First principle budget example

 

The following describes an example where we helped an Australian underground mine set up a site wide budgeting process that was based on first principle modelling of the organisation.

 

Our client, an Australian copper mine had 2 mine sites that had been in production for a few years. Annual budgeting was a challenge and so was quarterly forecasting. The budgeting process was typically lengthy, stressful and usually delivered substantially inaccurate estimates of the forthcoming year's expenses, capital and revenue. Given the big variation between the annual budget and the actual cash flows, the organisation struggled to make optimal operational funding decisions.

 

We were engaged to deliver a mechanism that yielded more accurate and transparent budgets and forecasts, as well as reporting against these. We realised quite quickly that the fundamental issues that were underpinning the challenges being experienced were 3 fold:

 

  1. The budget was being built using a platform (Excel) and structure that was error prone and unsuitable for multiple concurrent contributors.

  2. The mechanism by which the costs were derived was substantially divorced from the underlying business drivers (e.g. the mining plan). The result was that as the operating assumptions changed, the budgeted costs didn't change accordingly.

  3. The rules governing the way the actual costs were being recorded using the ERP system and the general ledger didn't match the accounting structure against which the budget was being built. This made it very difficult to reconcile variances between the budget and the actuals.

 

In order to deliver the results, we followed a 3 pronged approach:

 

  1. We delivered a robust budgeting platform that allowed for multiple managers to work on the budget simultaneously while using the same set of assumptions. We used our Q-Plan platform for this.

  2. We worked with the various managers on site to build up a budgeting structure for their business areas that was predominantly based on using first principle "drivers" to build up the costs and revenue.

  3. We worked with the accounting and inventory management teams to ensure that the rules governing the way the costs were recorded matched the rules that were used in building up the budget.

 

The outcome yielded substantial business value to our client. The speed and accuracy of the budgeting and forecasting processes were dramatically increased and the management team acknowledge that they are now in a position to make better funding decisions and to understand how operational changes will impact the bottom line. In addition, the insights generated as a result of the intervention have sparked a host of business improvement initiatives.