Strategic Planning & Budget Preparation Chapters 7 & 8, Management Control Systems, 12th Ed., Anthony and Govindarajan

Definition of Strategic Planning “… the process of deciding on the programs that the organization will undertake and on the approximate amount of resources that will be allocated to each program over the next several years.” [Text, p. 300]

Strategic Planning Provides: A framework for the operational budget A training tool for managers A mechanism forcing long-term thinking A means of achieving goal congruence Must have senior-level management support Normally personality driven

What’s Included? Proposed new programs Ongoing programs Required programs/improvements

Proposed New Programs Normally, approved only by senior-level management Analysis methods vary Quantitative (Payback, NPV, IRR) Qualitative (“Gut feelings,” experience) Suggestion/submission timelines follow budgeting timelines Can be submitted by anyone

Ongoing Programs Can be approved at various levels based on management authority and span of control Analysis methods Mostly quantitative (value chain analysis, activity-based costing, NPV, IRR) Some qualitative Submission timelines follow budgeting timelines

Required Programs/Improvements Normally dictated or mandated by law or regulations Health, safety, etc. Unavoidable cost of doing business Little or no analysis required Attempt to minimize costs incurred Funding included in budget during normal timelines

Types of Budgets Capital budget Operational budget Other budgets Projects for more than one accounting cycle Usually for specific investment or program Each investment/program shown separately Operational budget Normally, one accounting cycle Stated in monetary units Sets objectives Provides for performance assessment Other budgets

Operational Budget It’s more focused than strategic planning! One year vs. several Approved amounts vs. approved projections It’s not a forecast! Specified amounts vs. estimates Approved vs. not approved

What Does It Show? Budget by Corporation, Business Unit, Responsibility Center, etc. Broken into Revenues, by type Costs, by type and responsible area Net Income Can be for specific time periods Months, Quarters, Year

Other Budgets Pro Forma Financial Statements Contingency Budget Statement of retained earnings Balance sheet Statement of cash flows Cash budget Cash collections schedule Cash disbursements schedule Contingency Budget

Budgeting Process Must by emphasized and supported by senior-level managers (e.g., CEO) Reviews and approval by line managers Should be inclusive People need to “buy in” Should be reasonable Not punitive Revisable, as needed