Tuesday, November 25, 2008

(Past) Time for a tip on managing budgets?

Twice in times past, I've been in business situations where it was explicitly important to get a better handle on managing expenses. In the second case, the organization was seeing expense cycles of perhaps six months duration and couldn't seem to fix them.

When I saw the oscillations, I saw that as possibly coming from a structural problem. I created a system dynamics model that matched the structure of managerial decision making and accounting in the organization; with very few tweaks, I was able to reproduce in the model the essential behavioral characteristics of the real situation.

Seeing the structure laid out simply made it relatively easy to think of possible solutions, and I was able to eliminate the problem in the simulation by changing the information flows to simulated managers.

After getting buy-off, we implemented the changes in the organization, and fluctuations in spending variance dropped by 95%. What's more, we were able to adjust spending levels rapidly and accurately as needed to meet changing expense targets. That was fairly convincing proof that the model had been useful in identifying the cause of the problem and in testing proposed solutions.

Given current economic times, perhaps it's time to bring out some of those lessons again—or perhaps it was already time for that a few years ago. You can read more in Applying System Dynamics to Business: An Expense Management Example, where you can also find links to a model and to a published article on the project.

Incidentally, one of the lessons is that managing our personal expenses with credit cards is riskier than managing with cash. Read the article for more!

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