The benefits of budgeting
A Zurich case study

Page 4: Challenges of effective budgeting

Suppose sales volume, prices and costs were all projected to rise annually by 10% (incremental budgeting). This would make budgeting easy, but it is highly unlikely. To increase sales may require price reductions and discounts. Successive rises in sales volume might bring economies of scale, but might need investment to expand production in order to meet that demand.

Zurich 17 Image 11Effective budgeting is full of challenges. Whilst financial accounts relate to the past, budgets are about the future. All data is therefore planned rather than actual, probable rather than definite.

Assumptions

Budgets are based on a number of assumptions. Some of these are explicit, such as what the cost of labour and raw materials will be or what market research results indicate about likely customer demand. Others are more implicit. A change in leadership in the sales team, a good relationship with a new supplier or changes in the organisation's external environment could all affect budget projections.

Zurich may face unanticipated changes in legal or financial regulations or a change in market dynamics brought about by economic factors or the actions of competitors. An insurer needs to predict the risks its insurance policies protect against, both short-term risks, such as floods and earthquakes and longer-term risks, such as mortality rates. Budgets also need to reflect the business’ need to invest in specific projects or long-term improvements.

Zurich Business Partners

Budgets may also cause conflict between departments. For example, the allocation of additional budget to sales and marketing could result in operational areas receiving a reduced budget. Within Zurich, conflict between departments is resolved with the help of Business Partners. These work with the different departments to achieve an appropriate and fair division of the budget, in line with the business’ and senior management’s objectives.

Analysing budgeting data may uncover opportunities that would otherwise have remained hidden. Therefore budgets must be set using the best information available but have flexibility in order to respond to the changing business environment.

Zurich | The benefits of budgeting

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