"When you cut to the chase, costs are simply the residual of people or equipment doing activities. Costs are a derivative. They are a dependent variable – the residual of work being done and things being purchased. They reflect an impact. Costs are the shadow of a body or the echo of a sound."
Before defining any actual principles it is worth taking a step back and asking what we would actually like the budget process to achieve.
We suggest the following are all important elements:
- A tool to aid planning and ensure activities are aligned with strategic priorities
- A means of showing customers what products and services they get for specific levels of funding
- A means of supporting prioritisation and decision-making
- A means of comparing internal services with external benchmarks
A process that can achieve all of this is also a tool to aid organisational transformation: it changes the nature of the relationship between internal customers and suppliers and the nature of the dialogue about organisational priorities.
Meyer (2008) argues that because budget setting appears to be simply a mechanistic process, it is possible to effect transformational change by this means without engendering the same levels of tension and fear often associated with process review and other types of structural change.
It is evident that we do not achieve the objectives listed above by means of a budget based on historic costs and presented as a set of arcane general ledger codes. Such an approach disempowers both the service provider and the customer. We might however achieve them by applying some or all of the following principles:
- Linking costs to outputs
- Linking outputs to “customers”
- Understanding the full cost of services and distinguishing between different types of overhead
- Recognising the return on investment (ROI) from each activity