Strategic planning
Planning is the designing of desired future and effective ways of bringing it. There are two types of planning that are short term planning which is budgeting and long-term which is strategic planning. This aspect of planning and control assumes increasing importance as businesses grow in size and complexity. The proprietor of a small business, aided by common sense or intuition, can usually gauge the efficiency of the business using plans.
He is near enough to each section to form accurate judgments and to act quickly in order to correct anything he considers to be unsatisfactory. As a business grows, however, the proprietor tends to become more and more remote from the factory floor as problems of policy increasingly claim his attention. He is therefore compelled to delegate much of his authority and at the same time to control his executives to ensure that each is performing efficiently and within the general policy which he has established. He finds it necessary for quantitative interpretations of performance, where previously his eye told him all he wanted to know.
We can define strategic planning as a systematic and formalized process for purpose of directing and controlling future operations towards desired objectives for a period extending one year. Strategic planning involves decision-making in determining which specific investment among the available should be accepted. This must a project that has positive results that are increasing profitability. It also involves the decision on how much will be spent and which portfolio should be accepted.
All this is evaluated in relation to contributing to achieving the corporate goals. There are many goals for organizations but the most important is the goal of profit maximization. The goal of profit maximization increases shareholder’s wealth. There strategic planning is always involved in reconciling the goals of survival and profit maximization through increasing the value of the firm which in turn increases the market value of ordinary shares and distributable profits. This increases the shareholders’ wealth.
Forecasting
While preparing a budget forecasting has been used in determining the figures be incorporated into the budget. Take for example the incorporation inflation in the budget. The management takes into account the changes in the purchasing power index. From the Riordan case, they have explained how they have taken into account inflationary measures. “High oil prices, and to a lesser extent the weaker dollar, are contributing to raised expectations for inflation. An expected decrease in the rate of increase in labor productivity is another factor that is contributing to higher inflation expectations. On the other hand, there are factors that are contributing to lower inflation expectations.
These include the fact that while it is expected that the rate of increase in labor productivity will decline, productivity gains are still relatively good or at least on-trend. Other important factors are the relatively weak labor market (wage gains should be small but on an increasing trend), the expectation that Federal Reserve policies will restrain inflation, strong competition in the retail market, and strong international economic competition. The factors all balance to forecasts for the inflation rate continuing to be less than 3.00%” this means that all the forecasted figures will be adjusted for 3%.
This will be as follows for most items (1+0.03) x forested figure.
Elements of master budgeting
The master budget is prepared after all other budgets have been prepared.this includes the profit and loss budget and balance sheet. When preparing the master budget some defined processes are followed. First, one begins with preparing the sales budget, which shows quantities of each product being sold and the intended selling price. it provides the total expected revenue to be generated by the sales. This becomes the foundation of all other budgets.
After the sales budget has been made the production budget is made. This involves the quantities that will be produced and it is normally the responsibility of the production manager. The main aim is to ensure that there are sufficient stocks to meet sales. Other budgets like the direct materials usage and direct materials purchase budgets are derived. Other expenses are also budgeted for. Then each department produces their budgets, which are amalgamated to produce the master budget.
The mater budget must have various elements, which include; budgeted profit and loss account. The profit and loss account contains sales derived from the sales budget, opening stock derived from the stock sheet, purchases from the purchase budget, direct labor from labor budget, and other expenses, which also are derived from various expenses budgets. Budgeted balance sheet; this is derived from various budgets including the strategic planning budget. It contains Land, buildings, and other fixed assets which are a result of capital budgeting, current assets like stock, debtors, and cash derived from the cash budget.
Assumptions of the cash budget
The objectives of the cash budget are to ensure that sufficient cash is available at all times to meet the level of operations. Cash budgets ensure that there is enough cash, which is not surplus use, and the excess is made for investments. The assumptions for the cash budget are many are based on the other budgetary assumptions. For example, the assumption that the sales will be ass estimated in the sales budget and actually the sales will be made in either cash or credit as shown in the sales budget. However, to detect errors in the assumptions due to incorrect information provided one needs to have controls. The controls may include follow-ups, aggressive advertising to keep the sales to the level required.
Concerns
In preparing the most recent budgets the managers will be concerned about a number of issues like inflation, incorrect assumptions, exchange rates for those, buying and selling outside the country, escalating of labor costs, and fluctuation of interest rates. In trying to solve these concerns, the manager will need to do the following;
- Inflation: Inflation affects anticipated cash inflows by an increase in prices of purchase. In order for one to incorporate inflation in the future, cash flows, the prices have to be adjusted for inflation for the purchases and sales.
- Labor costs: negotiation has to be made between employees representatives and the management so that future expected demands are captured in the budget.
- Fluctuating interest rates: the management needs to prepare them to negotiate for constant interest rates if not the hedge against it. This should be captured in the Budget.
- The issue of exchange rates fluctuations the management needs to they should negotiate for forwarding contracts.
References
Ask, U, Ax, C. and Johnson’s (1996); cost management in Sweden: from modern to post modern management accounting.
Drury c (1998):costing An introduction international ,business press Thomson Learning.
Demski, J.S. (1997) Analyzing the effectiveness of traditional standard costing variance model.
Drury C; (2000); Management and cost Accounting;5th edition ,business press Thomson Learning.
Simmonds,K, (1981) strategic management accounting, management accounting.
Wald J (2000) Biggs’s Cost accounting.; The English Language Book Society and MacDonald and Evans Ltd London & Plymouth.