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ROE Comprehensive Budget Management, the Guiding Compass for Corporate Blueprints

Date: 2023-10-31Views:

——By Sira  Harvest Capital  

In the course of business operations, enterprises face numerous uncertainties that can easily impact profits. The resulting data often focuses more on post-event feedback, lacking pre-warning and in-process monitoring.

The establishment of an early warning and monitoring mechanism in businesses requires advanced management tools. We believe that the ROE Comprehensive Budget Management System can effectively assist enterprises in addressing these issues.

"ROE refers to the ratio of net profit to average net assets, reflecting the level of return on owner's equity."

We will explain the ROE Comprehensive Budget Management System for businesses in three parts, using simple language:

  1. Exploring the root causes of business operational challenges and why the ROE Comprehensive Budget System is important.
  2. How the ROE Comprehensive Budget Management System empowers business with data and cultivates operational cadres.
  3. Methodology of ROE: (Where budget comes from, how to formulate budgets, how to manage budgets).

The Dilemma of Traditional Budget Management: Lack of ROE Strategic Thinking

The crux of traditional budget management lies in the absence of ROE (Return on Equity) strategic thinking. The operational challenges faced by businesses fundamentally stem from management issues. The conventional budget management system exhibits issues such as unclear goal and responsibility delineation, weak process controls, and an inadequate connection between various stages. The root cause lies in businesses failing to adopt a strategic approach at a capital level for efficient resource allocation.

  1. The problems with traditional corporate budget management manifest in five main aspects:

1.1 Incorrect Objectives: There is a classic case where a company's profits are excellent, and all executives meet their year-end performance targets, receiving substantial bonuses. However, the owner is facing financial hardship because there is no cash flow in the accounts. This is due to the owner setting incorrect budget goals. The budget goals only assess profit without considering asset efficiency and cash flow. For instance, the procurement department, aiming to control raw material costs, may choose longer payment terms to negotiate lower purchase prices. The sales department might opt for extended payment terms to secure more sales revenue, leading to a cash flow crisis in the company.

1.2 Lack of Clarity in Responsibilities: In many companies, budgeting is often done solely by the finance department, lacking participation and cooperation from various business departments, including production, supply, and sales. In the end, it becomes a mere sheet of paper, devolving into a numerical game of financial predictions.

1.3 Inappropriate Methods: When businesses budget, there is often a lack of scientific methods, necessary process flows, and organizational structures to ensure smooth budget compilation. The absence of thorough discussions during the process can result in issues. For example, departments vie for group resources early in the year without considering the overall picture of how resources should be efficiently allocated.

1.4 Compilation without Follow-up: Once the budget system is established, there is often a lack of targeted and proactive tracking. This leads to internal resistance among some employees who view budgeting as a means of cutting departmental expenses. Ultimately, the budget system becomes a formality, unable to bridge the gap between strategy, planning, and performance, lacking management at pre-, during, and post-stages.

1.5 Talent Gap: Entrepreneurs often lament the absence of skilled employees. Despite strong leadership from the boss, there is a lack of capable individuals, resulting in a talent gap within the company. The problem lies not in the scarcity of talent but in the absence of an effective incentive mechanism to stimulate employees' enthusiasm and proactive engagement.


This statement suggests that, whether in business or individual endeavors, the most effective approach is to outline a comprehensive and concrete blueprint in the mind beforehand. It is akin to envisioning success in advance and then progressively implementing it according to the blueprint. Comprehensive budget management serves as a specific guide for operating a company's blueprint.

In the words of Sun Tzu in "The Art of War"

"Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win."

This passage suggests that, whether in business or on a personal level, the most effective way to achieve one's ideals is to first envision a comprehensive and detailed blueprint in the mind. It's akin to seeing the picture of success in advance and then systematically implementing it step by step according to the blueprint. Comprehensive budget management serves as a specific compass for operating a company's blueprint.

Comparing ROE comprehensive budgeting with traditional budgeting, comprehensive budget management discards financially-oriented budgeting, basing decisions on the effectiveness of spending. It comprehensively drives companies to improve performance, positioning it as a value creation activity. In terms of spending effectiveness, value creation, and the sequence of actions, it surpasses traditional budgeting models. Creating value takes precedence, followed by resource consumption, and the balance between resource consumption and value creation must be maintained.

Illustrating with a real-world scenario: When there is a conflict between the boss and executives regarding the company's goals, how should it be reconciled? For instance, if the boss aims to achieve a profit of 500 million next year, but several executives can only reach 300 million in their calculations. What should be done?

In reality, this is a very typical scenario. Budget goals are not a zero-sum game between the company and executives. Instead, goals can be divided into incremental and existing parts for consideration. If the existing goal of 300 million is achieved, a 1% profit reward is given. Achieving an additional 200 million results in an additional 3% reward. This approach motivates executives to strive for the incremental target rather than engaging in a tug-of-war with the company.

2、Huawei Insights

We introduce Huawei as a classic case to further illustrate the importance of comprehensive budget management, highlighting five key points in the Huawei case.

2.1: Huawei's Comprehensive Budget System Supports Sustained High Growth and a Bold Spending Approach

From 1995 to the present, Huawei has achieved a miraculous 30-year rapid growth in sales revenue. Each year, it invests over 1600 billion in talent, over 500 billion in market and customer service, over 1200 billion in product research and development, and allocates significant funds to establish an external management consulting think tank. The essence of being "bold in spending" lies in using comprehensive budgeting as the basis for all company operations, achieving efficient resource allocation.

Starting from 1998, Huawei hired IBM to streamline processes and establish a system. IBM quoted 48 million USD (approximately 560 million RMB), equivalent to Huawei's annual profit in 1998. After ten years of implementation, Huawei's revenue increased twentyfold, the R&D cycle shortened by nearly half, and R&D costs decreased by 30%.

Why did Huawei vigorously promote IPD (Integrated Product Development) in 1998? Ren Zhengfei explained that it aimed to break free from the company's dependence on individuals. The goal was to streamline the entire process from input to output, establish a direct end-to-end connection that is concise and effectively controlled, minimize hierarchical layers, and achieve the lowest cost and highest efficiency.

In the book "Huawei's Basic Law," which delves into the company's culture, comprehensive budget management is elevated to a significant level.

——from huawei insight


Comprehensive budgeting serves as the basis for the company's entire annual business activities. It is the key to navigating the uncertainty of the external environment, reducing the blind and arbitrary nature of decision-making, and enhancing the overall performance and management standards of the company.

In line with our commitment to sustainable business growth, we will establish reasonable profit margins and profit targets for each period. Our focus is not solely on maximizing profits but rather on meeting the requirements for sustainable development in our business.

2.2: Huawei Establishes a Multi-Level Budget Control System for Organizational Assurance

To support the comprehensive budgeting system, Huawei has set up a multi-level budget control system consisting of two verticals and four horizontals. This system is designed to ensure the effective implementation of the comprehensive budgeting approach.

2.3: Huawei's Comprehensive Budgeting Reflects Efficient Allocation of Strategic Resources

Focusing on the Pressure Principle of Strategy

Huawei adopts the pressure principle of focusing on strategy in its budgeting approach, avoiding the consumption of strategic competitive strength on non-strategic opportunities.

Either not doing it at all or, if chosen, concentrating human, material, and financial resources intensively to exceed the intensity of the main competitors in resource allocation, achieving key breakthroughs. The budgeting closed-loop management ensures a balance between risk avoidance and intervention in investments.

Huawei's budgeting is not rigidly tied to input equals output. It follows the principle of favoring potential and benefits to determine the level of various expenditures.


For different responsibility centers, different control methods are proposed. The preparation of budgets for revenue centers and profit centers follows the principle of favoring potential and benefits to reasonably determine the level of various expenditures. In the budgeting of cost or expense centers, the policy is implemented based on input equals output and rigorous cost-saving measures.

The philosophy is summed up as: "Having money doesn't necessarily mean spending more; not having money doesn't necessarily mean spending less. The key is whether the money is spent wisely." - Ren Zhengfei

Behind Huawei's willingness to spend lies a strategy of differentiation and closed-loop management to ensure budget execution.

The annual budget is based on projects/opportunities, and a logic of "strategic plan—project—budget" is established to create a budget allocation mechanism. Products and projects are fundamental units for effective business management at Huawei. Differentiated management is applied to budgets based on the lifecycle of different products. Project management teams purchase resources from supporting organizations according to business plans and allocated budgets.

Comprehensive budgeting is a closed-loop management system. It guides through planning and budgeting, evaluates and monitors the execution of planned budgets through accounting, ensuring sustainable business development and balancing the avoidance of risks with the courage to invest.

2.4: Huawei establishes effective budgeting rules to enhance organizational efficiency. 

Huawei defines budgeting rules and, through delegation of authority and flexible budgeting, balances flexibility to achieve agile organizational efficiency.

Rules: According to the principle of "flexible acquisition, rate-amount combination."

1. Granting by Rate: Allocate expenses based on the rate for mature businesses. Linearly allocate resources according to changes in output, such as sales revenue, to maintain the investment in customer interfaces. Huawei's improvement target for the expense rate is a 5% annual reduction to drive the enhancement of internal operational efficiency.

2. Granting by Amount: Strategic or transformative projects are granted budgets based on a fixed amount.

2.5: Huawei links budget goals with employee growth, and the management system inspires employee potential.

By examining the following set of data, it can be observed that Huawei's performance growth aligns with employee efficiency. From 2012 to 2019, Huawei's revenue, profit, and compensation packages all achieved growth rates of over 20%, while the number of employees only increased by 4%. Employee potential has been fully stimulated.


Huawei has left two assets for the company: one is the management system supported by management architecture, processes, and IT, and the other is the management and incentive mechanisms for people.

Huawei believes that factors of production such as capital, technology, and talent can only yield results when integrated through effective management.

  • ——Ren Zhengfei

In summary, based on the case of comprehensive budget management at Huawei, we believe that an advanced management tool has the potential to help companies achieve strategic implementation and talent development. So, what exactly is comprehensive budget management?



ROE comprehensive budget management is fundamentally a management system that operates two things: resources and talent. The system configures a company's human, financial, and physical resources and, fundamentally, is a comprehensive target management for all employees, forming a high-dimensional system for cultivating cadres who understand business.

ROE DuPont analysis breaks down into three main indicators:

  1. Sales net profit margin, measuring the level of profitability.
  2. Total asset turnover rate, measuring the level of asset turnover.
  3. Equity multiplier, measuring the level of liabilities and financial leverage.

It further breaks down business goals and lands them in the KPIs of each department. Through the cascade of KPIs, it reaches every position, every employee, and every day's work. This means that through this hierarchical breakdown, the ultimate result is achieved: every employee in the company is contributing to the overall growth of ROE.

So, how does the ROE comprehensive budget management system operate talent and resources? We believe that a crucial dimension is empowering operations with data.

  1. 1、The essence of ROE comprehensive budget management: Empowering operations with data.

  2. ROE comprehensive budget management is a strategic-planning-budget-performance operational loop, a complete data-driven operational management system.


THe difference in talent between ordinary and outstanding companies is less than 1%. Since the talent gap itself is not significant, how do we explain the performance difference between outstanding and ordinary companies?

The answer lies in the management system. A well-established management system can train and cultivate talents who truly understand business, enabling them to unleash greater potential.

— Harvard Business Review

More than 90% of the Fortune Global 500 companies possess highly robust comprehensive budgeting systems, considering the comprehensive budgeting system as a core lever for corporate management. According to statistics, the adoption rate of budget management systems in Western countries is 98%, serving as a crucial means for multinational enterprises to ensure long-term sustainability. Budget management has a history of over a century, and most Fortune Global 500 companies have successfully implemented budget management.

The stages of budget formulation are as follows:

  • Budget formulation, as the foundational work at the forefront of the entire budgeting system, serves the true purpose of providing a digital standard and a quantifiable navigation system for subsequent budget management. Through budget formulation, enterprises achieve goal decomposition, breaking down objectives to each individual on a daily basis.

  • If the expected results are not achieved, enterprises need to identify the root causes based on budget variance data and continually optimize and iterate.

  • Comprehensive tracking is conducted through daily control, monthly reporting, and annual evaluation, forming a complete data-driven operational management system. This aids various business departments in swiftly reviewing whether their work has been effective.

2、ROE Comprehensive Budget Management System: Cultivating Management Cadres

Budgeting is a form of education for individuals. Through the strategic-planning-budget-performance operational loop, enterprises assist managers and reserve cadres in enhancing their management capabilities, establishing a comprehensive framework of thinking.

Firstly, let's examine its requirements for organizational structure. Typically, the comprehensive budget management system necessitates three essential organizational components:

    1. Board of Directors (Budget determination)
    2. Budget Management Committee (Budget review)
    3. Budget Office (Budget formulation, execution, monitoring)

    It's worth noting that the Budget Management Committee requires the participation of department heads from various departments. The Budget Office is manned by a reserve cadre from each department. When a department head is promoted, a reserve cadre can take their place in the committee, ensuring a continuous stream of talent.

    Cadres joining the Management Committee simultaneously possess both business and management perspectives. They work around the three key ROE indicators (Profitability, Efficiency, Leverage) to develop their skills. The cultivation of cadres using digital management to grasp the essence of business and improve the quality of management decisions is the core value hidden beneath the iceberg in the budget management system.

ROE Comprehensive Budget Management Methodology Introduction

We will discuss three aspects: where the budget comes from, how to formulate the budget, and how to manage the budget.

  1. 1、Where Does the Budget Come From? – Opening the Operational Loop with Budgeting

We believe that operations form a closed loop encompassing strategy, planning, budgeting, and performance. These four steps are interconnected, with a core focus on talent cultivation and activation.

Strategic Planning:

    • It involves determining the direction, and all resources are allocated around the strategy.


    • Based on the strategy, the next year's work plan is formulated. Planning requires support and cooperation from other departments.


    • It involves effective allocation of human, financial, and material resources, transforming qualitative plans into quantitative execution plans.


    • Efficiency is assessed through performance. The higher the resource utilization efficiency, the greater the rewards.

    Human Talent in the ROE System:

    • Strategy is driven by talent to achieve goals, planning is executed by talent, budgeting involves talent in resource allocation, and performance activates employee motivation. The ROE system is fundamentally a talent cultivation system.

    The operational loop needs detailed breakdowns over time, with specific tasks for each quarter.

2、How to Formulate the Budget?

We believe addressing three key aspects is crucial:

    1. A comprehensive organization and process provide support for budgeting, and information systems serve as efficiency tools.

    2. Linking ROE with financial and business goals to ensure the comprehensiveness of outcome documents.

    3. Business budget formulation aligns with the three major decomposition goals of ROE.

2.1、Organization and Processes Safeguard Budgeting, Information Systems Enhance Efficiency

A complete budgeting organization consists of decision-making, execution, monitoring, and evaluation institutions, placing budgeting within an organic and dynamic management system.

Typically, there are multiple levels of systems managing together, each with different responsibilities and competency requirements:

  • Budget Decision-Making Institution
  • Budget Execution Institution
  • Budget Oversight Institution
  • Budget Evaluation Institution

The budget formulation process must strictly follow the budgeting team and adhere to the principle of "top-down, bottom-up, top-bottom integration, and repeated iterations." The budget process consists of nine steps:

The information system should serve as an efficiency tool. To enhance the efficiency of budget formulation and execution analysis, enterprises must be adept at utilizing information systems by integrating budget control sheets with the existing accounting systems. It only requires financial software vendors to conduct simple secondary development on the financial system, enabling the one-click generation of budget execution analysis reports. Ideally, an enterprise's information system should possess the following features to better assist in improving the efficiency of budget formulation and execution analysis.

2.2 Connecting Financial and Business Goals through ROE, Ensuring the Completeness of Outcome Documents

We believe that decomposing ROE into three major budget systems – profit budget, asset efficiency budget, and leverage budget – is a very elegant and concise approach.

Profit Budget: It revolves around the breakdown of indicators such as net profit margin, corresponding to the profit budget system. The bottom layer of the profit budget is supported by the income statement. The income statement is further broken down into sales budget, production budget, procurement budget, and tax expense budget. When preparing the profit budget, it requires a profit-oriented mindset. Profit-oriented thinking is explained by a core principle: focus on increasing revenue while devising a low-cost plan.

Asset Efficiency Budget: It is broken down around the total asset turnover ratio. The bottom layer supporting the asset efficiency budget is the asset-liability ratio. It can be broken down based on the characteristics of the enterprise, such as accounts receivable budget, inventory budget, capital budget, and accounts payable budget. When preparing the asset efficiency budget, the enterprise needs to have an asset-oriented mindset. On the one hand, it should focus on revenue, and on the other hand, under certain revenue conditions, it needs to control the scale of enterprise assets.

Leverage Budget: The bottom layer supporting it is the cash flow statement, including operating cash flow, investment cash flow, and financing cash flow. The enterprise needs to have a cash-oriented mindset, meaning fully leveraging the benefits of leverage while controlling leverage to prevent debt risk and cash flow disruption.

Let's take a look at the final report files that need to be drawn up. Through the budget system, the enterprise can proactively create the three major financial statements, providing effective reference for the decision-making of managers. This represents the enterprise's transition from financial accounting to management accounting. For example, the budgeted income statement.

It is crucial to note that besides balancing the budgeted income statement, the enterprise also needs to create a marginal profit statement to better achieve management goals.

The budgeted balance sheet is another financial statement derived from balancing the business budget.

Budgeted cash flow statement. Many times, businesses will prepare the first two cash flow statements. We believe that the budgeted cash flow statement also needs to be prepared, and we will introduce it later.

Let's open each one and see how to compile them.

2.3 Business Budget Compilation Undertaking the Three Decomposition Goals of ROE

Before preparing the budget, understanding the underlying logic of the income statement helps identify structured methods to enhance profitability. Following this approach, businesses can be reminded throughout the process of how to navigate profit logic.

Key Issue of Profit Budget: How to Increase Profit?

Direction One: Increase Revenue, Control Costs.

The first dimension is the product profit statement. By examining the product profit statement, we can determine which products are more important, helping us adjust and optimize the product structure.

The second dimension is the employee profit statement. The finance department needs to create profit statements for each employee or as a team. If an employee or team contributes higher profits, more resources can be allocated to them (applicable to sales and business departments).

The third dimension is the customer profit statement. It allows identification of customers that truly create value and those that may result in losses. Based on the information in the table and considering strategic needs, the company can strategically invest more in key customers.

At the human level, there may also be a per capita efficiency table. Comparing per capita gross profit and per capita net profit with the same period last year helps assess whether efficiency levels have improved. The purpose of this table is to use per capita efficiency data to assist the company in controlling future expansion. If the CEO believes the team needs to increase staff, how to control inefficient expansion can be determined by looking at the per capita efficiency table.

Direction two: Keeping revenue constant while reducing costs.

How to increase revenue and control costs? Here, we suggest that companies, based on the original financial profit statement, conduct a thorough analysis and divide it into three major sections for further processing.

First, design low-cost systems. For example, companies can reduce business processes through internal process optimization to create a more cost-effective business chain.

Second, engage in strategic procurement. Develop suppliers similar to developing customers and position the procurement department as a profit center.

Third, innovate in production costs. Find cost advantages, such as relocating the company's production base.

Based on the analysis of these dimensions, companies can dynamically interpret and identify specific growth points in each dimension. This is the first direction we mentioned: increasing revenue, controlling costs, and identifying key investments in people, finances, materials, and resources.

The intrinsic connection of the profit budget:

On the technical side, we look at how to compile sales budgets, production budgets, procurement budgets, and tax expense budgets.

Sales budget. In sales forecasting, predicting sales volume is a key indicator, and how to predict it? We believe it is necessary to use the zero-based budgeting method. Zero-based budgeting starts from scratch. Instead of basing the forecast on a percentage increase from the previous year, it considers future development and budget feasibility, reimagining the sales volume from scratch.

Production budget. Since sales volume is directly related to production volume, a common operational question is whether the production volume should be greater than or less than the sales volume. Our suggestion to companies is to consider the product lifecycle for control. For example, during the growth phase of a product, the production volume should be slightly higher than the sales volume. If the product enters the maturity phase, they should be roughly equal. The recommendation is to keep the fluctuations between 5% to 10% to achieve efficient production.

Purchasing budget. How to forecast the purchasing quantity? The purchasing quantity is based on the production volume from the budget table, combined with the company's internal Bill of Materials (BOM) for each raw material to determine the quantity of each raw material to be purchased.

Tax and Expense Budget. When creating the tax and expense budget, a crucial budgeting method is the flexible budgeting method.

The flexible budgeting method involves a reference point. It is essential to distinguish between variable costs and fixed costs. Once the distinction is made, the flexible budgeting method can be applied to variable costs. The reference point for the flexible budgeting method is typically based on a business volume metric.

For example, the metric could be sales volume, production capacity, or other business reference data related to variable costs. As for fixed costs, we recommend using zero-based budgeting.

It's important to emphasize the distinction between fixed costs and variable costs because it will be crucial in the upcoming discussion of an important formula.

"Profit is equal to revenue minus variable costs, then minus fixed costs."

And when revenue is reduced by variable costs, this corresponds to a crucial item in management accounting, known as contribution margin. Through the analysis of the contribution margin for products, departments, and customers, we can identify which products and departments require more resources.

So, to achieve this profit and loss balance analysis, the starting point is to distinguish all the complex cost items of the enterprise into fixed costs and variable costs.

  • Fixed Costs: Costs that remain constant and do not vary with changes in business volume. Examples include rent and depreciation expenses.

  • Variable Costs: Costs that vary proportionally with changes in business volume. Examples include packaging costs and material costs.

  • Mixed Costs: Costs that have characteristics of both fixed and variable costs. An example is the compensation of sales personnel, where the fixed cost includes the base salary and benefits, and the variable cost includes sales commissions.

Through breaking down fixed costs and variable costs, we can calculate the marginal contribution for each dimension to help the enterprise optimize its product structure.

Insight 1: Whether a product is sold or not depends not only on the simple financial perspective of gross profit margin but also on the management accounting perspective of marginal contribution.

Insight 2: Enterprises need to control fixed costs to help expand their profit levels.

Lastly, there's the issue of incentivizing the internal executive team of the company. We believe that the breakdown of management accounting can guide executives to better assume the responsibility for high growth. In other words, if the budgeted revenue is significantly below the breakeven point, it will force executives to think actively and request an increase in budgeted revenue. Because only by increasing budgeted revenue, making it higher than the breakeven point, can executives prove their ability and demonstrate that they are creating value for the company.

② Asset Efficiency Budget

We believe there is a key point to understand here: given a certain level of revenue, the fewer assets a company has, the higher its asset turnover ratio will be. Therefore, companies need to constantly pay attention to which assets have longer lifespans and work on increasing the speed of asset turnover.

We have summarized that the budgeting methods for the three major assets - accounts receivable, inventory, and accounts payable - are the same. Taking accounts receivable as an example:

First, calculate the actual aging of accounts receivable and analyze the current situation. Second, determine the target aging. Third, determine the budgeted accounts receivable balance.

③ Let's focus on discussing the leverage budget.

The cash flow statement is the circulatory system of an enterprise, and cash flow is crucial for the continuous operation of a business. The preparation of the leverage budget should be an important component of budgeting.

Leverage budgeting has a dual nature. On one hand, utilizing leverage can increase a company's ROE, but on the other hand, increased leverage also means higher debt risk. Therefore, the key to leverage lies in control.

There are several ways to help us amplify leverage without increasing the level of interest-bearing debt. One approach is to seek financing from upstream and downstream industries. Specific cases, such as Starbucks and Wahaha financing from customers and suppliers, can be examined for reference.

Rolling budgeting addresses a practical issue that arises when various departments in a company work hard to create a budget, and then the market environment undergoes changes. In such a situation, rolling budgeting allows budget management to have both seriousness and flexibility, providing a long-term perspective on the changing business models over time.

Rolling budgeting helps a company respond promptly to significant changes in raw material prices. It enables the company to implement loss prevention measures or seize better opportunities for raw material procurement. The key points for establishing a rolling budget mechanism involve considering the degree of situational changes. Generally, companies implement rolling budgets on a quarterly basis, with business departments responsible for the compilation.

The rolling budget mechanism should be set up based on the degree of situational changes. While the old budget plan cannot be used for control, it is still utilized for performance assessment and year-end performance evaluation.


How to Manage Budgets: Overview of Budget Control and Analysis

Managing budgets involves addressing two important issues:

    • Budget management needs to form a closed loop of "Budget—Analysis—Improvement—Evaluation" to ensure the effective implementation of the budget.
    • Budget control and analysis are effective means to ensure the realization of the budget.

How to Manage Budgets: Overview of Budget Control and Analysis

Key Principles:

  • Top leadership leads the analysis, and finance acts as the organizer.
  • Budget units are responsible entities.
  • Emphasize cost-effectiveness, with a focus on detailed analysis of key projects with a variance deviation rate exceeding 10%.
  • Trace back to the roots, identify the root causes of budget execution variances, and seek actionable solutions.

3.2、 Identifying and resolving issues through budgeting

Operating Analysis Meeting

① Operating Analysis Meeting

In the management process, how should the operating analysis meeting be conducted?

Establish a monthly meeting mechanism to keep various responsible parties synchronized with information and complete monthly summaries to form improvement plans. If actual operating data exceeds budgeted data, the company should extract benchmark experiences and replicate them to other departments. If actual operating data falls short of budget targets, the company should review the reasons for not meeting the standards and promptly improve operational management.

Budget meetings are divided into three stages: pre-meeting, during the meeting, and post-meeting. Before the meeting, everyone should unify the data headers, during the meeting based on presenting data, identifying issues, and proposing suggestions. After the meeting, follow up on issues.

Now, we've been talking about this budget report. What headers should the budget report have?

② Budget Report

As an analysis progress bar for meeting standards, the budget report should include ROE overall and the breakdown of the three major budgets to the product, customer, and team levels.

Step one: Through comprehensive analysis, understand the overall operational issues of the company. This includes ROE analysis (profitability analysis, asset efficiency analysis, cash flow analysis).

Step two: Analyze the three major financial reports, understanding the marginal contribution and budget compliance of each analyzed section.

Step three: Examine income, focus on key products, and analyze the three major expenses. Evaluate where the company should allocate resources and focus on cost reduction in the future.

③ How to analyze the budget variance rate?

The budget variance rate is a measure of the deviation between the actual completed data and our budgeted data. We will analyze the reasons for the variance, then trace it back to each department's responsibility based on these reasons. Additionally, a corrective action plan can be formulated.

Budget Variance Rate = (Actual Completed Data - Budgeted Data) / Budgeted Data x 100%

Combining the different reasons for variances, the core project variances can be divided into planned variances (orange) and controllable variances (blue). Controllable variances are the focus of subsequent improvement plans.

④ Establishing a Daily Core Indicator Early Warning Mechanism

Dynamically monitor core indicators based on data from comparable companies in the same industry and historical company data. Implement a warning mechanism through a Business Intelligence (BI) system to control risks effectively.

⑤ Principles and Methods of Budget Adjustment

In principle, budgets are not subject to adjustment without submission of an application. Budget adjustments are categorized into regular and irregular adjustments, and the methods include top-down and bottom-up adjustments.

3.3 Performance Evaluation and Cadre Assessment Based on Budget Completion

In conclusion, when integrating budget completion into cadre assessment and performance evaluation, it ultimately returns to the decomposition of ROE. This involves breaking down ROE into three major indicators, refining a series of specific metrics, and ensuring that each business department is accountable for these metrics. The goal is to align all employees towards the common objective of ROE growth.

For example, the sales department, in addition to being responsible for profitability, also needs to be accountable for sales revenue, sales profit, asset efficiency, and leverage. However, the dimensions may differ from other departments. For the sales department, asset efficiency assessment would focus on days of accounts receivable and days of finished goods inventory.

This understanding is crucial, as highlighted in the earlier case mentioned, where solely assessing profitability might lead business departments to compromise on credit terms. By incorporating asset efficiency metrics, the risk associated with business departments can be better mitigated.

For the procurement department, common profitability indicators include procurement costs and department expenses. In terms of asset efficiency, metrics like days of raw material inventory become essential for assessing the procurement department. Leveraging considerations may involve evaluating the credit term risks associated with suppliers.

By setting up these assessment metrics, ROE goals can be comprehensively ensured. Ultimately, each department's achievement of a specific metric will result in a variance from the initially budgeted target. Thus, performance assessment fundamentally revolves around evaluating the variance rate from their budgeted targets. Two principles in this regard need special attention from enterprises.

Taking a progressive approach to view the budget variance rate, comparing oneself with oneself, is essential. Additionally, the performance incentive mechanism should precede budget execution. As for the type of performance evaluation system that enterprises should use, whether KPIs or a Balanced Scorecard (BSC), it depends on individual perspectives and preferences.

Some information referenced: "ROE Budget Management" by Fu Xiaoping.

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