The purpose of the report is to analyse how should SightSavers International uses budgets to plan and control its operations. This report considers key performance indicators in relation to the key strategic issues that SightSavers International facing. It will then move on to examine the differences between profit and non-profit organisations and discussed the implications for effective budgetary control. The following session will be examined the reasons of SightSavers support the arguments put forward by the 'Beyond Budgeting Round Table'. Last but not least, several implications has been discussed to overcome the challenges remain after implemented changes in SightSavers International.
From the case study and the website, outline the key strategic issues facing SSI and recommend 20 KPIs, explaining who u choose them.
There are several key strategic issues have been found:
1. Are SightSavers's goals consistent with their financial funds?
This question invites organisations to assess whether they can achieve their goals, given their financial position.
Recommended KPI: Growth in fundraising contribution/ Cash flow/ Cost effectiveness (refer to Table 1)
2. How SSI could predict the future income levels due to the uncertainty of fundraising environment and competitive increasing aggressively?
There are number of competitors involved in this sector such as Oxfam, Christian Aid, Save the Children and etc. Thus, individuals donors may possibly change to support other competitors rather than SightSavers.
Recommended KPI: Sufficient cost covered/ Diversity of income resources / Growth in committed givers (refer to Table 1)
3. How could SSI influence new beneficiaries and convince partners as a result of it takes considerable of time to build a new product to replace current products?
The lead time to bring a new product onto market to replace existing products, to reach new beneficiaries or to develop new relationships with partners was lengthy.
Recommended KPI: Form of funds / No. of government providing support eye care / Partnership development expenditure (refer to Table 1)
4. What is the usefulness of using budgeting since there are some deficiencies of annual budgeting process were found?
Several notable indications were found that budgets could lead to inappropriate resource allocations as a result of its difficulties with the annual budgeting process such as lack of attention to implementation of details, out-of-date and results in dysfunctional behaviours.
Recommended KPI: Level of expenditure/ Distribution of expenditure/ Prioritisation of activities / Degree of availability, accessibility and reliability of information (refer to Table 1)
5. Given that the instability of operating environment how could SSI provide better access to beneficiaries?
Majority of projects were force to on hold due to unstable operating environment such as the changes in economic, environmental and political terms.
Recommend KPI: Reserves/ Partnership development expenditure (refer to Table 1)
6. How does SightSavers manage to match tremendous demands with limited resources given?
Organisations need to match sources and uses - for example, in order to avoid the exposure of having long-term capital commitments financed by short-term grants that may expire
Recommended KPI: Break-even level of income/ Fund and activities match/ Funding structure (refer to Table 1)
7. How could SightSavers provide the most good as donors demand to restrict their donation to particular activity?
The restricted income provided a constraint for SightSavers to allocate resources to other areas of activities.
Recommended KPI: Degree of income restrictions (refer to Table 1)
Key Performance Indicators
Target Explanations
Growth in fundraising contribution
Ensure that an increase in percentage of income compared to last year to meet their goals given to their financial position. (1)
Cash flow
Amounts of cash inflow or outflow required to have a better understanding of their financial position. (1)
Cost effectiveness
Costs are spend valuable ways to achieve their goals. (1)
Sufficiency cost covered
Ensure that certain amounts of funds are adequate in funding essential costs in an uncertainty and competitive environment. (2)
Diversity of income sources
Income from any source should not more than certain amount of total income so that to avoid a dependable manner to donor. (2)
Growth in committed givers
To make sure that reduces the uncertainty of funds for long-term viability. (2)
Form of funds
To notice amounts of funds realisable within certain weeks to allocate sources and develop a new product onto market. (3)
No. of government providing support eye care
To reduce the lead time issues as it shorten the planning process (3).
Partnership development
expenditure
To make it easier to move new products onto market to replace existing ones as there is a strong relationship with partners which means better connection. (3)
Level of expenditure
To have a clear picture of amounts of available resources to be spent on certain areas. (4)
Distribution of expenditure
To avoid inappropriate resource allocations. (4)
Prioritisation of activities
To ensure that budgets in furtherance of objectives spent on core ranking activities (4)
Reserves
Prepare approximately 3 months expected expenditure ahead in order to have adequate funds to various activities to address the uncertainty of the operational environment. (5)
No. of government providing support eye care
It will reduce the uncertainty of operating environment on planning process (5).
Break-even level of income
Amounts of funds not greater than certain amounts of expenditures to match their sources and uses. (6)
Fund/activities match
To validate no greater than amounts of activities matter to competing funding bids (6)
Funding structure
To ensure that fund will be arranged appropriately as the resources are always limited. (6)
Degree of income restrictions
Obtain amounts of income unrestricted to spend on the other area of activities in providing better access to different beneficiaries. (7)
Cost/income ratio
Ensure funds do not exceed between the cost and income and the investment in further income-making activities is not overlooked. ( )
Donor yield
It provides reassurance of future results to be achieved as SSI would have early warning if the indicator perform poor results and so that can act accordingly
Table 1: Recommended KPIs
How do the differences between profit and non-profit organisations affect the way in which they should employ budgetary controls?
Numerous of budgeting principles apply to both for profit organisations and non-for-profit organisations, however there is a significant difference.
Non-profit organisations include local government, charities and hospitals regularly prepare detailed budgets revealing the different classification of expenditures (Lucey, 2003). Such organisations often find that it is difficult to measure output, therefore the budgeting process normally concentrating on comparing current expenditure to budget expenditure rather than to compare expenditure in relation to performance achieved. Budgets are less controllable as many of their activities and costs are controlled in different places. Besides that, non-profit organisations have problems with long-term strategic planning and resource allocation. In contrast, for profit-seeking organisations, budget can be relatively straightforward in applying the comparison of expenditures and profits (Lucey, 2003). From a financial management perspective, profit seeking organisations focus on profit and shareholder wealth maximisation as their long-run objective. It is simple to measure performance success as by collecting quantitative data on such measures as profit, return on investment and shareholder value creation, which enable them to target their performance against competitors (Sawhill &Williamson, 2001). On the other hand, financial perspective provides a constraint rather than an objective for non-profit organisations as their primary goal is typically stated in terms of some mission rather than shareholder wealth maximization (Kaplan, 2003). Because not-for-profit organisations do not have stakeholders, they can be served any parties that have interest in their organisations (Brigham & Ehrhardt, 2011). In general, non-profit organisations are lack of financial flexibility due to the fact that they rely on donations that are not undertake an exchange transaction.
As a result, the non-profit organisations are essentially to monitor their spending and comply with financial budgets, nonetheless their success cannot be measured by looking how carefully on spending to budgeted amounts, or even if they restrain spending so that actual expenses are controlled under budgeted amounts (Kaplan, 2001). The non-profit organisations are certainly requires to be aware of its cash reserves whether it is sufficient to maintain services to their clientele. In fact, cash flow can be particularly difficult to forecast as non-profit organisations depends on donations. There will be a tragedy if social services are overly demand as resources may not be sufficient to allocate and it is hard to predict the contribution revenue in a dependable manner throughout the year (Brigham & Ehrhardt, 2011)..
Due to this reason, such organisations will emphasis on manage resource and adopt zero-based budgeting as it "serves as a tool for systematically examining and perhaps abandoning any unproductive projects" (Drury, 2008). Zero-based budgeting combines budgeting and planning into one process which is focus on analysis of needs, objectives and priorities (Lucey, 2003). Managers are required to justify budgets in detail which can help the organisations to distribute funds efficiently as it demonstrates where should budgets be spend on. Afterwards the management will arrange all budgets into one ranking based on the significance of demands and compare the needs of each budget to allocate funds. As a result, it helps managers to notice overstated budgets and reduce wasteful and obsolete so that funds will not be allocated to those not cost-effective activities. Hence, it encourages managers to identify a cost-effective ways to make changes of the operations. However, zero-based budgeting involves large amount of time as it requires to generate vast amount of paper work particularly for the decision packages because management have to study many packages source (Lucey, 2003). Furthermore, some managers might intentionally understate the expenditure or even overstate the results. Moreover, it is costly to control as this kind of budgeting might focus on short-term benefits instead of long-term planning. It might also be difficult to communicate and manage in the operation since there are more managers take part. Non-profit organisations do not have sufficient resources to apply full set of zero-based budgeting as their resource is limited (Lucey, 2003). Therefore, the ideal suggestion could be implement partial of zero-based budgeting to resolve the resource allocation problems.
Given that there are some deficiencies from the techniques above, it can be suggest that Balance Scorecard produce a coherent relation between the ideas and activities to target better processes to measuring the performance of such organisations (Hartnett & Matan, 2011). Through this, organisations are required to combine information from several areas within the organisation, concerning financial data, feedback from donor and volunteer, business process, and performance and future results (Hartnett & Matan, 2011).
Organisations must have a strong understanding of their financial condition particularly for on funding sources, services cost, operating costs are required to be included in the non-profit's strategic plan so that to give a clearer picture of overall condition (Kaplan, 2001). Besides that, it is necessary to measure the satisfaction of clientele, donor and volunteer as they are crucial to keep operation going. Such organisations should evaluate the viewpoint of its loyal supporters and keeping them involved in order to provide an absolute advantage to the organisation (Hartnett & Matan, 2011). Moreover, the efficiency of internal processes such as measuring the cost, quality and throughput of the operational processes give management a better picture of how well the organisation is operating so that they will be able to determine which services and programs are complying with the real needs of society (Zimmerman, 2004). It is essential that the performance of staff and volunteer be measured as they are the non-profit organisation's main resources (Kaplan, 2001).
Through Balance Scorecard, non-profit organisations able to concentrate on evaluating the cause and effect relationship of their objectives which provides evidence on which to base their decisions rather than presuming which fund raising, events and services are significant to them. Unlike traditional approach that does not provide an up-to-date idea of what is working well or bad, Balance Scorecard allows such organisations ability to react proactively as they are taking a plan of problems for implementation (Hartnett & Matan, 2011).
In what ways does the experience of Sight Savers support the arguments put forward by the 'Beyond Budgeting Round Table'?
SightSavers abandoned all forms of traditional budgeting in 1999 in response to some criticisms of traditional budgeting put forward by Beyond Budgeting (BBRT).
BBRT argue that budgeting systems often consume large amounts of management time (BBRT, 2013). Adrian Poffley asserts that budget consume large amount of time in producing and agreeing it which results to abandonment of their charity's activities (Poffley, 2010). The process of generating the annual budget was excessively detailed and it often took from May until November to complete which was slowing down the response times. The budget precisely took less than a month for approval before the start of the new budget year (Lindsay & Mark, 2005).
BBRT also argued that budgets often slow down organizations from being flexible and responsive to deal with unpredictable environments change (BBRT, 2013). In Sight Savers, the changes in key assumptions such as the movements of exchange rate, which often result in out of date even from the beginning of the budget year. As a result, inconsistencies taking place in SightSavers as they are unable to accept new opportunities arised despite funds were obtainable (Lindsay & Mark, 2005).
Hope and Fraser (2001) disputed that budgeting often result in dysfunctional behaviours. In this case, it can be seen that budgeting system in SightSavers encouraged senior management had a dysfunctional behaviour towards expenditure of budgets. Managers most likely to spend whatever amounts the budget authorized and it is not potentially carried forward because unexpected sums at the financial year end could prompt funding cuts for the following year. As a result, the 'use it or lose it' mentality arised in the charity which resulted from excessively of unspent money was not reported therefore regularly leads to wasted resources (Lindsay & Mark, 2005).
They also addressed that budgeting system is a one year planning cycle so it is too short for many activities (BBRT, 2013). The issue with the associated three year strategic plan was that strategic planning and budgeting had become a single annual event. It appears to be one time that the spenders can get commitment from SSI for resources. Hence, it has creates a brick-wall mindset as they think in terms of 12 months periods whatever the natural activity cycle of the charity work (Lindsay & Mark, 2005).
Hope and Fraser (2001) argued that managers only concentrate on making numbers rather than changes, and target their set objectives rather than potential due to the fact that budgets provide them a pressure from fixed targets and performance incentives. It was found that SightSavers was only concentrates on monthly finance reports in place of the effectiveness of their charitable activities (Lindsay & Mark, 2005).
Instead of using budgeting, SightSavers uses rolling forecast to support their ongoing strategy and resource management decisions (Hope &Fraser, 2001). As it pushing managers to think in terms of twelve month periods unescapably extend beyond the financial year end can be fundamentally changing the culture. It prevents the brick-wall mindset as encouraging the fundraisers and spenders to think in twelve month blocks (Poffley, 2010). In other words, managers can view the forecast quarterly to ensure the projects remain strategic and provide useful performance indicators. Adrian Poffley added that the up-to-date decisions and activities can more easily be measured by using a trend of twelve months' results in SightSavers (Hope & Fraser, 2001). SSI has also begun to use KPIs as their primary control weapon rather than precise outcomes (Hope & Fraser, 2001). It is used to inform the financial stewards concerning whether their financial performances are in a satisfactory level. KPIs tend to provide prompt notice indication if something might be going wrong and managers would have a clearer picture of current activities and what is expected to arise in short term. (Poffley, 2010).
Several experiences have been demonstrated to show that budgeting is problematic enough for SightSavers. As a result, SightSavers started to adopt beyond budgeting models such as rolling forecast and KPI to ensure their long term viability.
What challenge and problems remain, despite implementing changes to their planning and control systems? Suggest ways in which these might be overcome.
There are number of problems remain despite SSI using the theory of beyond budgeting and new control system.
Porter and others particularly emphasize that the insufficient attention to the details of implementation, which was one of the issue remain. As the senior management are lacks of concern about the training with other staffs to use the rolling forecasts, thus staff were begin with using the forecasts as budgets and rebudgeting every quarter (Lindsay & Mark, 2005). To overcome those problems, it could be suggest that rolling forecast and funding plans which combining two years operational planning with a financial interpretation. Both involve continuous monitoring and review so that finance team are accountable for their departmental KPIs to use resources strategically and efficiently. This will encourage the finance team working with operational staff and provided training in operating the new processes, hence discourage the 'spent it or lose it' mentality in the charity. Furthermore, there will be a better understanding for finance team on the activities happening within the charity.
In addition, the new system is difficult to making staff agree to be empower as they have to provide informed information facilitate in decision making based on their own knowledge (Lindsay & Mark, 2005). The resolution could be giving them more liberty to make decision so that they would not feel being empowered.
Another concern is that management pay lack of attention to cost conscious as the cost of operating is inconsistent with its tight budget. In this case, key performance indicators would help to alert management if the indicators show poor results, SightSavers would have an early warning of disappointing income figures to come, and can act accordingly.
Furthermore, it is difficult to measure their performance on the charitable delivery services (Lindsay & Mark, 2005). Such problem can be solved by implementing Balanced Scorecard that provide a logical relation of ideas and activities to target better processes in measuring their performance and allow them to react proactively as they are taking a plan of tasks for implementation.
There was an inconsistency because rolling forecasts ignored the fact that if a certain of quarter performed poorly (Lindsay & Mark, 2005). As a result it affects the confidence of donors and the funding negatively. To overcome this, SightSavers would need to clarify in the Annual Report that the results shown is not accurate since they have been using rolling forecast quarterly as the information keep rolling every month.
Conclusion
In the case study of SightSavers, several notable key strategic issues were found and those have been addressed by using 20 KPIs. The recommended KPIs will be used to act as early-warning system to alert management in sufficient time to facilitate corrective action to be taken. Undoubtedly, zero-based budgeting is applicable to non-profit organisations where quality of service is all important, however the major drawbacks to zero-based budgeting is the amount of time the system takes. Nevertheless, it would be more appropriate to apply Balanced Scorecard as a management accounting tool to focus on the budgetary control particularly for non-profit organisations. SightSavers has been agreed the argument put forward by BBRT as they have gone through some significance problems of using budgeting. There are several reasons to believe that beyond budgeting is fundamental for charity like SightSavers. As it achieved smooth and efficient management of funds through the year end cut-off, allowed management to follow the up-to-date financial information make decision and culminating the dysfunctional behaviours among staffs. It is not just makes a significant improvement in financial department but the understanding within the charity. Similarity, the implementation of Balanced Scorecard and associated KPIs would give a clear strategy direction to its staffs. It emphasises less on financial KPIs but measure of its impact. To conclude, SightSavers should adopt both beyond budgeting as well as Balanced Scorecard in order to operate effectively in a management culture where financial is the only aspect in measuring strategic success, thus allow them to focus on social change.
