Boeing’s executives expect their managers to know this information, in real time, if the company is to remain profitable.
Managers need good information about costs to set prices, determine how much of a good or service to deliver, and to manage costs in ways that make their organization more likely to achieve its mission.
Public financial resources are finite, scarce, and becoming scarcer.
CVP is a powerful tool that can directly illuminate many important management decisions.
For most public organizations personnel costs are the largest and most visible budget inputs. That’s why effective budgeting for public organizations starts, and often ends, with careful attention to budgeting for personnel.
Public managers must know what portion of the costs for which they’re responsible are fixed, variable, and step-fixed. They must also understand how different cost items connect to service delivery outputs, and how their cost center is assigned indirect costs. And perhaps most important, they must understand how their program’s cost structure and cost behavior will change under different performance scenarios.
For instance, for organizations with mostly fixed costs one of the best approaches to manage costs and bolster profitability is to “scale up.” Since fixed costs are fixed, one way to manage them is to spread them across the largest possible volume of service. However, for organizations with mostly variable costs, scaling up will simply increase variable costs. The better approach in that circumstance is to invest in new technology, procurement processes, or other strategies that can drive down variable costs.
The best we can do is understand these trends, forecast them to the best of our ability, and help policymakers understand the trade-offs these trends put in play.
But fundamentally, budgeting is a form of politics. Resources are scarce, and budgeting is the process by which organizations allocate those scarce resources. As such, budgeting is about managing conflict.
For budget policymakers, conflict and compromise is often around that annual percentage change, or increment. This assumes, of course, that last year’s budget – or base budget – was a fair representation of the organization’s goals and priorities. If this is not true, then debating incremental change will only amplify that disconnect between resources and priorities. In fact, for most public organizations, that disconnect is persistent and pervasive.
Legislators and board members are generally willing to appropriate small amounts of money to try “innovative” approaches. With time, many of those small experiments morph into large-scale programs.