are simply exercises in calculation unless they are used. When you use a budget to track performance, you do so as part of a system of budgetary control.  That is:

  • you have clear ideas of what you want to achieve
  • you prepare budgets to help you achieve those ideas
  • and then once you have done whatever it is that you wanted to do, you check to see if you kept to your budget.

Plan_Operations-3

A

One of the primary benefits and purposes of ‘budgeting’ is to enable you to monitor your actual performance against your budgeted or forecasted performance, and then to analyse the reasons for the differences that arise – often referred to as Variance Analysis.  Put simply, you will want explanations, answers and reasons for ‘differences’

  • if actual sales are down on your forecast levels – what are the underlying causes for this?
  • if actual wages costs exceed your forecast levels – why has this happened?

Therefore you should compare your performance against your budget quarterly or monthly – you need to carefully monitor and analyse the following three main indicators:

  • the reasons for differences between actual sales and your sales forecast
  • the reasons for differences between actual direct costs and your direct costs forecast
  • the reasons for differences between actual key overheads and your key overheads forecast

In all cases you need to determine the underlying reasons and examine the implications for the future of your business.

Flexible Budgets

So, what happens at month end?   At month end, it’s time to determine whether you fell in line with your planned expenditures.   Here flexible budgets are helpful.   The flexible budget is a performance evaluation tool.   A flexible budget adjusts the ‘static’ budget for the actual level of sales achieved.  The flexible budget asks the question:  “If I had known at the beginning of the period what my sales volume would be, what would my budget have looked like?”

A flexible budget is a budget with figures that are based on actual sales achieved.  The motivation for the flexible budget is to compare “apples with apples” – in other words, if I achieve 60% of projected turnover then my variable cost should also be 60% of projected, and other costs should be in line with the sales levels achieved.