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Planning, Budgeting,

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Sarah Werner

on 4 November 2014

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Transcript of Planning, Budgeting,

Planning, Budgeting, & Forecasting

design by Dóri Sirály for Prezi
Why Planning, Budgeting, and Forecasting?
All companies are facing competitive and highly regulated environments--all the more reason these tools need to be working for the company and not against it.
Management will still require these functions, but ineffective and inefficient tools will be dropped for new ones. They will be used to satisfying real needs rather than checking off an item on upper-level management’s to-do list
These reports will impact profitability, purchasing decisions, marketing initiatives, and be used for opportunity planning
PBF will become more specific for each industry and for individual companies
The Future of PBF
"The general who loses a battle makes but few calculations beforehand." - Sun Tzu

...or in lesser terms, "winners plan ahead"
"If you fail to plan, you are planning to fail." - Benjamin Franklin
"An unsophisticated forecaster uses statistics as a drunken man uses lamp-posts - for support rather than for illumination." - Andrew Lang
"It is far better to foresee even without certainty than not to foresee at all." - Henri Poincare
"Innovation is the process in which we change the world." - Carl Bass
: the act or process of making or carrying out plans:
: the establishment of goals, policies, and procedures for a social or economic unit
Planning: History
Igor Ansoff
Ansoff Matrix
Peter Drucker
Systematic Feedback
Michael Porter
Five-Forces Model
(Namaki, 2012)
(Byrne, 2005)
(Porter, 2008)
Planning: Current Practices
Overall Planning Picture
Strategic plans
used to set the company's long-term goals/objectives
Long-range plans
the "quantified plan for the strategic plan"
set company's financial targets
Annual plans
first year of long-range plan
guide the budget
(Radtke, 2011)
Strategic Plans
Strategic Planning: Stages
Development Stage
Implementation Stage
reasons, execution, and impacts
all representative groups should have input
the plan should align with the goals and environment
(Office of Planning and Institutional Assessment, 2009)
unless the plan is understood, it can't be implemented
communication is the "connective tissue" between the development and implementation stages
the plan should flow through the organization and be integrated into people's everyday jobs
(Edinger, 2012)
Balanced Scorecard
A Strategic Planning Tool
Developed by David Norton and Robert Kaplan
Valuable tool in implementing strategic plans
Visually monitor adherence to the plan
(Rigatuso, 2014)
Planning: Issues
: an amount of money allocated to certain resources, expenses or projects
: a plan for the coordination of resources and expenditures
Budgeting: History
Comes from a French word, bougette, which means small purse
Came over from Europe in the early 1800s
Used in European governments to review what happened over the last year
Governmental bodies needed a way to plan for the year; would not have happened without advancements in accounting
The railroad used a budget to show ability to repay creditors
(Rubin, 1993)
(Comeau, Rorem, Ehrenhalt, Silvers, Ewing, & Wallace, 2011)
Budgeting: Issues
Time Consuming
Time consuming chore with little to no benefit if budgeting process is not automated
Takes longer than necessary
Employees become frustrated when their hard work is changed or ignored
If/when employees become frustrated with the process, they are less likely to produce a well constructed budget
(Comeau, Rorem, Ehrenhalt, Silvers, Ewing, & Wallace, 2011)
Budgeting: Issues
Hard to pass budget from one user to another
Very limited information without descriptions
Hard to synthesize across departments
Works as an excuse to not invest in budgeting software
(Castellina & Hatch, 2011)
Budgeting: Issues
Level of Detail
Cost Benefit Analysis is never ending
Timeliness of information
Numbers could be out of date by the time the budgeting process is complete
Different levels of detail in different divisions
(Apanaschik, Hassan, & Connor, 2011)
: to calculate or predict (some future event or condition) usually as a result of study and analysis of available pertinent data
Forecasting: History
Ancient Greek Belief
Belief that forecasting was not necessary due to the future being controlled by the gods
Those who spoke out with "forecasts," such as astrologists, were actually attacked
Greek belief changed - "uncertainty and probabilistic events" began to be understood
(Lapide, 2009)
(McCloskey, 1992)
Forecasting: Approaches
1. Forecasting from past totals

2. Forecasting from past transactions

3. Forecasting from business drivers
(Information Technology Faculty, 2012)
Forecasting From Past Totals
Easiest method to use
Actuals from the past year are used
assumption that the past amounts will continue into the future
Use for relatively fixed accounts/amounts
(Information Technology Faculty, 2012)
Forecasting from Past Transactions
Larger companies use this method
vast amount of historical transactions that need data analysis
Costly forecast
For companies with a "data analysis" issue, it's essential: "until you have made sense of the present, you have no foundation for predicting the future."
(Information Technology Faculty, 2012)
Forecasting From Business Drivers
Past figures are ignored
the focus is on the causes of these figures, the business drivers
needs to be aligned to how the company actually operates
"Rolling forecast"
constraints are eliminated, as the forecast end period is continually "projected forward"
because managers must look beyond historical data, they are often better able to adjust plans and to react to "changing business conditions"
Used for larger accounts
ex: sales and payroll
(Information Technology Faculty, 2012)
(De Leon, Rafferty, & Herschel, 2012)
The Accountant's Role
"Collection" Step
accountant gathers and compiles all individual forecasts
"Prediction" Step
accountant uses his/her knowledge to adjust forecast
(Information Technology Faculty, 2012)
Forecasting: Issues
Common Pitfalls:
Wishful thinking
In making forecasts for your own company, it's easy to be over-optimistic. The management accountant is often in the best position to determine if a forecast is realistic.
Ignoring your own assumptions
ex: if you sense a declining market share, then it wouldn't make sense to forecast an increase in sales
Moving goalposts
A set timeline should be made for finalizing the forecast. If too much time is spent critiquing, the main focus of the business objectives/goals may be lost
(Info Entrepeurs)
Forecasting: Issues
Organizations spend a large amount of time and effort on the process, but only 1 in 5 "produce a forecast that is reliable"
(KPMG, 2007)
Issues, continued..
Unreliable forecasts cost organizations money
Data used for forecasting are often inaccurate or incomplete
Information technology is often a hindrance rather than a help
Forecasting should not be the preserve of finance
Leaders demand better forecasting
(Comeau, Rorem, Ehrenhalt, Silvers, Ewing, & Wallace, 2011)
The Future of Planning
Strategic planning to ongoing strategic management.
Performance management that deviates from the top-down one-size fits all approach.
Planning will involve the entire company.
(Poister, 2010)
The Future of Budgeting
Emphasis on being within 4% of budget rather than ‘beating the budget’.
Measure Key Performance Indicators on a fixed and variable basis.
Use budgeting for sustainability initiatives.
Better understanding of efficiency improvements.
Even more so of an ongoing cycle.
Integration with forecasting

(Castellina & Hatch, 2011)
(Bartley, Buckless, Al Chen, Harvey, Showalter, & Zuckerman, 2012)
(Institute of Chartered Accountants in England and Wales, 2012)

The Future of Forecasting
Integration with budgeting
Improvements in software, cloud computing, real-time information for forecasting
Less management interference when preparing a forecast
Look at uncertainty to measure error

(Institute of Chartered Accountants in England and Wales, 2012)
(Franses & Legerstee, 2011)
(Ciccarelli & Hubrich, 2010)

Igor Ansoff
Ansoff began his work in 1957 with the Ansoff Matrix
A strategic planning tool that provides a framework to help management create strategies for business growth
Peter Drucker
Drucker's pioneering work dates back to 1973 with his book
, where he explains planning as "simply the organized performance of a new task"
In order to help with the implementation of plans, Drucker used plain language that was easily understood by everyone
He also focused on systematically organizing plans, comparing the results of those plans to expectations, and creating systematic feedback
Michael Porter
1980 - Five-Forces Model
allows managers to create more meaningful strategic plans and meet profitability objectives
the five forces help in defining an industry's structure and form the "nature of competitive interaction within an industry"
History (cont'd)
For a period in the 1980s, strategic planning became unpopular - companies began reporting issues with the plan
During this time, however, there was a recession, globalization, and increased competition
Instead of refocusing the plan to adapt to these external issues, blame was placed on strategic plans for the failure of achieving business objectives
The strategic planning process has become a main part of many business sectors, ranging from multinational corporations to not-for-profit entities
Strategic plans are useful for all organizations
"No single formula"
strategic plans can vary based on the "size, scale, and longevity" of companies
Display a simple story
this story should clearly translate the business strategy and the company's future
Quantify the company's vision
strategic plans allow management to see what's possible/not possible
Strategic Plans, Con't
(Khan, 2013)
(Comeau, Rorem, Ehrenhalt, Silvers, Ewing, & Wallace, 2011)
(Radtke, 2011)
"Top-down" approach
leads to plans being too removed from reality
CEO's responsibility; just a "document"; meant for only a limited number of people
growth of companies - individual business units
Issues, con't
Many organizations have not responded to changes in the business environment, though they are aware of its potentially harmful impact
This finding may be due to a lack of knowledge in strategic planning execution (only 9% of survey participants felt they had the ability to "fully optimize their strategic initiatives")
Failed plans often occur when "the course is charted, the direction is set, and nothing more happens."
The last part of the strategic planning process, "reaching the destination," often goes missing
(PR Newswire, 2014)
(Edinger, 2012)
In the late 1900s, it then became more clear that much of the future could be controlled by the actions of people
The start of this thought was ignited with theories such as "game theory" (Nash Equilibrium)
1950s - Exponential Smoothing Forecasts became popular
1970s - forecasting revolutionized into a variety of statistical time-series methods
Even more "sophisticated" methods have since been developed in order to account for seasonality and trend variations.
(Lapide, 2009)
History, Con't..
Forecasting: Current Practices
Financial forecasting methods today take many forms
It's important to note that "any forecast has to be derived from past or present data, otherwise it is simply a guess"
(Information Technology Faculty, 2012)
Forecasting Issues
A forecast often starts as a "this may happen forecast," and moves to a "I hope this will happen forecast," and then eventually to a "I'm sure this will happen because you're telling me it needs to happen forecast."
The accountant then..
aligns the forecast with the balance sheet, creating a balance sheet forecast, and subsequently, a cash flow forecast
Accountant compares the results to the budget and determines any variances
Budgeting: Current Practices
Multinational Corporations
Interest rate risk
Inflation risk
Exchange rate risk
(Rivera & Milani, 2011)
(Institute of Chartered Accountants in England and Wales, 2012)
Budgeting: Current Practices
Excel: a major tool still used today

Sales budget
Expense budget
Capital expenditures budget
Cash flow budget

More advanced software: 4CastPro, IBM Cognos TM1, PROPHIX,

More efficient for cash flow budgets
Better integration across the company
In combination with cloud computing, better ability to drill down into a budget

Budgeting Current Practices

Company Needs
Industry practice
Quality of information available
Amount of historical data
Economic outlook of firm

Numerous different reasons to choose a certain type of budget:
Budgeting Current Practices
Zero Based Budget
Justify every single dollar spent
Used to reduce budget padding
Takes a lot of time (i.e. costly) to prepare

(Castellina & Hatch, 2011)
Budgeting Current Practices
Historical Cost Budget
Usually increase/decrease last year’s numbers
Provides the least amount of detail about expenses and expectations
(Castellina & Hatch, 2011)
(Castellina & Hatch, 2011)
Budgeting: Current Issues
Budgeting: Current Issues
Driver Based Budgeting
Find business drivers; customers, inputs, major elements of production
Update budget based on fluctuation of business drivers
More costly to prepare
Gives managers better information about why the budget is changing

(Castellina & Hatch, 2011)
Performance Based Budgeting
Budget works backwards from desired outcome
Gives managers more freedom in deciding how to allocate resources
Better budget for giving managers ability to innovate

(Comeau, Rorem, Ehrenhalt, Silvers, Ewing, & Wallace, 2011)
Budgeting: Current Issues
Other Budgeting Items
Report various variances
sales volume variance, exchange rate variance, margin variance, sales price variance
Benchmarking is considered outdated
Unique assets, unique business model, unique competitive advantages
Goal is for upper management to better understand the day-today activities of how the business accumulates costs
Top-down and bottom-up

Budgeting: Current Practices
Types of Budgets
Zero Based Budgeting
Historical Cost Budgeting
Driver Based Budgeting
Performance Based Budgeting
Luxor Cosmetics: A Case Study
What experience have you had?
Personally or in Business?
What types of budgets are being used?
What current practices do they need to adopt?
What key event happened that should have required a change to the corporate strategy?
What major issues need addressing? How would you deal with these issues? What would you recommend to Mr. Luxton?
Question 4:
Average contribution margin per sales dollar: 23.2%
Fixed costs: manufacturing costs, marketing, G&A, Interest expense
Question 5
Loan amount $16.3 million
Questions 4, 5, 6, 7
Question 6
Should we consider what Wendy has to say?
How does this affect the decision making process?
Question 7
How is this question still relevant to planning, budgeting, and forecasting?
What other company changes need to be made?
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