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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:
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
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.
Conclusion
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.