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Management Control Systems CF2003

Management Control Systems

Class 22.1 The budget process

1

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Strategy FormulationBusiness units strategies

2

1. Its mission: What are its overall objectives?

- BCG model and GE model provide a guide to corporations toselect its mission.

2. Its competitive advantage: How should the business unit competein its industry to accomplish its mission?

- Michael Porter Industry analysis and Value Chain analysis

Business units strategies depend on two aspects:

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Strategy Formulation

Value Chain Analysis

3

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

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Management Planning and Control SystemsCF2013

Strategic planning process

Current Strategies

4

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

VALUE CHAIN ANALYSIS- MICHAEL PORTER:

Value chain analysis objective:Move materials from vendors, through production, and tothe customer at the LOWEST COST, in the SHORTEST TIME and with GOOD QUALITY

Companies must improve their efficiency!

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Management Planning and Control SystemsCF2013

Strategic planning process

Current Strategies

5

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Reducing the number of vendorsComputarized system to place orders automaticallyLimiting deliveries to Just in timeHolding vendors responsible for quality

HOW TO IMPROVE ON THE INBOUND?

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Management Planning and Control SystemsCF2013

Strategic planning process

Current Strategies

6

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Increasing automationRearranging machinesBetter production contrl systems

HOW TO IMPROVE ON MANUFACTURING?

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Management Planning and Control SystemsCF2013

Strategic planning process

Current Strategies

7

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

MarginProcurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

Having customer place orders electronicallyChanging locations of warehousesChanging channels of distributionImproving the efficiency or warehouses operationsOwn fleet versus outsourced distribution

HOW TO IMPROVE ON THE OUTBOUND?

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Strategy Formulation

Value Chain Analysis

8

1. Can we reduce costs in this activity, holding value (revenue) constant?

2. Can we increase value (revenue) in this activity, holding costs constant?

3. Can we reduce assets in this activity, holding revenues constant?

4. Most importantly, can we do (1), (2) and (3) simultaneously?

Procurement

Technology Development

Human Resource Management

Firm Infrastructure

MarginProcurement

Technology Development

Human Resource Management

Firm Infrastructure

Margin

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Strategic planning process

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DEFINITION: Process in which an organization decides on the STRATEGIES

(plans to achieve organization goals)

PARTICIPANTS: Top-management authorities

WHAT DO THEY DO?Analyze current strategies or programs

Decide on new strategiesDecide assumptions and guidelines, which guidelines?First review of new strategic planAnalysisSecond review of new strategic planFinal review and approval

BENEFITS:

It is the framework for developing the budgetMeans of aligning Managers with corporate strategies

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Management Planning and Control SystemsCF2013

Strategic planning process

Diagrama

10

BUDGETING

STRATEGICPLANNING

BUDGETING

Strategic option A

Strategic option B

Strategic option C

Strategic option D

Strategicoption A

Strategicoption C

Strategic option A

Strategic option B

Strategic option C

Strategic option D

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Management Planning and Control SystemsCF2013

Strategic planning process

New strategies

11

Some useful technics, not always used:

Net present value of the project (NPV):The excess of the presentvalue of the estimated cash inflows over the amount of theinvestment required.

The internal rate of return (IRR) implicit in the relationshipbetween inflows and outflows

Payback period

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Management Planning and Control SystemsCF2013

Budget Preparation

Nature of a Budget

12

A budget estimates the profit potential of the corporationIt is stated in monetary terms $$$$It is detailed by month and by type of income/expense

Generally covers a period of one yearIt is reviewed and adjusted several times according to a corporationobjectivesIt is prepared usually six months before the start of the budgeted yearRequires the involvement of all areas of the companyIt is regularly one of the managers objectives

Actual financial performance is compared to budget.Updates of the budget are presented during the year. Usually after eachquarter.

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Management Planning and Control SystemsCF2013

Budget Preparation

Use of a budget

13

Fine-tune the strategic plan with better information

Inconsistencies in the organization showed upAssigns responsability to managers on the amounts of money that

they can spend

Evaluates performance

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Management Planning and Control SystemsCF2013

Budget Preparation

Content of an operating budget

14

+Revenues

-Production costs and costs of salesGross Margin

-Marketing expenses-Logistic expense

-General and administrative

-Research and developmentOperating Margin

-Income taxesNet income

PROFIT & LOSS STATEMENT (P&L)

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Management Planning and Control SystemsCF2013

Budget Preparation

Revenues

15

UNIT SALES X EXPECTED SELLING PRICES

ASSUMPTIONS:Economic assumptions such as Inflation, GDPPolitical assumptionsPrices impactsMarket growthProduction constraintsCannibalizationCompetition

SeasonalityHistorical dataProduction constraintsCustomers level of inventoriesImportant events (World cups, Olimpic games, etc)

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Management Planning and Control SystemsCF2013

Excel- Basics

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PIVOT TABLES (TABLA DINAMICA)

VLOOKUP (BUSCARV)(What I am looking for, where, what I want back, False(exact) True (close)The first column in which I am looking must be the column where the value will befound

IF (SI)

(Condition, value if the condition is true, value if the condition is false) Accepts only 7 conditions

SUMIF(SUMAR.SI)(range in which I will look, condition, column to sum)

TEXT TO COLUMNS(Data- Text to columns)

CONCATENATE(CONCATENAR)(cell 1, cell 2)Can also be used with the symbol &

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Management Planning and Control SystemsCF2013

Excel- Basics

Validation- Function

17

LEFT/ RIGHT(Cell, number of characters to get)

PROTECTION(FormatProtection)

CHARTS

REPLACE / FIND(Ctrl+F, Ctrl+B)

IFERROR(SI.ERROR)(Value, Value if there is an error)

VALIDATION(Data-Validation)

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Management Planning and Control SystemsCF2013

Excel- Basics

Verification and Validation

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Verification - does my model run correctly?Validation - does my model correspond to reality well?

Conduct random spreadsheet auditsBuild protection into spreadsheet

e.g., unlock any cell that is allowed to be changed (under Format->cell->protection) then protect spreadsheet.

Clearly document formulas and name cells. Spreadsheet should be readablefrom top to bottom.Design sheet BEFORE building itBuild in modulesHave someone else check overChange input parameters & observe model behavior

e.g., crank up mean to stress systemSanity checks on output - does it all make sense?

DO NOT FORGET THE FORMAT