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© 2024 N. Dean Meyer and Associates Inc.
Excerpt from www.NDMA.COM, © 2024 N. Dean Meyer and Associates Inc.

Essay: Planning versus Accounting Systems

tools designed for planning, budget negotiations, and rate setting are quite different from those designed for tracking

by N. Dean Meyer

The tools designed for planning, budget negotiations, and rate setting are quite different from those designed for tracking (cost accounting).

Planning Tools

A planning tool is used to develop the budget submission, as well as to calculate the cost of products and services (in total for the budget) and rates (cost/unit).

Beware of simple cost-amortization tools. In these, the budget and plan (catalog with sales volumes) are inputs, and rates are the output. Since a cost model has to be imbedded in an investment-based budgeting tool in any case, there's little value in a tool that takes a known budget and distributes it among a known set of products and services.

A budget planning tool has capabilities well beyond simply cost modeling:

  • It forecasts the costs of deliverables (projects and SLAs) in total, as well as rates; these costs include reimbursables (pass-throughs) that don't go into rates.

  • It has the resolution to portray specific projects and SLAs, each with unique mixes of project-team members (prime and subs).

    This is critical to support the "What do you want to not buy?" strategy and to managing expectations.

  • It amortizes indirect ("fixed") costs without knowing in advance the actual budget (the base), and still ensures that they're fully recouped.

  • It calculates compensation costs without knowing in advance how much work there will be, and hence what actual headcount (including staff-augmentation contractors) will be needed.

    It produces labor rates that remains consistent throughout the year, even if new projects require additional contractors.

  • It applies compensation costs to all deliverables -- base case and speculative -- consistently, such that the cost of one project does not change when another project is approved and uses up the last of the employees, necessitating staff-augmentation contractors or vendor services (at a higher cost).

    This takes away any incentive for clients to meddle in whom you assign to their projects, and there's no change in the cost of a project if it's discussed early in the budget process or late (after approved projects have absorbed all available employees).

  • It generates an operating plan complete with forecasted demand, staffing requirements, project and service-delivery team accountabilities, and vendor costs.

  • It includes tools and reports for developing the plan, including reports that help executives scrutinize managers' inputs for frugality.

  • It includes reports that help present and negotiate the budget, including filters and summaries by client business unit (at various levels of their organizational structure), overseers (such as committees and other approvers), enterprise strategy, high-level product sets, and various scenarios (base case through optimistic).

    Clients can view different scenarios as they analyze what they will and won't "buy."

  • It produces management metrics, and uploads the budget into tracking systems to compare actual results to the plan.

  • It's designed to engage the leadership team in a participative process (not just for use by cost analysts).

Planning tools are used once per year, and are designed to allow managers to develop their assumptions, forecasts, and plans. They're designed to engender ownership by individual leaders, since every empowered manager must plan his or her own internal entrepreneurship (and then live up to the plan). They're designed to be highly interactive, allowing managers to see "what if" scenarios as they plan their businesses.

Also, Planning tools include analytic tools that aren't needed in actuals-tracking systems, such as labor billable-time ratios, blended rates for employees and contractors, new services and speculative projects which may or may not be funded (with various levels of probability), analysis of internal primes and subs on project teams, decision support for internal sales, and the cost model itself.

Tracking (Accounting)

Tracking systems are built on accounting systems. They collect data on actual costs, and produce reports for both pursers and providers on the actual costs of products and services.

Pursers need to track their checkbooks, understand where their money is going, and view remaining spending power. Providers need to understand their costs and their revenues (a profit-and-loss statement), and their balance sheets (in more advanced stages of an internal economy). These views are generally added to (built on top of) existing data collection and accounting applications.

Planning tools provide a annual input to tracking systems, including the catalog of products and services, rates for each, and the budget for the purpose of tracking actuals against the plan.

Different, and Separate

There is little advantage to making them one and the same system.

In fact, combining them has risks. Doing so may imply that the priorities discussed in the budget are to be followed all year long, undermining the purchase-decision (portfolio management) process. And it may undervalue sources of revenue other than the core budget, such as additional fee-for-service work.

Meanwhile, there are many advantages to building a plan in a more accessible, flexible environment.


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