Planning Control Financial

INTRODUCTION AND PURPOSE

Chapter 1 defined and discussed the manage - ment process-planning, organizing, staffing, leading, and controlling-as the basic foundation for comprehensive profit planning and control (abbreviated PPC for convenience). The emphasis in Chapter 1 was on management planning, organizing, and controlling because these are the management functions in which PPC is primarily applicable. To build upon Chapter 1, the purposes of this chapter are(a) to introduce the fundamentals of a comprehensive PPC program (b) to explain the primary application features of PPC, and (c) to discuss the main advantages and some application problems of PPC

OVERVIEW OF PPC

Comprehensive profit planning and control, as used in this book, is viewed as a process designed to help management effectively perform significant phases of the planning and control functions. The PPC model involves (1) development and application of broad and long-range objectives of the enterprise; (2) specification of enterprise goals; (3) development of a strategic long-range profit plan in broad terms; 4) specification of a tactical short-range profit plan detailed by assigned responsibilities (divisions, departments projects); (5) establishment of a system of periodic performance reports detailed by assigned responsibilities; and (6) development of follow-up procedures.

Throughout this book, we use a comprehensive view of PPC (also called budgeting) rather than the narrow, traditional view of a budget as a clerically derived set of quantitative schedules by an accountant following the stereotyped reporting formats used in external financial statements. In past years, there has also been a tendency to view the budget primarily as a mathematical model for an organization developed by computer programmers. These views completely overlook the three most relevant aspects of the PPC concept:

(a)PPC requires major planning decisions by management, (b) PPC entails pervasive management control activities, and (c) PPC recognizes many of the critical behavioral implications throughout the organization Viewed comprehensively, PPC is one of the more important approaches that has been developed to facilitate effective performance of the management process. The concepts and techniques of profit planning and control, as discussed in this book, have wide application in individual business enterprises, governmental units, charitable organizations, and virtually all group endeavors.

In modern-day businesses except in very small companies, it is virtually impossible for the top manager to have firsthand knowledge of all the relevant factors operating throughout a business. Nor can a single lower-level manager be expected to have the range of knowledge, experience, and competence to make all the decisions for the large segments of a company, either as a source of reliable information or as a participant in decision making. The quality of the judgments of the total management effort will continue to distinguish the better – managed and more successful companies. It is unlikely that clerical techniques, mathematical models, and simulations will substitute in major respect for managerial judgment in complex endeavors. These important tools, on the other hand, can be used to increase significantly the effectiveness of a management and to place managerial judgments on a more objective and informed foundation.

FUNDAMENTAL CONCEPTS OF PROFIT PLANNING AND CONTROL

The fundamental concepts of PPC include the underlying activities or tasks that must generally be carried out to attain maximum usefulness from PPC. These fundamentals have never been fully codified. As a basis for discussion, an outline of the fundamental concepts usually identified with PPC is given in Exhibit 2-1 Notice that this list does not include the mechanics of PPC, The mechanics of PPC involve such activities as the design of budget schedules, routine and repetitive computations, and clerical activities related to a PPC program.

Next, we discuss the application of a PPC program to the managerial planning and control functions, with special emphasis on the fundamentals listed in Exhibit 2-1 2.

MANAGEMENT PLANNING USING PPC

The fundamental purpose of management planning is to provide a feed forward process for operations and for control. The concept of feed forward is to give each manager guidelines for making operational decisions on a day-to-day basis. The approved plans constitute the primary element of feed forward.

Planning is generally recognized as the most difficult task facing the manager, and it is one that is very easy to procrastinate. Feedback is also an important ingredient of both replanning and control. The characteristics of the seventh fundamental listed above-continuous feed forward and feedback-are shown in Exhibit 2-2.

Planning rests upon the view that the future success of an entity can be| enhanced by continuous management action. It presupposes that an entity will be more successful, in terms of its broad objectives, with management actions to implement the feed forward process than it can if there is no activation by the management.

Ackoff suggest that the management of an entity, during the early-stage planning process, should develop three different types of "projections" as follows:

1 A reference projection (the static case) - this involves an attempt to specify what the future state of the entity would be if nothing new were done, that is, if there were no planned intervention by the management.

2 A wishful projection (the highly optimistic case) - this involves a specification of "hopes and dreams” as to the future state of the entity; that is, essential fulfillment of all of the aspirations of the entity.

3 A planned projection (the most likely case) - this involves a specification of how closely the entity can attain the wishful projection realistically. The planned Projection tends to be a realistic compromise between the reference and wishful projections. The planned projection specifies the planned objectives and goals (for example, the future state) to be attained during the time covered by the planning process.

Some companies use a fourth type of projection, sometimes referred to as a “stretch projection." A stretch projection or budget is one that is attainable but will really push people and facilities to the limit. The essence of a stretch budget is, “What can the company achieve if it pulls out all the stops and maximizes attainable performance?

The primary value in considering these different projections is to avoid including the elements of each as a mixture in the planned projection. Therefore, planning should start with a reference projection, coupled with a wishful projection, and conclude with a planning projection that represents realistic a management plan expressed in words and numbers.

Management planning is a continuous process because a planned projection can never be considered as the final and ultimate. It must be revised as conditions change and new information becomes available.

From another viewpoint, management planning may be approached with complete informality at one extreme, or with complete formality at the other extreme. Formality means the extent to which (1) the planning process is structured (or systematized), and (2) the planning decisions are expressed in the form of written plans and standardized financial results (as in a budget). Numerous studies have shown that the better-managed companies strike a reasonable balance on this point, with a strong tendency toward a systematic approach to planning and expression of the results in a comprehensive profit plan and related documents. However, it is important to understand the hazards of over formalization.

Planning decisions are interdependent and must be partitioned in conformity with the operational or organizational subdivisions of the entity. Therefore, planning follows the lines of authority and responsibility in the enterprise. This subdivision means that there is a subset of planning decisions (and a consequent plan) for each manager in the entity (i.e., for each area of responsibility) from the highest to the lowest management levels. It makes possible effective and integrated application of the feed forward concept.

Each facet of planning must encompass an evaluation, or reevaluation, of the relevant variables (both the controllable and no controllable variables, as shown in Exhibit 1-5) because they will have significant impacts on the planning of realistic objectives and goals. The development of enterprise objectives is the most fundamental level of decision making in the planning process. Objectives state the desired broad, long-range future state of the enterprise. For example, the objectives for a manufacturing company should relate to such basic, issues as breadth of product lines, quality of product, growth expectations, and responsibilities to the owners, economic expectations, employee relationships and attitudes, and social responsibilities. Objectives express the desired future state and the end results of entity activities.

The next planning level is known as goals, which represent the broad objectives brought into sharper focus by explicitly specifying (a) time dimensions for attainment, (b) quantitative measurements, and (c) subdivision of responsibilities. For example, goals would explicitly state such items as the following: Three years from now the new product being developed with be introduced; the return-on-investment goal for next year will be 15 percent; and the profit goal for product A is 5 percent of sales for next year (i.e. the budget now being developed).

To establish the foundation for attainment

...