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The purpose of the report is to analyse how should SightSavers International uses budgets to plan and control its operations. This report considers key performance indicators in relation to the key strategic issues facing SightSavers International.
Non-for-profit organisations include local and central government, charities and hospitals regularly prepare detailed budgets revealing the different classification of expenditures. Such organisations often find that it is difficult to measure output, therefore the budgeting process normally concentrating on comparing current expenditure to budget expenditure rather than to compare expenditure in relation to performance achieved. Many of their activities and the level of costs are controlled in different places and hence budgets are less controllable. Besides that, non-profit organisations have problems with long-term strategic planning and resource allocation.
----In contrast, for profit-seeking organisations, budget can be relatively straightforward in applying the comparison of expenditures and profits or revenue. From a financial management perspective, profit seeking organisations focus on profit and shareholder wealth maximisation as their long-run objective. It is simple to measure performance success as by collecting quantitative data on such measures as profit, return on investment and shareholder value creation, which enable them to target their performance against competitors.
On the other hand, financial perspective provides a constraint rather than an objective for non-profit organisations as their primary goal is typically stated in terms of some mission rather than shareholder wealth maximization. Because not-for-profit organisations do not have stakeholders, they can be served any parties that have interest in their organisations. In general, non-profit organisations are lack of financial flexibility due to the fact that they rely on donations that are not undertake an exchange transaction.
As a result, the non-profit organisations are essentially to monitor their spending and comply with financial budgets, nonetheless their success cannot be measured by looking how carefully on spending to budgeted amounts, or even if they restrain spending so that actual expenses are controlled under budgeted amounts. Budgeting and cash management are the fundamental financial exercises for non-profit organisations. The non-profit organisations are certainly requires to be aware of its cash reserves whether it is sufficient to maintain services to their clientele. In fact, cash flow can be particularly difficult to forecast as non-profit organisations depends on donations. There will be a tragedy if social services are overly demand as resources may not be sufficient to allocate and it is hard to predict the contribution revenue in a dependable manner throughout the year.
Due to this reason, such organisations will emphasis on manage resource and adopt zero-based budgeting as it "serves as a tool for systematically examining and perhaps abandoning any unproductive projects" (Drury, 2008).
Zero-based budgeting combines budgeting and planning into one process which is focus on analysis of needs, objectives and priorities. Managers are required to justify budgets in detail which can help the organisations to distribute funds efficiently as it demonstrates why these budgets should be spend on. Afterwards the management will arrange all budgets into one ranking based on the importance of the needs and compare the needs of each budget to make funding allocation. As a result, it helps managers to notice overstated budgets and reduce wasteful and obsolete activities as those not cost-effective operation activities will not be allocated funds. Hence, it encourages managers to identify a cost-effective ways to make changes of the operations.
However, zero-based budgeting involves large amount of time as it requires to generate vast amount of paper work particularly for the decision packages because management have to study many packages source. Furthermore, some managers might overstate the results or even understate the expenditures. Moreover, it is costly to control as this budgeting may emphasis on short-term benefits instead of long-term planning. It might be difficult to communicate and manage in the operation since there are more managers take part.
Non-profit organisations do not have sufficient resources to apply full set of zero-based budgeting as their resource is limited. Therefore, the ideal suggestion could be implement partial of zero-based budgeting to resolve the resource allocation problems.
Given that there are some deficiencies from the techniques above, it can be suggest that Balance Scorecard produce a coherent connection between the ideas and activities to direct to better processes to measuring the performance of such organisations. Through this, organisations are required to combine information from several areas within the organisation, concerning financial data, feedback from donor and volunteer, business process, and performance results and the drivers of future results.
-Organisations must have a strong understanding of their financial condition particularly for appropriate data on funding sources, services cost, operating costs are required to be included in the non-profit's strategic plan so that to give a clearer picture of overall condition.
-Besides that, it is necessary to measure the satisfaction of clientele, donor and volunteer as they are crucial to keep operation going. Such organisations should measure the attitude of its loyal supporters and keeping them involved in order to provide an absolute advantage to the organisation.
-Moreover, the efficiency of internal processes such as measuring the cost, throughput and quality of key operational processes give management a better understanding of how well the organisation is running so that they can determine which programs and services are meeting the real needs of community.
-It is essential that the performance of staff and volunteer be measured as they are the non-profit organisation's main resources.
Through Balance Scorecard, non-profit organisations can focus on measuring the cause and effect relationship between their objectives and have an accurate report on leading and lagging initiatives. It provides substantial evidence on which to base their decisions rather than presuming which fund raising, events and services are significant to them. Unlike traditional approach that does not provide an up-to-date idea of what is working well or bad, Balance Scorecard allows such organisations ability to react proactively as they are having a schedule of tasks for implementation.
SightSavers abandoned all forms of traditional budgeting in 1999 in response to some criticisms of traditional budgeting put forward by Beyond Budgeting (BBRT).
1. Adrian Poffley asserts that budget consume large amount of time in producing and agreeing it which results to abandonment of their charity's activities. The process of generating the annual budget was excessively detailed and it often took from May until November to complete which was slowing down the response times. The budget precisely took less than a month for approval before the start of the new budget year.
2. According to Adrian Poffley, the changes in key assumptions, such as the movements of exchange rate, which often result in out of date even from the beginning of the budget year. As a result, inconsistencies taking place in SightSavers as they are unable to accept new opportunities arised despite funds were obtainable.
3. Moreover, the budgeting system in SightSavers encouraged senior management had a dysfunctional behaviour towards expenditure of budgets. Managers most likely to spend whatever amounts the budget authorized and it is not potentially carried forward because unexpected sums at the financial year end could prompt funding cuts for the following year. As a result, the 'use it or lose it' mentality arised in the charity which resulted from excessively of unspent money was not reported therefore regularly leads to wasted resources.
4. The issue with the associated three year strategic plan was that strategic planning and budgeting had become a single annual event. It appears to be completing the year end accounts although the responsibilities of allocating resources and achieving good performance are continuous. It becomes the one time that the spenders can get commitment from SSI for resources. Hence, it has creates a brick-wall mindset as they think in terms of 12 months periods whatever the natural activity cycle of the charity work.
5. It was also found that SightSavers was concentrating on monthly finance reports in place of the effectiveness of their charitable activities.
Beyond Budgeting Models:
SightSavers uses rolling forecast to support their ongoing strategy and resource management decisions. As it pushing managers to think in terms of twelve month periods unescapably extend beyond the financial year end can be fundamentally changing the culture. It prevents the brick-wall mindset as encouraging the fundraisers and spenders to think in twelve month blocks. It may help the forecasts by quarter as four quarter forecasts force the managers to think at the trend that they believe will occur in the future not just the end result. The comparison of the forecast for the next four quarter against the forecast to the end of current financial year end will underline what is expected to happen in the quarters beyond the current financial year end. In other words, the separation of forecast by quarter ensure the projects remain strategic and provide useful performance milestones.
Adrian Poffley added the up to date decisions and activities can more easily be assessed using a trend of twelve months' results.
SSI has begun to use KPIs as their primary control weapon rather than precise outcomes. It is used to inform the financial stewards concerning whether their financial performances are in a satisfactory level. KPIs tend to provide prompt notice indication if something might be going wrong. They can be seen in historic terms of what actually happened or in the future terms of what is likely to happen. They tend to be few in number and appropriate to the management level. When taken together, they provide a performance picture that tells managers what is happening now and likely to happen in the short term future.
What challenge and problems remain, despite implementing changes to their planning and control systems? Suggest ways in which these might be overcome.
There are number of problems remain despite SSI using the theory of beyond budgeting and new control system.
1.Porter and others particularly emphasize that the insufficient attention to the details of implementation, which was one of the issue remain. As the senior management are lacks of concern about the training with other staffs to use the rolling forecasts, thus staff were begin with using the forecasts as budgets and rebudgeting every quarter.
2.The new system forcing staff to use their knowledge to provide informed information facilitate in decision making. The problem was that lesser projects were funded due to the fact that the budgeted expenditures were rarely spent as partners often did not take time into consideration to implement their projects. To resolve this, the overseas program director was forced to estimate expected expenditure levels based on historic numbers.
4.It is difficult to measure their performance on the charitable delivery services. In fact, benchmarking was often not undertaken on the service delivery side as charities often implemented different activities or encountered uncertain situations. Likewise, the evaluation systems to measure expenditures continue to change gradually.
Overcome the problems
To overcome those problems, it could be suggest that rolling forecast and funding plans which combining two years operational planning with a financial interpretation.
Both involve continuous monitoring and review so that finance team are accountable for their departmental KPIs to use resources strategically and efficiently. This will encourage the finance team working with operational staff and provided training in operating the new processes, hence discourage the 'spent it or lose it' mentality in the charity. Furthermore, there will be a better understanding for finance team on the activities happening within the charity.
a new operational planning process which supported by rolling forecasts and funding plans both involve continuous monitoring and revision.