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Do you Budget Cost Savings?

Six Sigma – iSixSigma Forums Old Forums General Do you Budget Cost Savings?

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  • #32689

    Clint Allen
    Participant

    During our year-end budget preparation we are required to estimate cost savings for planned projects during the upcoming fiscal year.  Then those same estimated cost savings are then included in our annual budget.  What I’m asking is, is it commonplace to estimate project savings and then budget for that estimated savings?  Or, is it more common to realize cost savings from a project and following financial validation, your following years budget would be based on the completed project’s benefits (i.e. reduced cost per unit)?  I hope this makes sense, if not please ask for clarification.  And, thanks for the input.
    Regards, Clint

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    #87586

    babu
    Member

    Clint ,
    The saving have to be realised before budgeting in . In ideal terms the money have to be made available , rather than book it.
    Sundar

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    #87601

    mcintosh
    Participant

    Absolutely, the savings’ expectation must be budgeted.  This process must be held to a high standard: if there’s not a high probability of the savings materializing then it doesn’t warrant the time, effort and dollars being invested.  Your CFO may budget a cushion for the chance some savings aren’t achieved but the process must be held accountable.

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    #87635

    Harry Mott
    Participant

    We budget cost savings as part of the strategic and yearly business planning process which includes budgets. In some cases it is project specific if the project is known and in others it is targeted a particular departments, processes etc. In all cases it is the responsible executive to meet cost saving objectives based on target and stretch goals.
    Without integrating cost savings into the planning process I am not sure how you assure resources are aligned properly and prevent savings from being serendipitous and discretionary.

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    #87640

    Norbert
    Participant

    You can perfectly budget cost savings, if you respect the general budgeting rules: the proceeds are likely to occur and they are estimated conservatively in time and value.

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    #87645

    Ron
    Member

    It is common practice to define a project and remove the $$ from the budget up front. Actually it is better that way, you now have total support from the sponsoring manager to get it done.
    The down side is that 1) It sounds like you already know the solution BAD, 2)You are guessing at the actual cost savings sometime Good , sometime Bad.

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    #87646

    Clint Allen
    Participant

    Ron,
    “1) It sounds like you already know the solution BAD, 2) You are guessing at the actual cost savings sometime Good, sometime Bad.”
    That is it exactly, my question stems from a capitol improvement project in which cost savings were budgeted.  However, due to supplier delays during equipment fabrication and manufacturing these savings are yet to be realized.  As a result my feet are held being held to the fire (to say it nicely) because we are not meeting budget.  Management is holding me personally responsible for manufacturing delays from a supplier.  It’s a very frustrating experience to say the least.
    Clint

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    #87648

    Russell D. Ollie Sr., MBB, PMP
    Member

    I would say no. 
    Projected savings aren’t real UNLESS they are tied to headcount reduction for example.  In general our organization (Japanese conglomerate) doesn’t recognize savings or revenue until it is real (e.g., hard dollar benefits associated with a project are hard dollars not soft dollars purely because they are tied to an invoice / PO.)
    Thanks.
     
     

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    #87667

    ROSS
    Member

    Most Organisations going through Budgeting process have to identify improvements that are captured in the Budget. To ensure these gains are achieved you should at least complete the D&M phase combined with some form of sensitivity analysis to build up your cost structure. The company That I work for requires a 24% reduction in Costs for 2003 and we have developed a range of Projects including 6 Sigma Projects that will realise 30-35% and if we only achieve 75% success then we still beat Budget ( It looks like we will deliver 35-40%)

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    #87684

    rajakkumar
    Participant

    It is not common practice to budget cost savings in the same year, but if you are doing it I think it is avery aggressive practice and good for the organisation,but put the individuals concerned under a lot of pressure.
     

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