Transform Budgets to be Investments

If you don’t drive your business, you will be driven out of business. This B.C. Forbes quotation got me thinking..

imageThe relevance of this in Corporate Finance is that they are responsible for investing money in their business to  make money.

CFOs these days have to decide how to allocate money to different  business units.

In Bangkok where I live and work,  I’m a fan of the popular Thai-language discussion forum Pantip.com, Among the variety of discussions I am a contributing member in the Sinthorn Forum.

The trend there I notice now, is many are now asking where to invest. Thailand, like everywhere, has interest rates as low as 0.5% (Source: BOT), likewise of UK and US banks. In sympathy with the general global downturn, the Thai stock market Index also dived from 800+ to 400+ points through last year, so investors there are on the run.

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Some Key steps in allocation in resources budgets are:

  1. Removing underperformance units: In this step, Corporate Finance provides a high-level guidance to Business Unit (BU) requesting a list of X% of their lease-performing activities/plan for review. BU have to decide which metrics to use (KPI, strategic alignment, costs) to determine their “bottom X%” investment
  2. Finding better options: BU selects projects that they would like to receive funding based on ROI submissions  to CFOs for approval.

The steps seem easy, but of course we need to remember all of this has to be stored and kept in an auditable and accountable way. CFOs also would want to track  things like comparisons between BU, which BU performs comparisons with last year’s performance, comparisons between original and revised budget for each BU. This sort of information was what many of our investor discussion groups were asking too, so it seems the process is not dissimilar

Thus, the infrastructure of Performance Management of your organization should allow you to muddle through transformation of budgets effectively. It should be able to show you where the sweet spots are, and of course the hot spots and where your investment is not performing. It should also be accountable and auditable that you can track and analyze your investment based on different metrics, yet being enough transparency to stake holders involved.

Finding where to invest, say 50K USD, is easy as bottom line is return on investment. We now have SAA Consensus and brokers for advice. Finding where you should invest in the company is more challenging. Or is it the same?

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