The purpose of this article is to introduce a new approach to budgeting and planning developed by the CAM-I ABPB Interest Group. The new method places emphasis on achieving an operational balance first and then a financial balance. This is more advantageous than traditional budgeting because it creates a flexible and dynamic budget model that easily adapts to organizational changes.

Activity-Based Planning and Budgeting (ABPB) Details

The key feature of the new approach is the Closed Loop Model. This model takes individual strategies from initial thought to the final product and allows manipulations of all variables within the process. The following graphic provides an overview of the CAM-I closed loop model.

Phase one of the Closed Loop Model attempts to achieve an operational balance. Operational balance is defined as “providing sufficient resource capacity to meet the sum of all demands placed on the organization with an acceptable level unused capacity. Unused capacity may often be considered as useful buffer capacity, as opposed to negative idle or excess capacity.” The first step in this phase is to identify a strategy that fits with the organizational goals. This strategy is then used to develop a feasible operational plan. The organization should identify the demand, constraints, resources, drivers, and outputs desired with the particular operational process. Once these requirements are known, the model tries to achieve an operational balance between the resources required to meet the demand and the available capacity of the resources. The key aspect of operational balance is that it is achieved strictly on nonfinancial terms.

The second phase is to develop a financial plan that works with the operational balance to achieve the desired financial balance. Financial balance means “generating a financial plan/budget that uses the quantities and rates defined in the operational plan to deliver the required financial results.” This phase is simple because all the factors have been established. Management must now determine the cost of resources, then trace these costs to the activity costs. The activity costs will ultimately arrive at the product costs.

If any of these phases were to become imbalanced, the Closed Loop Model allows for an adjustment of the following five elements to reach the target budget:

·        Product demand quality

·        Activity and resource consumption

·        Resource capacity

·        Resource cost

·        Product/service price

The ability to alter the above elements makes this Model very beneficial for any organization. This more detailed view of the closed loop model is illustrated below.

Contrasting Traditional and ABPB Approaches

The following chart contrasts the two approaches:

Integration with Traditional Budgeting Process and Other Performance Management Initiatives

ABPB can be used in conjunction with traditional budgeting process. The best way to obtain integration is to use the Closed Loop Model for the parts of the organization that produce identifiable products or services. The Model can also be used for the parts of the organization that have processes that can be easily mapped. The parts of the organization that can not be mapped or do not have easily identifiable products or service can be budgeted using the traditional process.

ABPB can also be used as a management performance system. The Model helps the employees to focus and clearly see the strategy and how to execute it. The most important part of using ABPA is to view the Model as a one of many management tools. It should not be viewed in isolation. As a management performance system, ABPA can be coupled with the balance scorecard. These two methods compliment each other because they both commence with a strategy.

The main benefit of this new approach to budgeting and planning is related to the flexibility and dynamic aspect of the model. This aspect allows for a better link to performance management and accountability. This approach is not too time consuming because of the proactive and flexible planning involved. The ABPB approach accommodates the dynamic business environment that the majority of organizations operate in today.