THE FINANCIAL PLANNING PROCESS

Most people want to handle their finances so that they get full satisfaction from each available dollar. Typical financial goals include such things as a new car, a larger home, advanced career training, extended travel, and self-sufficiency during working and retirement years.

To achieve these and other goals, people need to identify and set priorities. Financial and personal satisfaction are the result of an organized process that is commonly referred to as personal money management or personal financial planning.

Personal financial planning is the process of managing your money to achieve

personal economic satisfaction. This planning process allows you to control your financial situation. Every person, family, or household has a unique financial position, and any financial activity therefore must also be carefully planned to meet specific needs and goals.

A comprehensive financial plan can enhance the quality of your life and increase your satisfaction by reducing uncertainty about your future needs and resources. The specific advantages of personal financial planning include

Increased effectiveness in obtaining, using, and protecting your financial resources throughout your lifetime. Increased control of your financial affairs by avoiding excessive debt, bankruptcy, and dependence on others for economic security. Improved personal relationships resulting from well-planned and effectively communicated financial decisions. A sense of freedom from financial worries obtained by looking to the future, anticipating expenses, and achieving your personal economic goals.

We all make hundreds of decisions each day. Most of these decisions are quite simple and have few consequences. Some are complex and have long-term effects on our personal and financial situations. The financial planning process is a logical, six-step procedure:

(1) determining your current financial situation (2) developing financial goals (3) identifying alternative courses of action (4) evaluating alternatives (5) creating and implementing a financial action plan, and (6) reevaluating and revising the plan.

Step 1: Determine Your Current Financial Situation

In this first step of the financial planning process, you will determine your current financial situation with regard to income, savings, living expenses, and debts. Preparing a list of current asset and debt balances and amounts spent for various items gives you a foundation for financial planning activities.

Step 2: Develop Financial Goals

You should periodically analyze your financial values and goals. This involves identifying how you feel about money and why you feel that way. The purpose of this analysis is to differentiate your needs from your wants.

Specific financial goals are vital to financial planning. Others can suggest financial goals for you; however, you must decide which goals to pursue. Your financial goals can range from spending all of your current income to developing an extensive savings and investment program for your future financial security.

Step 3: Identify Alternative Courses of Action

Developing alternatives is crucial for making good decisions. Although many factors will influence the available alternatives, possible courses of action usually fall into these categories:

Continue the same course of action. Expand the current situation. Change the current situation. Take a new course of action. Not all of these categories will apply to every decision situation; however, they do represent possible courses of action. Creativity in decision making is vital to effective choices. Considering all of the possible alternatives will help you make more effective and satisfying decisions.

Step 4: Evaluate Alternatives

You need to evaluate possible courses of action, taking into consideration your life situation, personal values, and current economic conditions. Consequences of Choices. Every decision closes off alternatives. For example, a

decision to invest in stock may mean you cannot take a vacation. A decision to go to school full time may mean you cannot work full time. Opportunity cost is what you give up by making a choice. This cost, commonly referred to as the trade-off of a decision, cannot always be measured in dollars.

Decision making will be an ongoing part of your personal and financial situation. Thus, you will need to consider the lost opportunities that will result from your decisions.

Uncertainty is a part of every decision. Selecting a college major and choosing a career field involve risk. What if you dont like working in this field or cannot obtain employment in it?

Other decisions involve a very low degree of risk, such as putting money in a savings account or purchasing items that cost only a few dollars. Your chances of losing something of great value are low in these situations.

In many financial decisions, identifying and evaluating risk is difficult. The best way to consider risk is to gather information based on your experience and the experiences of others and to use financial planning information sources.

Financial Planning Information Sources

Relevant information is required at each stage of the decision-making process. Changing personal, social, and economic conditions will require that you continually supplement and update your knowledge.

Step 5: Create and Implement a Financial Action Plan In this step of the financial planning process, you develop an action plan. This requires choosing ways to achieve your goals. As you achieve your immediate or short-term goals, the goals next in priority will come into focus.

To implement your financial action plan, you may need assistance from others. For example, you may use the services of an insurance agent to purchase property insurance or the services of an investment broker to purchase stocks, bonds, or mutual funds.

Step 6: Reevaluate and Revise Your Plan

Financial planning is a dynamic process that does not end when you take a particular action. You need to regularly assess your financial decisions. Changing personal, social, and economic factors may require more frequent assessments.

When life events affect your financial needs, this financial planning process will provide a vehicle for adapting to those changes. Regularly reviewing this decision-making process will help you make priority adjustments that will bring your financial goals and activities in line with your current life situation.

Illustration of Financial Planning Process

Financial Planning

Financial planning is a very important element in determining ones success in attaining financial security, growth and wealth whether it is personal or business related. In order to make great progress, you must be able to keep track of your cash and measure your progress. Here are some tips to make a financial plan; - List your goals. Decide where you want to be in your career, finances, and investment in the short term and long term. - Create a budget that indicates your cash flows such as your salary, other incomes, expenses, debts or loans, taxes, savings and anything else that affects the money you have. By establishing these figures, you can determine your financial position and make forecast for the future according to your goals. - Be consistent in keeping to your budget as well as be flexible and ready to review it when changes come. The Objectives of Corporate Planning and Budgeting This outlined the objectives of an effective system of budgeting and corporate planning in order for a company to maximize its potential within the marketplace. Definition Finance departments are always under pressure, the more so in a climate of economic uncertainty. Increasing accountability and shorter budgeting cycles result in organizations seeking new ways to manage the budgeting process and developing solutions that meet the exact needs of their clients as well as match their own business attributes. Corporate planning is defined as the process of drawing up detailed action plans in order to achieve the aims and objectives of an organization. It takes into account organizational resources and the environment within which a company operates. Corporate planning is the responsibility of senior management, and there should be a structured approach to achieving objectives and implementing corporate strategy. Good corporate planning and budgeting should reduce the cost of the overall budgeting process and the time taken to complete the budgeting cycle, as well as improve both data integrity and security. Corporate planning should also take into account corporate or enterprise objectives, structures, and functions. Results and performance solutions are built into a corporate business structure, to record actual business data based on resulting value, capital worth, and performance costs. E-budgeting solutions are becoming more popular as they completely automate the development of a Companys budget and forecast. Web-based enterprise budgeting systems are centrally administered and provide flexible tools for budget planners, allowing constant monitoring, updates, and modeling. They also free up time in the finance department for strategic decision-making rather than paper-pushing. Budgeting is about responsible money management. The overriding purpose of a budget is to stop

overspending, which can be done by monitoring cash flow, and to prevent any existing or future debt from becoming an unmanageable mess. Good budgeting ensures that a companys cash flow is monitored and assessed regularly, that funds are available for payments out, and expansion, and that the business does not spend beyond its capabilities. Companies should assess whether their spending is growing and why, and identify measures to reduce it. It is vital to ensure that the budget is in alignment with corporate objectives, and it is useful to measure budgets by activity and/or project, and not just by department. Advantages Strong financial planning ensures that a company can keep track of revenues, expenditure, cash flows, capital, and investments, as well as make accurate financial forecasts. Good budgeting calculates capital needed for business organization, human resources, facilities and equipment, and management strategy. Corporate planning should assess, monitor, and prioritize liabilities, focus on profitable opportunities, and involve regular reassessment of the companys business practices. It also helps to locate all of a companys concerns, such as money, products, employees, systems, and customers, less than one roof. Disadvantages Rigid corporate and financial planning may be inappropriate for some smaller firms, which may benefit from a more fluid approach. Larger corporations risk becoming fixed in their outlook by adhering strictly to planningits important to maintain a flexible approach and reassess plans if necessary. Action Checklist Define the goals and communicate a clear company-wide strategy. Customize plans and models to fit the business needs. Spend less time on processes and more on analysis. Enable participation by everyone involved in the company. Streamline workflow management. Dos and Donts Do Ensure that the traditional financial view generated by your financial system reflects a robust cost model. Develop a portfolio inventory listing all existing applications and systems.

 Identify the business owner of each application or project. Dont Dont forget to review and revise budgets on a regular basis. Dont view corporate plans as fixed eternally. Strategic planning Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues through which it can pursue a particular course of action. Generally, strategic planning deals with at least one of three key questions:[1] 1. "What do we do?" 2. "For whom do we do it?" 3. "How do we excel?" In many organizations, this is viewed as a process for determining where an organization is going over the next year ormore typically3 to 5 years (long term), although some extend their vision to 20 years. Key components The key components of 'strategic planning' include an understanding of the firm's vision, mission, values and strategies. (Often a "Vision Statement" and a "Mission Statement" may encapsulate the vision and mission).

Vision: outlines what the organization wants to be, or how it wants the world in which it operates to be (an "idealized" view of the world). It is a long-term view and concentrates on the future. It can be emotive and is a source of inspiration. For example, a charity working with the poor might have a vision statement which reads "A World without Poverty."

Mission: Defines the fundamental purpose of an organization or an enterprise, succinctly describing why it exists and what it does to achieve its vision. For example, the charity above might have a mission statement as "providing jobs for the homeless and unemployed".

Values: Beliefs that are shared among the stakeholders of an organization. Values drive an organization's culture and priorities and provide a framework in which decisions are made. For example, "Knowledge and skills are the keys to success" or "give a man bread and feed him for a day, but teach him to farm and feed him for life". These example maxims may set the priorities of self-sufficiency over shelter.

Strategy: Strategy, narrowly defined, means "the art of the general".[citation needed] - a combination of the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there. A strategy is sometimes called a roadmap - which is the path chosen to plow towards the end vision. The most important part of implementing the strategy[citation needed] is ensuring the company is going in the right direction which is towards the end vision.

Organizations sometimes summarize goals and objectives into a mission statement and/or a vision statement. Others begin with a vision and mission and use them to formulate goals and objectives. Many people mistake the vision statement for the mission statement, and sometimes one is simply used as a longer term version of the other. However they are distinct; with the vision being a descriptive picture of a desired future state; and the mission being a statement of a rationale, applicable now as well as in the future. The mission is therefore the means of successfully achieving the vision. This may be in the business world or the military. For an organization's vision and mission to be effective, they must become assimilated into the organization's culture. They should also be assessed internally and externally. The internal assessment should focus on how members inside the organization interpret their mission statement. The external assessment which includes all of the businesses stakeholders is valuable since it offers a different perspective. These discrepancies between these two assessments can provide insight into their effectiveness. A vision statement is a declaration of where you are headedyour future state - to formulate a picture of what your organization's future makeup will be, and where the organization is headed. Strategic planning process There are many approaches to strategic planning but typically one of the following approaches is used:

Situation-Target-Proposal

Draw-See-Think-Plan

Situation - evaluate the current situation and how it came about. Target - define goals and/or objectives (sometimes called ideal state)

Draw - what is the ideal image or the desired end state? See - what is today's situation? What is the gap from ideal and why? Think - what specific actions must be taken to close the gap between today's situation and the ideal state?

Path / Proposal - map a possible route to the goals/objectives

Plan - what resources are required to execute the activities?

Tools and approaches Among the most useful tools for strategic planning is SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats). The main objective of this tool is to analyze internal strategic factors, strengths and weaknesses attributed to the organization, and external factors beyond control of the organization such as opportunities and threats. Other tools include:

Balanced Scorecards, which creates a systematic framework for strategic planning; Scenario planning, which was originally used in the military and recently used by large corporations to analyze future scenarios. PEST analysis (Political, Economic, Social, and Technological) STEER analysis (Socio-cultural, Technological, Economic, Ecological, and Regulatory

factors)

EPISTEL (Environment, Political, Informatic, Social, Technological, Economic and Legal). ATM Approach (Antecedent Conditions, Target Strategies, Measure Progress and Impact). Once an understanding of the desired end state is defined, the ATM approach uses Root Cause Analysis (RCA) to understand the threats, barriers, and challenges to achieving the end state. Not all antecedent conditions identified through RCA are within the direct and immediate control of the organization to change. Therefore, a review of organizational resources, both human and financial, are used to prioritize which antecedent conditions will be targeted. Strategies are then developed to target the prioritized antecedent conditions. Linking strategies to antecedent conditions ensures the organization does not engage in activity traps: feel good activities that will not lead to desired changes in the end state. Once a strategy is defined then performance measures and indicators are sought to track progress toward and impact on the desired end state.

Situational analysis When developing strategies, analysis of the organization and its environment as it is at the moment and how it may develop in the future, is important. The analysis has to be executed at an internal level as well as an external level to identify all opportunities and threats of the external environment as well as the strengths and weaknesses of the organizations. There are several factors to assess in the external situation analysis: 1. Markets (customers) 2. Competition 3. Technology 4. Supplier markets 5. Labor markets 6. The economy 7. The regulatory environment It is rare to find all seven of these factors having critical importance. It is also uncommon to find that the first two - markets and competition - are not of critical importance. (Bradford "External Situation - What to Consider") Analysis of the external environment normally focuses on the customer. Management should be visionary in formulating customer strategy, and should do so by thinking about market environment shifts, how these could impact customer sets, and whether those customer sets are the ones the company wishes to serve. Analysis of the competitive environment is also performed, many times based on the framework suggested by Michael Porter. With regard to market planning specifically, researchers have recommended a series of action steps or guidelines in accordance to which market planners should plan.

Goals, objectives and targets Strategic planning is a very important business activity. It is also important in the public sector areas such as education. It is practiced widely informally and formally. Strategic planning

and decision processes should end with objectives and a roadmap of ways to achieve them. The goal of strategic planning mechanisms like formal planning is to increase specificity in business operation, especially when long-term and high-stake activities are involved. One of the core goals when drafting a strategic plan is to develop it in a way that is easily translatable into action plans. Most strategic plans address high level initiatives and overarching goals, but don't get articulated (translated) into day-to-day projects and tasks that will be required to achieve the plan. Terminology or word choice, as well as the level a plan is written, are both examples of easy ways to fail at translating your strategic plan in a way that makes sense and is executable to others. Often, plans are filled with conceptual terms which don't tie into day-to-day realities for the staff expected to carry out the plan. The following terms have been used in strategic planning: desired end states, plans, policies, goals, objectives, strategies, tactics and actions. Definitions vary, overlap and fail to achieve clarity. The most common of these concepts are specific, time bound statements of intended future results and general and continuing statements of intended future results, which most models refer to as either goals or objectives (sometimes interchangeably). One model of organizing objectives uses hierarchies. The items listed above may be organized in a hierarchy of means and ends and numbered as follows: Top Rank Objective (TRO), Second Rank Objective, Third Rank Objective, etc. From any rank, the objective in a lower rank answers to the question "How?" and the objective in a higher rank answers to the question "Why?" The exception is the Top Rank Objective (TRO): there is no answer to the "Why?" question. That is how the TRO is defined. People typically have several goals at the same time. "Goal congruency" refers to how well the goals combine with each other. Does goal A appear compatible with goal B? Do they fit together to form a unified strategy? "Goal hierarchy" consists of the nesting of one or more goals within other goal(s). One approach recommends having short-term goals, medium-term goals, and long-term goals. In this model, one can expect to attain short-term goals fairly easily: they stand just slightly above one's reach. At the other extreme, long-term goals appear very difficult, almost impossible to attain. Strategic management jargon sometimes refers to "Big Hairy Audacious Goals" (BHAGs) in this context. Using one goal as a stepping-stone to the next involves goal sequencing. A person or group starts by attaining the easy short-term goals, then steps up to the medium-term, then to the long-term goals. Goal sequencing can create a "goal stairway". In an organizational setting, the organization may co-ordinate goals so that they do not conflict with each other. The goals of one part of the organization should mesh compatibly with those of other parts of the organization.

Business analysis techniques Various business analysis techniques can be used in strategic planning, including SWOT analysis, PEST analysis, STEER analysis, and EPISTEL.

SYSTEM:

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System Pyramid Successful and sustainable transformation efforts require leaders who know how to manage change. At the simplest level, managing change means:

Knowing what you want to accomplish and creating a compelling vision that motivates others Understand stakeholders and communicating with them early, consistently and often Managing the varying levels of support and resistance that will inevitably emerge in response to any change Change Leadership is a skillset that is required throughout any deployment, from planning and executing to sustaining improvements. Change Leadership is essential for both high level executives and program leaders, who are responsible for setting the vision, communicate the vision and make the changes happen.

Project Planning a Step by Step Guide By Duncan Haughey, PMP

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The key to a successful project is in the planning. Creating a project plan is the first thing you should do when undertaking any kind of project. Often project planning is ignored in favour of getting on with the work. However, many people fail to realize the value of a project plan in saving time, money and many problems. This article looks at a simple, practical approach to project planning. On completion of this guide, you should have a sound project planning approach that you can use for future projects. Step 1: Project Goals A project is successful when the needs of the stakeholders have been met. A stakeholder is anybody directly, or indirectly impacted by the project. As a first step, it is important to identify the stakeholders in your project. It is not always easy to identify the stakeholders of a project, particularly those impacted indirectly. Examples of stakeholders are:

The project sponsor. The customer who receives the deliverables. The users of the project outputs. The project manager and project team.

Once you understand who the stakeholders are, the next step is to find out their needs. The best way to do this is by conducting stakeholder interviews. Take time during the interviews to draw out the true needs that create real benefits. Often stakeholders will talk about needs that aren't relevant and don't deliver benefits. These can be recorded and set as a low priority. The next step, once you have conducted all the interviews, and have a comprehensive list of needs is to prioritize them. From the prioritized list, create a set of goals that can be easily measured. A technique for doing this is to review them against the SMART principle. This way it will be easy to know when a goal has been achieved. Once you have established a clear set of goals, they should be recorded in the project plan. It can be useful to also include the needs and expectations of your stakeholders. This is the most difficult part of the planning process completed. It's time to move on and look at the project deliverables. Step 2: Project Deliverables Using the goals you have defined in step 1, create a list of things the project needs to deliver in order to meet those goals. Specify when and how each item must be delivered. Add the deliverables to the project plan with an estimated delivery date. More accurate delivery dates will be established during the scheduling phase, which is next.

Step 3: Project Schedule Create a list of tasks that need to be carried out for each deliverable identified in step 2. For each task identify the following:

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The amount of effort (hours or days) required to complete the task. The resource that will carry out the task.

Once you have established the amount of effort for each task, you can work out the effort required for each deliverable, and an accurate delivery date. Update your deliverables section with the more accurate delivery dates. At this point in the planning, you could choose to use a software package such as Microsoft Project to create your project schedule. Alternatively, use one of the many free templates available. Input all of the deliverables, tasks, durations and the resources who will complete each task. A common problem discovered at this point, is when a project has an imposed delivery deadline from the sponsor that is not realistic based on your estimates. If you discover this is the case, you must contact the sponsor immediately. The options you have in this situation are:

Renegotiate the deadline (project delay). Employ additional resources (increased cost). Reduce the scope of the project (less delivered).

Use the project schedule to justify pursuing one of these options. Step 4: Supporting Plans This section deals with plans you should create as part of the planning process. These can be included directly in the plan. Human Resource Plan Identify by name, the individuals and organizations with a leading role in the project. For each, describe their roles and responsibilities on the project. Next, describe the number and type of people needed to carry out the project. For each resource detail start dates, estimated duration and the method you will use for obtaining them. Create a single sheet containing this information. Communications Plan Create a document showing that needs to be kept informed about the project and how they will receive the information. The most common mechanism is a weekly or monthly progress report, describing how the project is performing, milestones achieved and work planned for the next period. Risk Management Plan Risk management is an important part of project management. Although often overlooked, it is important to identify as many risks to your project as possible, and be prepared if something bad happens. Here are some examples of common project risks:

Time and cost estimates too optimistic.

Customer review and feedback cycle too slow. Unexpected budget cuts. Unclear roles and responsibilities. Stakeholder input is not sought, or their needs are not properly understood. Stakeholders changing requirements after the project has started. Stakeholders adding new requirements after the project has started. Poor communication resulting in misunderstandings, quality problems and rework. Lack of resource commitment.

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Risks can be tracked using a simple risk log. Add each risk you have identified to your risk log; write down what you will do in the event it occurs, and what you will do to prevent it from occurring. Review your risk log on a regular basis, adding new risks as they occur during the life of the project. Remember, when risks are ignored they don't go away. Congratulations. Having followed all the steps above, you should have a good project plan. Remember to update your plan as the project progresses, and measure progress against the plan.

Diagram of a Project Planning

Planning processes Three main areas. This, the initial section, sets out some helpful ways to think about the overall planning systems. It sets some guidelines for a minimal planning system and notes the issues of legitimacy and power associated with setting this up. When you have read this section, your should have had the opportunity to rethink your view of what constitutes 'a strategy'. You will see where very general oversight on the business environment - such as is involved in scenario planning - fits in with these notions.

The second chapter is given over to the practical issues of how to apply these general notions. There are, of course, many methods which can be applied. This Chapter offers detailed insight into one particular route which has been proven to work. The third and concluding chapter has two parts to it. The first of these is concerned with scenario generation. The second considers the Forum process, both in respect of what it has achieved and what it may well do next. The section concludes with a range of issues that emerged from the scenarios, items which, when you come to apply this work, may serve as 'hooks' for business issues in any strategy processes in which you may become engaged. Planning for planning. Successful planning consists of doing the right things in the right order. No one of these things appears particularly revolutionary when seen on its own, but taken together; they create a momentum by which great things can be achieved. There is, therefore, a design task through which these steps are identified and put in place. We are going to begin by assessing the scope of 'planning' so that we can identify the field in which this task is to be carried out. We are then going to look at the specific issues which are solved during the more strategic, general aspects of this range of activities. We shall see that this is a field in which a range of different kinds of question collide and require simultaneous solutions; and in which issues of power and legitimacy can create additional tensions. We will then resolve this set of issues. The word 'planning' means different things to different people. There tend to be four classes into which these things can be sorted.

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There is one-off project planning, by which the ground work for a specific activity is defined and the project tracked. We are not going to address this issue.

Single-project planning uses many of the techniques of analysis, tracking and assessment that are applied to the short term cash and operational management of a firm. Treasury planning, coping with stock and collectibles, setting criteria and targets are all crucial features of commercial life that have their counterparts in public sector organizations. These contain some of the most important levers for change, which we review in a further section.

Organizations of any scale will always have some form of medium term planning, in which the definite intentions of the organization are set out and the resource flows which are necessary are reconciled. These entities, which we will call 'business plans' throughout this text, are always highly numerical in their focus and often represent the hard-fought balance that has been achieved between rival claimants for scarce resource.

Business plans are based around managerial insight into the operating environment. Some aspects of this are static, but managers wish to change them: they want to increase the quality of their service, for example. Others are rapidly changing and managers are eager to know whether this matters and how they might respond. The analysis that underpins this may be intuitive or explicit and may be the product of one head or many. The linkage between the insights that it generates and the actions which it proposes may be more or less direct.

The planner on whom the responsibility for action may descend has, therefore, a great deal of

ground work which it is often necessary to undertake before it is possible to design a process. This may be no more than a beginning, middle and an end of a straightforward project, something which can be specified completely from the outset. It may, by contrast, consist of a gradual system of iteration, in which the planner learns the full extent of what the organization needs and the organization comes to recognize the legitimacy of the points which the planner is trying to raise. The overall aim of a planning process is to understand the activity and its operating environment and, through this understanding, to be able to see threats and opportunities more clearly than had previously been the case. Where the system has deviated from what was expected, corrective action can be taken. Where areas of ignorance are identified as, perhaps, concealing areas of importance, then exploratory work can be undertaken. When people talk about "strategy", they mean the adaptive steps which they propose to take in order to reach a good match between the organization and the circumstances in which it finds itself. Naturally, this begs a number of questions. One of the chief difficulties is that a number of issues have to be solved in parallel, none of which are entirely independent of the other.

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The people who are making judgments need to have a good overview of the assets, current aims and limitations of the organization. It can be extraordinary how little managers know about their cost structure, for example: British Leyland is now known to have sold the Mini at a variable cost loss for over ten years. Nuclear electricity was generated and sold at a loss for decades in both the UK and France. It is, therefore, necessary to understand the present in order to review strategy.

Managers need to decide what constitutes both the question that they are trying to answer and also to find the response to it. This is not always obvious. Shareholder value, for example, appeared to be an innocuous, self-evident but somewhat obscure idea. It is, of course, the name given to the idea that managers must generate returns from the capital which is entrusted to them which are at least as attractive as those which the shareholder could gain by investing in a portfolio of stock. If companies have large areas of their business which destroy shareholder value (areas which perform less well than this objectively-established target) then a predator could buy them, terminate the loss-making activities and make a capital gain. Generating shareholder value (or creating sustainable advantage, or maintaining a risk-resilient position) are all examples of ideas which offer insight and which focus analysis. Even these, however, do not deliver 'an answer' but merely point up areas of strength and weakness.

Managers may have a set of declared aims - such as that the company is technically innovative, predatory, cost conscious or the like - which set themselves up as the criteria. Once again, these may be excellent criteria, but only in their full context, as a part of a set of criteria which answer to a unifying perspective.

There are questions which revolve around what is attainable in terms of the policy levers which are open to managers. Whilst it is possible to say that a key aim is to be leader in technology, the levers by which to make this occur are often indirect. Failure to assess the system that needs to be manipulated - building links to the academic world, convincing shareholders of this view, developing people, understanding the technology-relevant marketplace and the like - will lead to money being thrown at the problem, with the probability of failure ranking high.

An organization which is just starting out on planning may be somewhat nervous of the route

on which they are set: might it run away with them? Might it not cause a distraction of attention? In parallel to this, it is seldom the case that everyone in the organization shares the view that a review of fundamental issues is at all desirable. Issues such as these all appear obvious when set out in cold text. Busy people, when confronted with complex issues that are always embedded in equally complex systems, themselves poorly understood, may either tend to cut the Gordian knot or delegate the issue to a planner or study group. This brings forward two further difficulties. The planning group may have been delegated a part of the issue and may find that it is necessary to redefine matters or to extend their scope. The first problem is that this can be regarded with some suspicion. Bringing the management group along with the analysts can become a significant task. The second difficulty is that of coping with the new balance of power which this delegation creates. If the CEO or main board decides to think about 'strategy', then that is their right. If a new unit starts to undertake the same task, then it can be viewed in a negative light, particularly by subsidiary organizations. If the planning group comes its conclusions without the participation of the business units, then it is acting in some ignorance and is vulnerable to criticism. It can, however, find it hard to develop the trust and confidence of semi-independent unit managers, who can see it as the agent of senior management, grinding all manner of axes just out of sight. Strategic planning is, therefore, both a complex analytical and social process. It is foolish to try to deliver a single answer in a single step. What is needed is an endorsed, gradualist process, in which the various layers and flows of assessment are well understood by all. The intention should be to generate a smooth improvement in the general understanding which managers and others have of their operating environment, of the organization and of the changes which may be occurring to both of these. There are always tough decisions to be made. Experienced managers know, however, that issues which have been talked through and thoroughly assessed before they reach a crisis tend to have developed a momentum in which they almost solve themselves. Many small decisions, many options developed in advance, deploy themselves at times of stress such that the issues soft lands. It is the unconsidered, unexpected or enforced issue which creates the difficult choices.

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The importance of process.

Strategic planning can be seen as an investigatory, research-like process. It operates through an established process, feeding off the products of previous cycles and feeding into the next. It acts as the means of identifying the broad, general issues which need to be taken through to specific, tactical solutions, expressed in the business plan and in the operating criteria against which tactical matters take place. Its key feature is that it generates understanding.

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Figure 1: Extending corporate understanding. At the heart of what is going on is the development of what has been called the management model. This is the view that people have of, as Figure 1 suggests, 'how it all works and what we are going to do about it'. This model, which is always there to some degree, more or less shared, in a more or less analytical form, creates three outcomes:

Immediate actions, which link into the 'harder' planning process. The identification of specific areas in which exploration may prove profitable. Specific work is set in train to answer these questions: "if we need an acquisition to gain access to the US marketplace, then which ones should we short list; and how much will it cost?"

The acceptance that there are issue of importance about which the managers do not know enough even to specify the issues. They ask for a broad exploration of what is going on in these areas. As we shall see,, this is the key area for scenario development.

This approach has the huge advantage of being easy to understand and open to objective management. It can be 'miniaturized' so as to serve as the template for a workshop. By contrast, it can be the abstract background against which a complex planning process is designed and carried out. Issues which have been delegated for study from such a process, however, carry with them the authority of the group which set them up. People know when and how they are to be used. The people to who the work has been delegated have a clear remit against which to work. Managers understand why a group is offering them a presentation on something which they would otherwise find obscure and out of context. One should recall that there are two very distinct ways in which people know things. One form such as repairing a car or writing a computer program - can be written down, taught and directly transferred. We like to pretend that much of our management tasks are open to this sort of analysis. In practice, however, judgment and broad understanding are much more like the other sort of knowledge, which is tacit and difficult to transmit. You cannot tell someone how to swim, paint a picture or take business decisions and expect them to pick this up: rather, they learn from experience and from working in a team. Such knowledge bases gain more from helpful directions which make sense of and pull together disparate and unconnected aspects of their experience than from explicit teaching. The management model is brought into being by analogy, analysis, information and discussion, all of it calling upon the tacit, hard-to-express knowledge on which complex judgment is based. It follows that activities which are intended to help people improve their management model must take account of this fact. The answers cannot be written down, taught or

derive through feats of logic and analysis, for whether true or not, this material will only become a part of the management model when it has been tested and digested, linked into other knowledge and used under safe conditions. The operational planning cycle. We see, therefore, that it is necessary to iterate and to take time to develop and propagate ideas. Planning has much in common with gardening. There is a time to plant and a time to harvest. Many seeds do not grow and many crops yield unexpected fruit. The soil improves with care. There are problem plants, weeds, pests and diseases with which to cope. One can over-extend this analogy. Nevertheless, a predictable cycle of sowing, growth and harvest helps all who are involved. Everyone can see what is going on. They can see what will be required from them, when it will be needed and for what it will be used. The linkage between the various layers of planning - with which we began - can be made explicit. People make space in their diaries for this. Ideas are given a conduit through which they can flow into the system. A typical cycle has an annual element to it (and beneath this, quarterly or more finely divided systems of scrutiny). It also has a rather longer, perhaps biennial system. The annual cycle revolves around the review processes in the organization, business plan and whatever stands in the stead of an annual report to shareholders, supervisory agencies or the public. Some industries, which have to report to a regulator, will have an additional way station in this loop. There are, of course, many ways in which the various way stations can be arranged around this annual loop, but the following is something of a natural flow, which begins when senior management issue the business plan to the organization.

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Targets and criteria are set for the operating units. These will take most of their substance from the business plan. They may also evoke broader issues, which are identified from outside of the annual cycle.

Quarterly and other assessment processes run against these criteria. Around mid-year, the business units begin to develop their contribution to the next overall business plan. The integrating functions begin to pull together financial, human resource and other flows.

The operating units' plans are brought together around the third quarter and subject to scrutiny and critique, both in respect of the overall source and disposition and with due regard to the evolving portfolio of the organization. Plans are trimmed back, extended, massaged and in other ways made to fit the overall template, such that a single corporate overview is created which offers a snapshot of honest intentions for the next few years. The extent of 'few' depends on the life cycle of the activity, but is, for medium-sized organizations, typically three to seven years, heavily weighted towards the shorter period.

Sensible organizations offset the creation of their annual results and their business plan. Others find this operationally impossible: either way, the cycle closes with an internal assessment of the balances which the organization is able to strike and a report on as much of this as the organization chooses or is required to report externally.

This four step annual process is replicated, in greater or lesser complexity, in virtually all established organizations of any scale. It is well understood. It is also managed by people who have

formal responsibility for doing so. Their role is regarded as entirely legitimate by the rest of their organization.

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The broader process.

We suggested that there might be a broader, perhaps biennial system which supplemented this flow. This is not, however, nearly so commonly implemented or so closely managed. Where it is undertaken, with more or less formality, those given charge over it may feel less sure in their task. They may have less legitimacy. We have already discussed why this may be the case. The biennial cycle has two elements to it. Both run in parallel and are, in mature organizations, continuous activities which have alternate, biennial reporting points. One of these is an open-ended investigation of the nature of the operating environment. The chief 'probes' of this are those who are most involved with it, but their tacit knowledge may need to be codified and it may need to be supplemented by detailed or integrating analysis. Their management model, in the terms of the preceding section, may need to be articulated. The second of these activities, which entwines heavily with the first, is concerned with choice. That is to say, if the analysis of the operating environment creates a view of "how it all works" then it is important to be able to say "what we are going to do about it". The first set of analysis leads to the use of tools, such as scenarios and the second, to strategic choice. Neither, on the whole, led to action. This tends to follow further analysis - as set out in Figure 1 - and tends to be embodied within the activities which the operational units themselves undertake. A few big, dramatic activities may be triggered by and managed from the center, but these are exceptional. It is far more common to see the business gradually swing around to take account of new realities through many small accommodations.

Figure 2: Three layers in an idealized planning process. The three layers of an 'ideal' planning process are reflected in Figure 2. The outer loop has the two way stations which we have discussed on either horizontal extreme. On the right, we find the analysis procedures that create integration and insight. The definition of the issues and the choices

open to the organization are located on the extreme left. In between these, general thoughts are - at the bottom - turned into strategic issues through discussion with informed people. At the top of the outer loop, strategic ideas give rise to instructions, criteria and the setting of balances; and trigger further areas of exploration. The middle loop represents the operational planning process. On receipt of the messages, criteria and targets, the operational units go about the four stage process which was discussed early. (In the interests of clarity we have omitted two elements of this: building a draft business plan - which would go at 2 o'clock on the inner loop - and creating a report to the stakeholders, which would probably best be placed at about 11 o'clock on the same loop.) Inside of this loop lie the procedures of tracking and consolidation, without which no complex activity can function. The remainder of this text will focus on the outer loop and its interactions with the operational aspects of the organization. The operational planning procedures will be taken as read. At issue is, therefore, how to carry out four primary activities:

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How to analyze the existing and changing operational environment. How to bring this analysis to bear on the expert, operational people both so that they learn from this and so that they can inject their views into the process.

How to tease out the issues and opportunities which require a response and which offer the organization some choice.

Finally, how to embed the choices that are made into either delegation to 'further study' or else to action. One of the key issues is how to embody desired choices in the often very indirect levers which senior managers have at their disposal. The criteria which are set will, for example, have strong and often perverse effects unless their full ramifications are understood. This is a critical area, but it is also highly specific to the organization in question. General observations are all that it is helpful to make; but it is usually the case that senior managers of complex organizations have better insight into this area than virtually any others.

It is worth noting, once again, that each of these issues depends strongly on what has gone before. In the analogy with which we began, if the planning garden is well tended, then the gardener can focus on high level and subtle goals. If, by contrast, it is a weed-smothered wilderness, then this limits development to some rather basic tasks. Equally, if the garden is laid out - if the planning process is installed and well understood - then cultivation becomes all-important. If the paths have yet to be laid, however, then the design task must be completed and agreed before much more can be achieved. The advantages to be won from a full planning system. It is worth noting the advantages which flow from this outer loop. The management model is subject to a continuous upgrade. Tacit knowledge - about different areas of specialization, about the challenges to be overcome - are shared and put in a common framework. Crisis is easier to anticipate from a broad perspective and much easier to handle amongst people used to sharing such insight. Judgment on complex issues is much improved when it is set against objective analysis, not least as areas of uncertainty are defined and limited. Indeed, the organization automatically builds resilience into itself as it begins to understand these uncertainties better.

The operating units, too, are addressed in a common language and come to see the necessary central adjustments that are made to their plans as more structured and less arbitrary. Functional areas of responsibility - in finance and treasury, in human resource, information management, and safety management and stakeholder relations - are all seen to have a proper place in the broader scheme of things. This place can be hard to identify in a highly focused, very segmented and operationally focused organization unless there is some mechanism which generates this oversight. Indeed, this is the core and most important point to be made. Organizations have probably never been so specialized and task-centered. Issues and concerns which do not answer the imperatives of the coal face can seem irrelevant and impertinent. Systems of this nature will not, of themselves, generate the oversight from which innovation, managed change and external relations develop. The center of an organization can be thought of as the parent of many child agencies and processes. It justifies itself to the degree that its actions add value. The chief value that it can add lies in two areas: in disciplining the children to a common set of values, and in carrying out those useful initiatives which will never, of themselves, arise from the actions of the agencies, each acting in its own sphere.

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Scenarios to strategy.
It is important to hold this 'architectural' model of the strategy process in the back of the mind. It brings forward one obvious and major implication, which is that the would-be architect needs to have the legitimacy to act. Planning in complex organizations is a major task. It diverts people from core tasks. It is seen to interfere with natural patterns of delegated authority. It causes senior managers to re-assess the fundamentals of the organization, with sometimes unpredictable consequences. People can fear it, senior managers can wonder where it may lead: those who take up this task are, therefore, treading upon something of a mine field. They need to make it clear to all concerned the exact scope and limits of what they intend. The disciplines of project management with regular way stations, at which the process can be aborted if managers feel out of control - can serve as a potent reassurance in the early stages of design. Legitimacy flows from the personal involvement of the CEO and the management team. All planners have their tales of disaster. Most of these stem from trying, for all of the best reasons, to get a project 'round the system' by stealth, or to stimulate action through the medium of a myriad of pinprick initiatives. If, therefore, the CEO cannot see the point of such activities, even in the light of a structure such as that set out in Figure 2, then there is little point in embarking on more than very generic analysis. This Chapter is concerned with the bottom loop of Figure 2. It takes it as read that there is a operational planning cycle - the inner loop - and that some form of environmental scanning, including the generation of scenarios, has been done. It is concerned; therefore, to work with the operational units and with senior managers in order to define the issues on which choice has to be made, instruments created to bring about that change and, where uncertainty remains, further work can be triggered.

Thinking about business choices.

One can be unsure of the answer to a question, or unsure of what question to ask. Figure 1

suggested that the improving management model first identified the questions and then found answers to these. Excellent and relevant reviews of the operating environment, either current or in prospect, may not lead directly to problem identification. In part, this is why management fashions are so prevalent. They offer ways to think about hitherto diffuse issues such as the shareholders, the implications of information technology, the living environment or the competition. They set an accessible agenda. Firms need to undertake much the same task for themselves. Management fashion is much set by events: by, for example, its ability to interpret crisis. If firms trail behind fashion, then they will also trail behind events. Clearly, there are many ways by which issue identification can be undertaken. This Chapter discusses one process which delivers results. We make no claim to completeness, however, and there may be better approaches and styles which better suit individual organizations. These techniques can, for example, be used to focus upon innovation and the generation of new ideas, something which requires a re-balancing of some of the elements which follow. The products of analysis - such as scenarios - describe the operating environment of the organization in ways which are designed to spark insight. There are, therefore, two stages have to be designed into the process. One of these exposes these ideas to as many people, from as many operational backgrounds, as it are feasible to achieve, asking them to say what implications they see as flowing from this. The second stage takes up what each of these events has produced and consolidates this. We are going to treat these two phases under distinct headings.

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Drawing in the operational units.

This creates a range of benefits. The interactions with the operational staff will have created new insights. These will be applied to their various areas of responsibility, something which will appear in their respective operational plans. Secondly, they will be thoroughly briefed in the preoccupations and oversight of the organization as a whole, something which serves as an antidote to the tendency to over-focus which can develop in hard-pressed activities. The third advantage is that of ownership. The analysis that emerges from the phase of consolidation will be seen to have drawn on the knowledge base of the operational units. The managers of these units will know that they have been consulted and will be inclined to accept the outcome. In addition, the assessment will be better informed for the process of consultation. It will be more expert, more able to avoid dangerous generalizations. Finally, a degree of network building and cross-fertilization will develop in the organization. This can help to offset intense divisional focus and can bring people with the capability to develop multi-sectorial innovation into contact, under conditions in which they are predisposed to think about new things. Issues such as legitimacy are effectively settled when a cycle of consultation is complete. The process managers come to carry out a defined and rather enjoyable task, management teams find themselves enriched by the process and gain, rather than lose, authority as a result of their involvement. The chief way in which this consultation is advanced is through the medium of workshops. Almost everyone has been to something called a workshop. Some of these have been professionally facilitated; others have been little more than a formless round table. It is a general rule that structured workshops succeed more often than structure less events; and this rule grows in

strength as the issues become more complex and the numbers of people who are involved increase. There are few ways of losing legitimacy more surely than appearing before an unroofed management team, with no agenda and a few generalizations to hide one's conceptual nakedness. There are three rules of workshops:

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Agree the process and the general nature of the products with the CEO well in advance of the meeting. Arrange for a number of end points around which matters can be terminated if the workshop loses structure or momentum. The end products may - probably will - include 'further work'. The workshop facilitator has no powers to order such action and the CEO must be prepared to either direct appropriate actions or fund third party assistance in the event that volunteers do not come forward. Finally, agree with the CEO who will attend how they will be invited and how these terms of reference will be reinforced by the way in which the meeting is opened.

Agree on a range of pre-analysis, such that the chief structural issues are table in advance of the meeting. Scenarios - for example - serve as a challenge and may, in some circumstances, be sufficient, but a truly 'strategic' discussion is greatly assisted by the preliminary tabling of a series of pertinent facts. We discuss this analysis below.

In parallel with the both of these issues, the facilitator and helpers need to have a well understood process through which the workshop is to be taken. This has a set of phases to it, which we shall discuss next.

A workshop begins with a statement of intent. It calls forward one or more scene-setting presentations. It then begins an interactive process of enquiry, through which the participants are led to explore their individual management models, tabling and consolidating these. A central set of issues emerge and are prioritized in various ways. Those with high priority are captioned and delegated. The workshop closes with an agreed timetable through which the actions will be reviewed by the participants. Let us look at each of these steps in more detail. The statement of intent has already been discussed. It is, however, as important to say what the workshop is not as what it is. It is not, for example, a review of performance or a forum for decisiontaking. It is a means by which managers can feed into corporate processes and from which they can gain oversight on corporate preoccupations. They can take a part in setting the criteria against which they are going to be judged. Meetings can be conducted at many levels of abstraction, from the vaguely aspirational to the detailed, tactical and adversarial. At least one role played by scene-setting presentations is that they define the level of abstraction at which it is useful to talk. Scenario presentations can pitch people too high up the abstraction scale, trying to better the scenario process; and a helpful offset to this are specific items of analysis. These can be pitched at the corporate level. It is always instructive to see how the organization has performed against plan, year after year. Its use of assets can be compared to equivalent organizations. Customer and other stakeholder attitudes can be tracked over time or in cross section. If the material has been made available (something to be agreed with the CEO) the detailed performance of the operational unit can be assessed in much the same way: how well is it using its people, its capital assets; how is it positioned with respect to stakeholders, its cost structure, its use

of IT or technology? Objective attempts to map the operating unit on key dimensions (size, growth, stakeholder satisfaction, environmental impact, regulatory burden.....) create the two dimensional maps so beloved of consultants, which permit the unit to be located in respect of other activities to which it can be compared. A key dimension for commerce is that of shareholder value: does the organization meet its cost of capital when weighted of the risks which it faces; and if it does not, then how is return to be increased or risk reduced. Does the unit, indeed, fit with the overall organization or should the link be cut? Opening presentations of this sort should never aim to answer the question, merely to pose it. Further, managers should be allowed to develop their own conclusions, not have negative messages served up to them. Stylistically, therefore, the nature of this material and its presentation need to be carefully managed. The facilitator must never, under any circumstances, present material which will give rise to a defensive response. It is ideal if the CEO can take on this role. The facilitator - or a member of the team - can present challenging scenarios and corporate material which has a negative slant to it, but only those who have needlessly enraged a management team will know the joys of being the quarry in a game of 'hunt the facilitator'. The presentations lead, through a coffee break, to the process of enquiry. The break is important: it gives people an opportunity for one-on-one discussion about issues that remain unresolved and allows complex ideas to consolidate. The enquiry consists of a structured mechanism, by which the various management models around the room are given expression. It is intended to open things up, not bring them to synthesis, which occurs in a subsequent phase. The most useful tool that has been developed around this step is the yellow Post-It. Sophisticated facilitators use adhesive-treated plastic hexagons for the same purpose, which has the advantage of size, if not of cost. Each member of the workshop is equipped with a block of these and a wall board pen. The facilitator will have prepared a range - three to five - sweeping questions that cut through the problem area from a number of directions. He or she should begin the session by outlining the remainder of the day: expansion, consolidation, prioritization, and agreed action. The expansionary phase is about to start. "The presentations have raised a number of issues. One that all will agree is of great power is the following. Please will you use your Post-Its to capture a number of points that you would wish to make on this. The results are going to be stuck to - and then arranged in clusters on - the wall. Could you please use few words and big letters, so that everyone can read your products?" Five minutes of squeaking pens and crumpling paper follow. Working up to the CEO around the table, the facilitator asks each person for their best comment. Unless the comment is one of clear fact, it is helpful to ask what is intended by the comment, as this is often where the useful remarks emerge and where others intervene to generate debate. The Post-It is stuck on the wall, with the facilitator trying to keep some vague clustering in mind whilst doing this. "Let's see: that's about people, isn't it? Do you want this with internal human resource issues or with the stakeholder group?" Repetitive Post-Its are to be discarded by their owners, which avoids duplication and allows a wide range of thoughts to be tabled in a brief period. Once a tranche of Post-It is exhausted, the facilitator poses another question, with the same result.

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Some facilitators prefer to have an assistant, whose job is to record remarks from discussion on Post-Its in much the same way, but where the style relies heavily upon debate within the group. This is, without doubt, the most fruitful approach. It can be hard to carry off with a group who are inexperienced in the technique, however, or who are not expert in the issue under discussion. It is ideal for, for example, in technical discussions. After two or so questions, the facilitator may choose to ask the group if there is something on which they would like to focus, or suggest something that has proven to be the core of debate. After a while, however, the group begins to repeat themselves or to embroider small areas of the issue. It is time to move to the next phase.

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Issues emerge as the Post-Its fall into clusters. Many facilitators now take a fifteen minute break,
during which the participants are encouraged to re-arrange the Post-Its in ways which seem better to capture the structure which is emerging from debate. There are usually five to ten clusters, often with no evident connection between them, and some orphan issues. There then follows a phase of negotiating a form of words which captures what people mean by the clusters which they have created. This is invariably a highly fruitful step and one for which the recording assistant has a major role to play. The lead facilitator should withdraw and allow the debate to proceed, or should become the recorder if he or she is alone. As the debate winds down, there may be gaps which are evident to an outside eye. It is helpful to have prepared a check list of the issues evoked by the presentations with which the day began. "So. Have we said enough about the managing the interface with suppliers?" The end of this stage marks a natural break and is best celebrated with lunch. The tasks which follow are convergent, aimed to bring matters to a clean conclusion. The chief aim of the afternoon is to prioritize the issues that have been surfaced. There are a number of schemes by which to do this. We will discuss two of them. One approach is to sort issues into components which are primarily out of the organizations control - and are therefore risks - and those over which some element of choice can be exercised. The aim is to move as many risks as possible into the 'choice' category by finding out the levers which can be exerted upon them. This is a good approach when one is looking at well understood and operational issues and considerably less helpful when one is looking at unknown territory for the first time. We turn to this issue in the next section. One helpful device which emerges from the scheme that identifies choice is that it allows one to map the key dimensions of choice and thus to create a species of road map for the organization.

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Figure 3: An example of a 'choice' matrix. A company might be able to suggest that the key choices that faced it were between consolidation and growth, on the one hand, and between becoming a low cost commodity supplier of intermediates, as opposed to a innovation-focused, consumer product manufacturer, on the other. These independent choices create a space on which the company and its competition can be located. Possible future options might become apparent and impossible combinations blocked out. Figure 3 suggests such a matrix for a toy manufacturer. The grey area is non-viable and two options suggest themselves: to pre-empt or capture the flow of growing Asian imports and to reposition the firm as a fast growth, low cost intermediate supplier to the industry. This approach has the advantage of being clear and easy to communicate. It can be simplistic, however, and can ignore a wide range of important issues. It must lead into a phase of prioritization. A number of issues - perhaps between five and fifteen - have been tabled. These have been discussed in depth and people know what they mean by the forms of words that have been chosen, something not always clear in issues which have not emerged from joint debate. If the "choice" schema has been followed, then there may be a pair of options also on the table. Each of these, excluding the options, should be transcribed onto a Post-It. These should be stuck, vertically, on the wall. People are asked to arrange them in rank order. Is this more or less important than that? Debate ensues and words are changed. "Importance" is, of course, a weasel word. The facilitator should make it clear that the criterion is whether understanding the implementation of the solution to a given issue, irrespective of the time frame involved, is more or less important than the Post-Its that frame it. This phase can take a while to complete. The second stage is to ask the team to rank the Post-Its for the urgency of their solution. Keeping the vertical rank order constant, therefore, a new horizontal movement occurs. Figure 4 gives some idea of what the resulting structure should resemble.

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Figure 4: Creating the action agenda. This figure is, of course, the priority order of the matters which the management team has decided most need to be addressed as a result of a detailed discussion of the challenges which they face. It is, therefore, a powerful symbol. Those issues which occupy the top right hand corner of the figure are the most important and most urgent issues upon which attention should be turned. The lower left is the converse. These issues need to be captioned and delegated. This is where the CEO becomes central to events. The facilitator should withdraw and allow the team to decide who does what, when it will be done and to whom it will be reported. It is often the case that the key individuals wish to consult with their own teams before defining the next steps and it is up to the CEO as to how this is to be handled. The minoring of the meeting, for example, is a matter for the CEO to delegate. Many choose to do it themselves. This ends the workshop. The facilitator has a record of events, which may include a Polaroid photograph of the Post-It array. Experienced facilitators lines the walls with paper - it is possible to buy A1-sized blocks with adhesive edges, rather like Post-Its - and these can be detached and taken away for transcription. This is not, however, possible with hexagons. The chief thing which the facilitator carries away, however - and which is retained by his or her colleagues - is better insight into the operational aspects of the organization. It is important to codify these and bring them together, so as to be in a position to take forward the overall processes of synthesis. It is this, the corporate-level strategic synthesis, which is the subject of the next section.

Corporate consolidation.
Figure 2 set out four way stations on the outer loop of the planning process. The last section of the preceding Chapter described a proven approach to one of these blocks. It creates two outcomes: better informed and more 'strategic' choice at the level of the operational units and technically-better informed oversight on the part of the corporate team. This team has access to broad tools of analysis. Shareholder relations know how shareholders look at a company, for example, and all organizations have a good feel for their general reputation.

Specific instances of this, such as recruitment, staff attitudes and press comment serve to reinforce these views. There may be formal surveys which are conducted. There may be elaborate exercises with consultants and within house expertise, aimed to unlock a theoretical understanding of these issues. In addition, work on the business environment - such as scenario development - will have generated a deep pool of understanding amongst those who were engaged in it: far deeper than can be offered to those who hear a presentation of read a publication. All of these factors compound and grow as the iterations around the planning process develop and the knowledge pool begins to fill. These sources are, of course, supplemented by the parallel insight and concern of senior managers. Central management has a distinct set of concerns from operational staff. They must coordinate, reconcile, foresee and steer with a far greater reach and with far more tenuous tools than people who operate in the immediate feedback of market forces. The core of a company does not stand still: it migrates, changing in all its parts as time passes. Migration which is not managed has all of the coherence of a bucket of fish poured into a stream. The businesses dart off in all directions and the cohesion is lost. Task such as these can only be overseen from the center and is the chief value which it adds to the business portfolio. Planners need to understand and incorporate these issues. In other respects, however, consolidation at the corporate level has much in common with consolidation after a work shop. Complex issues are seldom addressed in a single sweep and there is seldom a single workshop. Through discussion and through interview, perhaps as a result of one or more workshops, the central planners are set an agenda of issues to be developed. These are, increasingly, focused upon straightforward issues. In commerce, the key issues tend to be the scope of the portfolio - "is the organization doing the right things in the right places in the right way with the right people?" as one consultancy puts it - the relative cost structure, the nature of the competition and the changing character of markets and regulation. Organizational style is often of importance to established organizations and to those going through a phase change. Management and staffing in changing times is also a generic issue. Finally, and perhaps most significantly, there are the issues of resource needs, of income, of borrowing and of the justification of these. Most organizations find that it is unwise and impossible to try to find solutions to all of these issues in a single pass. Particular matters - such as the portfolio, cost effectiveness, human development are regarded as being of particular importance and are given prominence for a turn of the planning cycle. Other issues are seen as being important but in too immature a state to take to the organization for action: they are set aside for further development, just as they were in the focused workshop.

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Making change happen: levers and options.

Some issues are, therefore, given priority. It is not enough to say that an issue matters, however: one has to have a clear notion of how it is to be brought about. As we discussed earlier, some issues can be addressed from the center: in respect of borrowing, for example. The great majority of the key issues are, however, in the hands of the operational units. There are a limited number of tools by which these can be induced to do what the central organization deems to be appropriate. These tools include:

Setting criteria for performance which will cause operational managers to increase the return on assets employed, speed up their activities, increase quality, safety or regulatory compliance. In essence, the central office sets itself up as a regulator, forcing the equivalent of RPI-X upon its operational divisions.

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The basis on which plans are agreed can be changed. Plans may have to show compliance with initiatives that have been raised in previous cycles of the planning process. Plans may have to be re-justified every year, rather than justifying incremental spending. Such rejustification may require detailed cost and performance benchmarking against comparable or competitive organizations.

The selection and rotation of people through jobs can be a powerful force for change, breaking otherwise established habits of thought. The negative side of this, which is that errors are left behind for someone else to clean up, has been tackled in some firms by the general knowledge that there will be retrospective reviews of major projects and that these reviews will be appended to staff records. Experimental efforts in America, which aim to pay individuals with a share in the profits derived from the activities with which they have been involved in the past, have proven difficult to implement and unjust in action.

Power without accountability is dangerous, but accountability without power is paralyzing. Criteria to which managers cannot respond are worse than no criteria at all. A great danger from management which relies entirely upon criteria - as opposed to collegiate understanding of goals, imperatives and mutual interest - is that the organization descends into a species of gamesmanship, playing the system rather than seeking real advantage. In particular, such systems can make migration, managed adaptive change in the core activity, something of a wistful dream.

The creation of scenarios.

Scenario generation is a technical business. Before we get too close to the details, therefore, it may be worth considering what role it plays in the planning process. Figure 2 had, as readers will recall, three layers to it. The outer shell, concerned with broad issues, had four way stations. We have now visited three of these: bringing issues to the operational units, fusing this and other thoughts into a set of priorities for the organization and building these priorities into directions which will take the organization in the desired direction. The fourth block was concerned with the development of analysis that informed and extended the range of these processes. Scenarios are a tool by which such analysis is co-ordinated and communicated to the organization at large. Tacit knowledge, it will be recalled, is difficult to communicate. We explain complicated things with analogies, though diagrams and by them acting out. Scenarios, telling tales of alternative futures latent with a better understanding of the present, encapsulate huge amounts of impenetrable analysis in accessible stories. People remember them and use this memory as an acid test for the equally complex proposals that come to them. Scenarios have to do rather more than this, however, for well-developed ones give people confidence about reasonable ranges and the nature of the key variables which they must watch. They are educational, giving a sense of the invisible clockwork against which the affairs of the world may tick. Scenarios integrate the complexity of the present and of prospective change into manageable 'memories of the future'. Scenarios are, therefore, communication tools as much as they are the machinery which gives

structure to analysis. They are developed with the intention as much to understand the present to as to be able to foresee elements which may govern the future. In order to do this, the team has to focus upon on one or two central issues that it is appropriate to highlight. These issues are chosen for their relevance, through interview, work shop and through the routes which have been described in the preceding chapter. The issues tend to come in a number of distinct 'flavors', however, which can cause confusion. The approach which is most commonly used is to create a mental picture, a 'model', of what it are that matters and how these various things may impinge on each other. It can be that such a model shows one that almost any future is going to be starkly different from the present. If so, then this is the main message that one needs to communicate. It is more commonly the case, however, that certain factors in the model stand out as being both highly important and rather uncertain in the way in which they will work themselves out. Scenarios are used to explore the range of possibility which these factors represent. They are often called the critical dimensions of the scenarios, with each scenario defining a situation in which various combinations of these dimensions are expressed. This is why the matrix is so popular, for if one has identified the two or more critical dimensions that one wants to explore, then the square (or, as may be unavoidable, the cube) that has these measured out along its sides serves as a sort of map of the territory which the scenarios are going to explore. We have already met something of the sort with the 'choice matrix', shown in Figure 3.

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Figure 5: The passage through time of alternative scenario 'logic'. Figure 5 shows something of the factors which have to be balanced. Time flows from left to right. Two or more lines of development emerge. Each is affected by a number of factors, such as social conditions. The courses pass through a number of time windows, which are shown as planes, each made up of the key dimensions which the scenario writers want to high light. Scenario A is, therefore, the outcome of the forces which are driving change, to be sure, but also of the time frame and the dimensions which have been chosen. Readers will note that the scenarios which are shown as A and B straddle the 'present' in the figure. This is often the case where the current way in which things are organized is maintained, but where this structure is subject to many different forces. The best approach to such a case is to spell out

these forces and the subsystems which they tend to emphasize. The scenarios are used to highlight two or more distinctive outcomes, dwelling on issues which matter a great deal to the participants. It is seldom possible to offer a definitive analysis as to why these are the right or indeed the only outcome. Indeed, the scenarios are there explicitly to challenge thought about what seems to be a smoothly developing status quo. By distinction, it is often the case that two or more interesting outcomes (that is to say, two or more interesting dimensions, drivers and time frames) produce results which are more or less different from each other - but which are starkly different from the present. One might have presented such cases to Gorbachev in Spring of 1989, for example: nothing which is foreseeable is remotely like the old USSR. Is such circumstances, it is a mistake to present a single future, but also a mistake to strain after wildly differing futures. Presentations of this sort tend to emphasize the systematic nature of change, of how - for example - abstract forces have rendered obsolete the former status quo. They may well be led by economic or numerical analysis and one can make a good attempt to prove the validity of what is being said. The presentation is more predictive and offered less in the spirit of integration than is the case in the previous paragraph. Finally, there are instances in which there is genuine uncertainty as to how the world is to be interpreted. There are two rival models: if one is true, then this will happen, whilst if the other is valid, then something distinctive will follow. This has more in common with pay off matrixes and risk analysis than scenarios. One might have asked in 1920: will the democracies or the totalitarian world prove the viable approach to the world of mass markets and technology? One could sketch two alternative worlds, in the manner of science fiction. This may be sometimes be helpful, but it is a primitive approach that does not offer much to decision support.

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Phases of development.
As we have already noted, scenario development is something of an art form, in which several layers of judgment collide in useful ways. It is possible to write a 'strategy cookbook' but not, with any hope of success, a similar guide to scenario writing. All that this section can do is set out some of the guidelines.

Setting useful boundaries.

Scenarios are not right or wrong, but useful or distracting. What constitutes 'useful' depends on the preoccupations of the users, their level of sophistication and the time frame within which was operated. The 1996 Forum round drew on a workshop of senior representatives to define the specific issues to be developed, but also had the benefit of having conducted interviews with over a hundred further organizations in 1995. A surprising commonality of interest emerged: about the cohesion of the industrialized societies, about the muddle around the concept of 'globalization' in respect of information technology, with regard to the pace of competitive change in companies. A further subgroup was interested in security issues and a further group in the issue of economic development. A range of practical questions arose around how business is to be done in poor countries. Regulation, the way in which Government ought to go about its business and the haplessness of politicians in the industrialized world was all recurrent themes. Scenarios may be seen as a message to the organization or as a genuine attempt to explore. It

may be that senior management choose to dwell on an issue - economic survival, technological change - at the expense of a more balanced approach because they want to focus attention on this single area. This is uncontroversial if done on occasions or for one particular case in a suite of scenarios, but can rather vitiate the point if the exercise is always focused upon a lopsided view of the world.

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Developing the issues.

The scenario process begins with a sifting of the issues, of the various declared interests that have come out of the planning and other processes, of senior management concern, of matters delegated from elsewhere in the planning process. It may be that colleagues who work in areas such as human resource, information technology support or public affairs have much to contribute. The end product is, however, a set of themes which are specific enough to be clear and general enough not to be prescriptive. These themes are endorsed by those who grant legitimacy to the whole process, which may include the operational units which we met in the preceding chapter. The themes are then developed, primarily to 'anatomies' them. This consists of finding out what makes them up. It seeks the areas in which unresolved tensions lie and what new factors have come to bear upon them. Expert help, where this can be found, is always assistance. The aim is, however, for the team to feel that they understand the structural nature of the problem, the chief uncertainties and the primary drivers of change. Experts may help them to gain this understanding and experts may tell them when they have failed to reach it. Experience suggests, however, that whilst experts know enormous amounts about specific aspects of their field, they are as incapable as lay people of giving an overview of all of it, least of all its connections into other areas of interest. This limitation is most pronounced in the social sciences and least true in the technical disciplines, the exact converse of what is popularly thought to be the case. There is always frequent interaction between the 'theme teams', not least as the same people tend to serve on several of them. Experienced people offer balance and are able to point, for example, to the right level of abstraction at which to work. A key balancing act is that of offsetting sources of specific technical expertise and enthusiasm. It is not enough to be excited by, for example, neontechnology, one has to see the role which this plays in the overall structure which describes the focus of the theme. Enthusiasts and specialists may miss this balance. This, indeed, is a central issue: how to be sufficiently realistic about a field without being too detailed or too diffuse. The time frame in which key developments are likely to show themselves also becomes clear and a 'future chronology' can be guessed at. It may be possible to put some numbers to some aspects of what is being discussed. At this stage, it is time to put together what has been learned.

Consolidation and synthesis.

The themes will have been triggered by people who have a strong intuition of both what matters and what is seen to matter by their target audience. They will be concerned to build bridges between the two. As the themes begin to come into coherence, therefore, they have to ask themselves whether their intuition is correct. Most scenario processes aim at a mid-term review, at which the themes are presented and subject to discussion. This review usually surfaces areas of weakness and gaps in the logic. It may point to

the need to refocus the process. These are distinct matters. The focus - upon the industrialized world, multinational companies, the chemicals industry, India - depends upon the preoccupations of the target group. It can be hard to address highly specific issues in the medium term without reference to broad issues, however, and scenarios for - let us say - the aviation industry in Latin America are usually rather tenuous and weak if they do not take account of what drives the Latin business environment. The longer the time frame, the broader must be drawn the framework. The Forum scenarios offer a framework against which more specific or detailed work can be developed, of which more, below. The areas of weakness are usually self-evident. In addition, however, there are those issues in which matters of great importance are felt to be latent, perhaps as a sculptor sees a rough stone, but which need development for the nature of this importance to be apparent. For example, it might be that the media are seen to have an increasing role in political debate. Very well, say other members of the team, we know that. What are you trying to say which is new? Should we dig into this a bit more? Further work would show this to be the root of an exciting new development or a continuation of something already well understood. A string of meetings are often run between the mid-term meeting and the beginning of the development of the draft scenario logic. Synthesis is greatly assisted by three key features: a clear remit, experience from the past and the participation of people who have a good feel for the way in which the important systems under scrutiny they operate. We have discussed the process which gives rise to the first of these. The second is something which develops as the process itself matures. There are, however, people who have developed such oversight as a part of their profession, perhaps as an economist, or who are simply rather good at such things. They are valuable and should be involved as much as is feasible, but should not allow predetermining the outcome in respect of some professional orthodoxy or other. Syntheses should beware of fashion, passion and enthusiasm. Towards the end of the synthesis period, the 'key dimensionality' should be emerging. (This piece of jargon is explored in the opening section of this Chapter.) The focus of the work should also be clear. "We are talking about the future of the aviation industry in Latin America, taking our focus on what happens over the next ten years. The key dimensionality is concerned with the balance between deregulation and competition. The first of these is dependent on the world stage - and certainly on North American relations with Latin America - whilst the second considers matters such as the technology that will let global companies begin to deliver local and long haul services at low cost into the Latin area. Now....." This state is a happy one when it is reached. The teams need to be behind it. The people, who have contributed to defining the issue, and in particular, senior management, need to endorse the basic logic and focus. This is achieved, usually, by one-on-one discussion with the CEO, a presentation or a note to the management team, followed by a flurry of redirection. Many issues need validation. Numbers and facts have to be collected. Many back their work with quantification: essentially, a simple extrapolation of key variables under the scenario logic, in order to see if the balances which are created are viable. If, for example, the balanced-but-bad outcome which looks commercially challenging brings with it, however, a level of unemployment that would disrupt the innate balance of the case, then has failed the test of consistency.

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Formalization.
Quantifications are a minor part of the exercise, but they can grow to disproportionate influence. The can take on the mantle of a forecast and can sweep aside the logic: the answer is 42, after all. Drop that into the spreadsheets. Crank up the business plans: look - the answer! They are to be treated with care and to be published with circumspection. The central issue of the process of formalization is to tell a good story. You are creating two - or at the most, three - 'memories of the future'. Like well-drawn characters in a novel, these need to be distinct, coherent and memorable. Coherence is the most demanding of these criteria. Mid-term scenario papers are often filled with spaghetti charts, in which a maze of influences impinges, one upon another. Final documents have often found better ways to express this, but the underlying truth is that of well-understood connectivity. It is often the case that malfunctions predisposes a coupled system to further failure, whilst success sets the grounds for success. It may be, therefore, that the logic leads to a sunlit and a cloudy world. One may have to have a bad case and a good one. It may also be, however, that the sunlit world is dreadful from a business perspective, whilst the sheltered gloom offers sustainable returns. Most surges of growth carry within themselves the mechanisms of correction, whilst most collapses give rise to mechanisms of recovery. It is in these features that the operational messages are carried: the deregulated case for Latin America is commercially alarming - but suggests the following options. If the barriers remain, however, this will be against the background of economic malfunction and we may find ourselves in a difficult position when, as seems inevitable, the barriers finally fall. It can be helpful to begin the analysis with the predetermined elements. The population is growing. Female participation is doubling the work force. Biotechnology will have opened many doors in a decade. It is then necessary to spell out the key dimensionality: deregulation or not, invasion or not. The next step, based upon detailed analysis, is to set out the structure which underpins these issues, with an aim to exclude some outcomes and to show mutual dependence in others. This analysis may be too much for a single reading and usually serves as something to which people can refer as they wish to develop their understanding. It is also the basic material from which the presentation is drawn. The synthesis then explores the balances to be struck amongst the key dimensions on the basis of this analysis, arriving at the two or three cases which are fleshed out as the scenarios. These are described so as to touch on a number of common themes in each, showing the implications for employment, sector growth, partnership or whatever the key concerns of the stakeholders seem. The implications of these issues can be further accentuated through a limited exposure of the quantification. The overall aim of this work is threefold. The first is to arrive at a consistent, rational and broadly expert overview of the operating environment. The second is to offer the immediate audience for this an accessible set of alternative outcomes, such that they gain some insight into the forces which are running and the range of possibilities which exist. The third is to convey these issues (and the implicit messages embedded by senior management) into the strategy process.

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Presentation.

35 Most of us operate in a presentation culture. People read booklets after they have heard the presentation and been convinced by the outline, the numerical case and the prevalent views that is ripening on the grape vine. The presentation is, therefore, important. There are three points to make about this:

The story of the editor who received a note to the effect that the writer "enclosed the 300 page MS with regrets that he did not have time to write the 20 page version" generates nods amongst all who have sat through interminable, complex, knotted presentations in which the point is never quite stated. One should aim to speak for no more than an hour, excluding scene setting and introduction, but one should allow at least as much time again for questions, discussion and debate on process. (Clearly, workshops have a different time budget.)

Written reports and open presentation are two different media. One cannot simply present the main figures; or follow the booklet. At the same time, the two need to be evidently connected to each other and the 'look' of both should be similar.

The presentation will often be repeated many times, by different people and to distinct audiences. Presenter skills are, of course, important; but over-reliance on charismatic individuals or on audience familiarity with the material can lead to a cold reception when the focus moves from senior management to the work shop environment. One should be also be careful of slides which contain phrases which one has ceased to notice through over-familiarity: these can sometimes strike audiences with distinct interests of from a distinct ethnic background as anything from hilarious to offensive. An overview of munitions effectiveness, entitled "Stealth Fighters and Stealth Women, behind the veil in the Gulf War" and illustrated with curvaceous cartoons wearing damasks, played poorly when exposed to an Islamic audience.

Complex figures are often best handled by build-ups. That is to say, one starts with something simple and builds upon this, offering commentary. The traditional way of doing this was with overheads, often with fold-over layers to them. A more effective tool is the modern PC-linked projector, in which common software packages such as MS PowerPoint allow one to build images up in complex and helpful ways. Other tools which have been used are videos - costly, and with a poor history of acceptance - and audio tapes, for use in the car. There has been talk of interactive hypertext scenarios, world wide web-style; but successful solutions to the problems which this raises are not, shall we say, widespread. One issue which is always raised in discussion is how scenarios are to cope with disaster or with the unexpected: with wild cards. The short answer is that unless the roots of the disaster are in the scenario logic, then they will not cope. From time to time, people draw up lists of wild cards:

Environmental disaster or clear threat of disaster. Sudden climate change. Pandemic disease, attacking humans or crops, perhaps of military origin. Systemic failure in commonly used IT, such as telecommunications or computers. Unexpected systematic risks that undermines an industry: Lloyds, BSE. Nuclear accident or incident.

War amongst the major powers. A breakthrough in energy production: cold fusion, that works. Other sudden technological change: anti-ageing, nanotechnology, AI, antigravity. Religious mania, panics and ideological expansion. Philosophical upsets: humans proved to be thinking machines, scientists execrated. Meteor strikes, Martian landings.

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If one is to take note of these, then it is in the "workshop-to-strategy" loop in which one must do it. It is clearly the case that a telecommunications company has to take cognizance of active attempts that private individuals, extortionists and military powers might make to subvert its system. This is hardly scenario: it is a real systemic risk to which the business must respond. That society may suddenly become phobic about telephones is, however, a wild card that one can hope is not played but about which essentially nothing can be done. BUDGETING Since companies strive for profitability through the efficient and economical use of resources and labor, they require financial road maps to show how they will allocate their resources to achieve their business objectives. In other words, companies require prudent budgeting to accomplish their goals. Companies practice budgetingthe estimation of probable expenditures and income for a specific periodto determine the most efficient and effective strategies for making money and expanding their assets. Budgeting allows companies to control their expenditures and to allocate resources to maximize profits, thus allowing them to demonstrate to banks, investors, and shareholders that they have a plan for where they are going. Intelligent budgeting incorporates good business judgment in the review and analysis of past trends and data pertinent to the business enterprise. This information assists a company in determining the type of business organization needed, the amount of money to be invested, the type and number of employees to hire, and the marketing strategies required. In budgeting, a company devises both long-term and short-term plans to help implement its strategies and to conduct ongoing performance evaluations. Businesses generally develop and execute their budgeting plans each year, in a five-step process called the planning cycle. First, companies develop a strategic plan that focuses on their long-term goals and how to achieve them. The strategic plan typically includes general financial projections and covers a five-year period. Second, businesses prepare an annual operating plan that provides a detailed outlook for the coming year. This plan contains very specific financial projections and often is what companies refer to by "budget." Third, since things change after the year actually starts, businesses revise their plans, yielding their adjusted plan. The adjusted plan takes sudden and unforeseen changes into consideration. Fourth, companies often make forecasts, or informal projections, throughout the year. For example, businesses frequently predict their annual sales at mid-year. Fifth, companies produce their business plans, which they use to apply for venture capital and other investments. The business plans also often contain detailed financial projections. A host of management personnel participates in the budgeting process. In general these

participants include "submitters" and "reviewers." The submitters are usually division managers who prepare and propose possible spending plans to achieve company goals, whereas the reviewers are often executives, controllers, or accountants who determine whether the proposed budgets and their objectives are affordable, realistic, and attainable. These roles, however, are not mutually exclusive: those who submit budget proposals often review other proposals and vice versa. A HISTORICAL PERSPECTIVE The practice of budgeting has existed for ages. In ancient times individuals and societies engaged in processes of planning their economic activities, evaluating the annual outcomes, and revising when necessary. Through observation and experimentation, agrarian peoples discovered, invented, and standardized various practices to increase the quality and quantity of their yields. The desire for excess supplies to sell for profits, and for storage as wealth, led people to make plans to maximize their income by budgeting a certain amount of money and energy for stabilizing farming conditions. These efforts brought about the discovery and use of crop rotation, fertilizers, fences, scarecrows, and irrigation. While having few devices against the vagaries of the weather, ancient peoples used their profits and hard labor to protect their fields by deploying armies, building walls, planting in remote locations, and paying tribute to powerful neighbors. Similarly, modern peoples employ various strategies to use their accumulated wealth to generate new profits and to continually expand their wealth. The fact that modem budgeting generally consists of a series of 12month periods may reflect these agrarian origins. PLANNING FOR PROFIT To engage in any profitable commercial enterprise, a company employs its resources to exploit various business opportunities. If the profits are consistent, a company may purchase more assets and, therefore, expand its base of wealth. To do this effectively, a company undertakes the budgeting process to assess the business opportunities available to it, the keys to successfully exploiting these opportunities, the strategies the historical data support as most likely to succeed, and the goals and objectives the company must establish. Companies also must plan long term strategies that define the overall plan to build market share, increase revenues, and decrease costs. In addition, companies require short-term strategies to increase profits, control costs, and invest for the future. Both long-term and short-term strategies must contain control mechanisms for implementing performance evaluations as well as control mechanisms for making modifications in the above strategies when and where necessary. Although company leaders generally conceive of business opportunities and initially provide the impetus to pursue them, companies move beyond the embryonic stage by formulating their strategies in quantifiable terms, such as: the volume of units that the company expects it can sell, the percentage of market share the volume of units represents, the dollars of revenues it will receive from these sales, and the dollars of profit it will earn. Likewise, a company outlines its longterm goals and specifies its short-range plans in quantifiable terms that detail how it expects to accomplish its goals:

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the dollars the company will spend in selling the units

the dollar costs of producing the units the dollar costs of administering the company's operations the dollars the company will invest in expanding and upgrading facilities and equipment the flow of dollars into the company coffers the financial position, expressed in dollars, at specific points in the future

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To be successful, the budgeting process establishes criteria and control mechanisms for the systematic evaluation of the company's ability to effectively implement its plans. These controls are often detailed and complex. Therefore, the company includes in the budgeting process employees from each organizational level and from each department. The company marshals these resources in a coordinated effort in the following functions. PLANNING. The company establishes long-term financial goals and operational objectives for the future size and activities of the company. These include products, product mix, services, markets, market share, volume of sales, quality of sales, level of debt and capitalization, number of employees, degree of horizontal and vertical integration, research and development , public or private ownership, advertising campaigns, training and development, and benefit packages. STAFFING. The company clearly defines and assigns responsibility for the budgeting process itself, along with the level of detail required to formulate the business plan. The treasurer's office generally organizes and coordinates the budgetary process through a budget director, controller, or chief accountant. Budgeting hinges on accurate accounting of all activities, including machine use, manpower needs, employee turnover, inventory levels, supplier pricing, sales discounts, benefit costs, production schedules, selling costs, and the like. Therefore, the accounting staff plays a central role in collecting, analyzing, and processing the needed data. Contemporary approaches to budgeting, however, often emphasize the role of managers in the budgeting process. ORGANIZING. In planning for profits the staff needs to organize for action. They provide standardized reporting directives. The staff distributes familiar and "user-friendly" forms for collecting, organizing, evaluating, and disseminating information. They propose procedures to form a comprehensive plan for each activity and for the company as a whole. DIRECTING. The budgetary process establishes lines of reporting and accountability for the execution of the plan. Besides spelling out the various responsibilities of the managers, it also places limits on their authority. The budgeting process involves all levels of managerial responsibility: office, department, division, and corporation. To maximize the benefits of the budgeting process, managers must not only be responsible and accountable, but also need to be in agreement with overall goals and objectives.

CONTROLLING. The budgetary process sets up the reporting procedures and techniques for evaluating both shortterm and long-term outcomes. Since the budget program is an instrument of organizational control, a company's accounting and its chart of accounts will reflect clear lines of responsibility for each of its divisions. Not all control activity, however, emanates from the accounting office. Line supervisors and individual employees keep their own logs. Consequently, the accounting/budgeting staff sets up schedules for the collection, processing, and analysis of data and its subsequent distribution to the appropriate managers. The managers use this information to evaluate their own performance with an eye toward making modifications where necessary. THE FINANCIAL FORECAST AND THE BUDGET The end product of this process is the creation of the financial forecast. It projects where the company wants to be in three, five, or ten years. The financial forecast quantifies future sales, expenses, and earnings according to certain assumptions adopted by the company. Since projecting company sales, expenditures, etc., involves uncertainty, a company must consider how changes in the business climate could affect the outcomes projected. A company presents this analysis in the pro forma statement, which displays, over a time continuum, a comparison of the financial plan to "best case" and "worst case" scenarios. The pro forma statement acts as a guide for meeting goals and objectives, as well as an evaluative tool for assessing progress and profitability. Through forecasting a company attempts to determine whether and to what degree its long-range plans are feasible. This discipline incorporates two interrelated functions: long-term planning based on realistic goals and objectives and a prognosis of the various conditions that possibly will affect these goals and objectives; and short-term planning and budgeting that provide details about the distribution of income and expenses and a control mechanism for evaluating performance. Forecasting is a process for maximizing the profitable use of business assets in relation to: the analyses of all the latest relevant information by tested and logically sound statistical and econometric techniques; the interpretation and application of these analyses into future scenarios; and the calculation of reasonable probabilities based on sound business judgment. Future projections for extended periods, although necessary and prudent, suffer from a multitude of unknowns: inflation, supply fluctuations, demand variations, credit shortages, employee qualifications, regulatory changes, management turnover, and the like. If a budget fails to distinguish between what management can and cannot control, it also will fail to indicate whether management is successful or unsuccessful, or merely fortunate or unfortunate. To increase control over operations, a company narrows its focus to forecasting attainable results over the short term and identify the assumptions it makes concerning the uncertainties. These short-term forecasts, called budgets, are formal, comprehensive plans, using quantitative terms to describe the expected operations of the organization over some specified future period. While a company may make few modifications to its forecast, for instance, in the first three years, the company constructs individual budgets for each year. Furthermore, this approach allows a company to periodically review the

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assumptions it makes and revise them if necessary. A budget delineates the expected month-to-month route a company will take in achieving its goals. It summarizes the expected outcomes of production and marketing efforts, and provides management benchmarks against which to compare actual outcomes. A budget acts as a control mechanism by pointing out soft spots in the planning process or in the execution of the plans. Consequently, a budget, used as an evaluative tool, augments a company's ability to make necessary alterations more quickly. PRINCIPLES AND PROCEDURES FOR SUCCESSFUL BUDGETING REALISTIC AND QUANTIFIABLE GOALS. In a world of limited resources, a company must ration its own resources by setting goals that are reasonably attainable. Realism engenders loyalty and commitment among employees, motivating them to their highest performance. In addition, wide discrepancies, caused by unrealistic projections, have a negative effect on the creditworthiness of a company and may dissuade lenders. A company evaluates each potential business activity to determine which will help the company achieve its goals the most. A company accomplishes this through the quantification of the costs and benefits of the activities. HISTORICAL COMPONENT. The budget reflects a clear understanding of past results and a keen sense of expected future changes. While past results cannot be a perfect predictor, they flag important events and benchmarks. PERIOD-SPECIFIC BUDGETING. The budget period must be of reasonable length. The shorter the period, the greater the need for detail and control mechanisms. The length of the budget period dictates the time limitations for introducing effective modifications. Although plans and projects differ in length and scope, a company formulates each of its budgets on a 12-month basis. STANDARDIZATION. To facilitate the budgeting process, managers should use standardized forms, formulas, and research techniques. This increases the efficiency and consistency of the input and the quality of the planning. Computer aided accounting, analyzing, and reporting not only furnish managers with comprehensive, current "real time" results, but also afford them the flexibility to test new models, and to include relevant and high-powered charts and tables with relatively little effort. INCLUSIVE PROCESS. Efficient companies decentralize the budget process down to the smallest, logical level of

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responsibility, i.e., the responsibility center. Responsibility centers often include the revenue center, the cost center, and the profit center. Those responsible for the results take part in the development of their budgets, and learn how their activities are interrelated with the other segments of the company. Each has a hand in creating a budget and setting its goals. Participants from the various organizational segments meet to exchange ideas and objectives, to discover new ideas, and to minimize redundancies and counterproductive programs. This way, those accountable buy into the process, cooperate more, work harder, and, therefore, have more potential for success. BUDGET REVIEW. Decentralization does not exclude the thorough review of budget proposals at successive management levels. Management review assures a proper fit within the overall "master budget."

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ADOPTION AND DISSEMINATION. Top management formally adopts the budgets and communicates their decisions to the responsible personnel. When top management has assembled the master budget and formally accepted it as the operating plan for the company, it distributes it in a timely manner. FREQUENT EVALUATION. Responsible parties use the master budget and their responsibility center budgets for information and guidance. On a regular basis, according to a schedule and in a standardized manner, they compare actual results with their budgets. For an annual budget, managers usually report monthly, quarterly, and semiannually. Since considerable detail is needed, the accountant plays a vital role in the reporting function. A company uses a well-designed budget program as an effective mechanism for forecasting realizable results over a specific period, planning and coordinating its various operations, and controlling the implementation of the budget plans. FUNCTIONS AND BENEFITS OF THE BUDGETING PROGRAM Budgeting has two primary functions: planning and control. The planning process expresses all the ideas and plans in quantifiable terms. Careful planning in the initial stages creates the framework for control, which a company initiates when it includes each responsibility center in the budgeting process, standardizes procedures, defines lines of responsibility, establishes performance criteria, and sets up timetables. The careful planning and control of a budget benefit a company in many ways, including: ENHANCING MANAGERIAL PERSPECTIVE. In recent years the pace and complexity of business have out-paced the ability to manage by "the seat of your pants." On a day-to day basis, most managers focus their attention on routine

problems. In preparing the budget, however, managers are compelled to consider all aspects of a company's internal activities. The act of making estimates about future economic conditions and about the company's ability to respond to them, forces managers to synthesize the external economic environment with their internal objectives. FLAGGING POTENTIAL PROBLEMS. Because the budget is a blueprint and road map, it alerts managers to variations from expectations that are a cause for concern. When a flag is raised, managers can revise their immediate plans to change a product mix, revamp an advertising campaign, or borrow money to cover cash shortfalls. COORDINATING ACTIVITIES. Preparation of a budget assumes the inclusion and coordination of the activities of the various segments within a business. The budgeting process demonstrates to managers the interconnectedness of their activities. EVALUATING PERFORMANCE. Budgets provide management with established criteria for quick and easy performance evaluations. Managers may increase activities in one area where results are well beyond exceptions. In other instances, managers may need to reorganize activities whose outcomes demonstrate a consistent pattern of inefficiency. REFINING THE HISTORICAL VIEW. The importance of clear and detailed historical data cannot be overstated. Yet, the budgeting process cannot allow the historical perspective to become crystallized. Managers need to distill the lessons of the most current results and filter them through their historical perspective. The need for a flexible and relevant historical perspective warrants its vigilant revision and expansion as conditions and experience warrant. THE MASTER BUDGET: A PROFIT PLAN The master budget aggregates all business activities into one comprehensive plan. It is not a single document, but the compilation of many interrelated budgets that together outline an organization's business activities for the coming year. To achieve the maximum results, budgets must be tailormade to fit the particular needs of a business. Standardization of the process facilitates comparison and aggregation even of mixed industries, for example, financial services (General Motors Credit Corp.) and manufacturing (General Motors Corp.). In the following discussion the term "production" includes the manufacture of goods expressed by their dollar value and number of units, and the provision of services expressed in labor-hours and in dollar value. Table A presents an overview of the master budget. The budgeting process is sequential in nature, i.e., each budget hinges on a previous budget, such that no budget can be constructed without the

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data from the preceding budget. In addition, each line budget is comprised of a number of smaller responsibility center budgets. Responsibility budgets are an important element of an effective accounting system. CLASSIFICATIONS AND TYPES OF BUDGETS Budgets may be broadly classified according to how a company makes and uses its money. Different budgets may be used for different applications. Some budgets deal with sources of income from sales, interest, dividend income, and other sources. Others detail the sources of expenditures such as labor, materials, interest payments, taxes, and insurance. Additional types of budgets are concerned with investing funds for capital expenditures such as plant and equipment;

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Table A The Master Budget: Common Segments Across Industries 1. OPERATING BUDGET Sales Budget Budget of ending inventories Production budget Materials budget Director labor budget Manufacturing overhead budget Budgeted cost of goods sold Administrative expense budget

Budgeted income statement 2. FINANCIAL BUDGET Capital expenditures budget Cash budget Budgeted balance sheet Budgeted statement of cash flows

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And some budgets predict the amounts of funds a company will have at the end of a period. A company cannot use only one type of budget to accommodate all its operations. Therefore, it chooses from among the following budget types. The fixed budget, often called a static budget, is not subject to change or alteration during the budget period. A company "fixes" budgets in at least two circumstances. 1. The cost of a budgeted activity shows little or no change when the volume of production fluctuates within an expected range of values. For example, a 10 percent increase in production has little or no impact on administrative expenses. 2. The volume of production remains steady or follows a tight, preset schedule during the budget period. A company may fix its production volume in response to an all-inclusive contract or it may produce stock goods. The variable or flexible budget is also called a dynamic budget. It is an effective evaluative tool for a company that frequently experiences variations in sales volume that strongly affects the level of production. In these circumstances a company initially constructs a series of budgets for a range of production volumes that it can reasonably and profitably meet. After careful analysis of each element of the production process, managers are able to determine the fixed costs (e.g., taxes) that will not change within the anticipated range, the variable costs (e.g., raw materials) that will change as volume changes, and the semi variable costs (e.g., equipment maintenance fees) that vary to some extent, but not proportionately within the predicted range. The combination budget recognizes that most production activities combine both fixed and variable budgets within its master budget. For example, an increase in the volume of sales may have no impact on sales expenses while it will increase production costs. The continuous budget adds a new period (month) to the budget as the current period comes to a close. Under the fiscal year approach, the budget year becomes shorter as the year progresses. The continuous method, however, forces managers to review and assess the budget estimates for a never-ending 12-month cycle. THE BUDGET PERIOD

45 As a general rule, a company adopts budgets covering a period long enough to show the effects of managerial policies, but short enough so as to make estimates with reasonable accuracy. Although planned activities differ in the length of operation, budgets describe only what a company expects to accomplish in the upcoming 12 months. Capital expenditures for major investments in plant and equipment are long term by nature. A company constructing new facilities, laying pipelines, or paving roads may design projects encompassing periods of five to ten years. Nevertheless, a company details the ongoing expenses on an annual basis. Most operating and financial budgets (Table A) cover a period of one fiscal year, comprised of 12 months arranged in quarters (segments of three months) and semiannual periods (segments of six months). THE OPERATING BUDGET The operating budget gathers the projected results of the operating decisions made by a company to exploit available business opportunities. In the end analysis, the operating budget presents a projected pro forma income statement that displays how much money the company expects to make. This net income demonstrates the degree to which management is able to respond to the market in supplying the right product at an attractive price, with a profit to the company. The operating budget consists of a number of parts that detail the company's plans on how to capture revenues, provide adequate supply, control costs, and organize the labor force. These parts are: sales budget, production budget, direct materials budget, direct labor budget, factory overhead budget, selling and administrative expense budget, and pro forma income statement. PREPARATION OF THE MASTER BUDGET Preparation of the master budget is a sequential process that starts with the sales budget. The sales budget predicts the number of units a company expects to sell. From this information, a company determines how many units it must produce. Subsequently, it calculates how much it will spend to produce the required number of units. Finally, it uses all this information to estimate its profitability. From the level of projected profits, the company decides whether to reinvest the funds in the business or in alternative investments. The company outlines the predicted results of its plans in a balance sheet that demonstrates how profits will have affected the company's assets.

Accounting: The Basis for Business Decisions notes the five major, sequential steps to preparing a
master budget: 1. Preparation of the sales forecast. How many units can be sold? How many units will be sold? How much will it cost to sell these units? How much net revenue will these sales generate? 2. Preparation of the production and operating costs. How much will it cost to produce the

units? How can production be more efficient? How much will administrative expenses run? 3. Preparation of a budgeted income statement. What will be the net income? How much will be cash, credit, and no collectible? How much will be available for capital investments? How much will remain as cash for financing daily operations? 4. Preparation of a cash budget. Will cash flow be adequate? Will receipts be evenly or erratically distributed? Will third-party financing be needed? How are excess funds to be invested? How much of the funds will be needed for capital expenditures? 5. Preparation of a budgeted balance sheet. How will the period's performance change the level of assets and liabilities? How will the profit position of the company change? How will the company's wealth be affected?

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THE SALES FORECAST AND BUDGET The sales organization has the primary responsibility of preparing the sales forecast. Since the sales forecast is the starting point in constructing the sales budget, the input and involvement of most other managers is important. First, those responsible for directing the overall effort of budgeting and planning contribute leadership, coordination, and legitimacy to the resulting forecast. Second, in order to introduce new products or to repackage existing lines, the sales managers need to elicit the cooperation of the production and the design departments. Finally, the sales team must get the support of the top executives for their plan. The sales forecast is prerequisite to devising the sales budget on which a company can reasonably schedule production, and to budgeting revenues and variable costs. The sales budget, also called the revenue budget, is the preliminary step in preparing the master budget. After a company has estimated the range of sales it may experience, it calculates projected revenues by multiplying the number of units by their sales price. The sales budget includes items such as: sales expressed in both the number of units and the dollars of revenue, adjustments to sales revenues for allowances made and goods returned salaries and benefits of the sales force, delivery and setup costs, supplies and other expenses supporting sales, advertising costs, and the distribution of receipt of payments for goods sold. Included in the sales budget is a projection of the distribution of payments for goods sold. Management forecasts the timing of receipts based on a number of considerations: the ability of the sales force to encourage customers to pay on time, the impact of credit sales that stretch the collection period, delays in payment due to deteriorating market and economic conditions, the ability of the company to make deliveries on time, and the quality of the service and technical staffs.

THE ENDING INVENTORY BUDGET The ending inventory budget presents the dollar value and the number of units a company wishes to have in inventory at the end of the period. From this budget, a company computes its cost of goods sold for the budgeted income statement. It also projects the dollar value of the ending

materials and finished-goods inventory, which eventually will appear on the budgeted balance sheet. Since inventories comprise a major portion of current assets, the ending inventory budget is essential for the construction of the budgeted financial statement. THE PRODUCTION BUDGET After it budgets sales, a company examines how many units it has on hand and how many it wants at year-end. From this it calculates the number of units needed to be produced during the upcoming period. The company adjusts the level of production to account for the difference between total projected sales and the number of units currently in inventory (the beginning inventory), in the process of being finished (work [goods, services] in process inventory), and finished goods in the ending inventory. To calculate total production requirements, a company adds projected sales to ending inventory and subtracts the beginning inventory from that sum. BEGINNING INVENTORY BUDGET The products completed and available for sale at the start of the period make up the beginning inventory budget. A company determines the value of the beginning inventory by: counting all products on hand, multiplying this quantify by the cost per unit, and aggregating the costs of the various products. WORK IN PROCESS BUDGET The work in process budget enumerates those units currently in the production phase. There inevitably will be some work in process at every point in the budget period. Therefore, a company needs to determine the number and value of the beginning and ending work in process inventories. Because the items are in different stages of production and finishing, these computations present a problem. Although computer technology has made great strides in simplifying the accounting process, predictive accuracy is contingent on the experience of line supervisors who feed the data to the accountants. THE DIRECT-MATERIALS BUDGET With the estimated level of production in hand, the company constructs a direct-materials budget to determine the amount of additional materials needed to meet the projected production levels. A company displays this information in two tables. The first table presents the number of units to be purchased and the dollar cost for these purchases. The second table is a schedule of the expected cash distributions to suppliers of materials. Purchases are contingent on the expected usage of materials and current inventory levels. The formula for the calculation for materials purchases is: Purchase costs are simply calculated: A company plans a direct-materials budget to determine the adequacy of their storage space, to

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institute or refine just-in-time inventory control systems, to review the ability of vendors to supply materials in the quantities desired, and to schedule material purchases concomitant with the flow of funds into the company. THE DIRECT-LABOR BUDGET Once a company has determined the number of units of production, it calculates the number of direct-labor hours needed. A company states this budget in the number of units and the total number of dollar costs. A company may sort and display labor-hours using these parameters: TYPE OF OPERATION. A company segregates employees according to the type of work they do regardless of the products. For example, a company will add up the costs for all assemblers even though they assemble different products. DIRECT-LABOR CLASSIFICATIONS. This method sorts labor by the production process. It focuses on the different types of employees working on one product. For example, a company constructs a budget showing the labor costs for all employees working on the same product, regardless of their role. LABOR STATUS. This method classifies employees by seniority, level of skill, union affiliation, and the like. A company uses this information to better understand the relationships between labor, skills, experience, and production costs. This information assists management in organizing the labor force more efficiently. COST CENTERS. A company using the cost center approach to organization gives each unit of the company the responsibility of controlling its labor costs. Each unit, therefore, is empowered to take corrective action if problems arise in meeting the budget's goals. THE PRODUCTION OVERHEAD BUDGET A company generally includes all costs, other than materials and direct labor, in the production overhead budget. Because of the diverse and complex nature of business, production overhead contains numerous items. Accounting lists some of the more common ones: 1. Indirect materialsfactory supplies that are used in the process but are not an integral part of the final product, such as parts for machines and safety devices for the workers; materials that are an integral part of the final product but difficult to assign to specific products, for example, adhesives, wire, and nails. 2. Indirect labor costssupervisors' salaries and salaries of maintenance, medical, and security personnel. 3. Plant occupancy costsrent or depreciation on buildings, insurance on buildings, property

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taxes on land and buildings, maintenance and repairs on buildings, and utilities. 4. Machinery and equipment costsrent or depreciation on machinery, insurance and property taxes on machinery, and maintenance and repairs on machinery. 5. Cost of compliance with federal, state, and local regulationsmeeting safety requirements, disposal of hazardous waste materials, and control over factory emissions (meeting class air standards). If anyone cost traverses the various budgets listed in Table A, the company would apportion that cost to reflect the benefits derived by the participating budgets.

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BUDGET OF COST OF GOODS SOLD At this point the company has projected the number of units it expects to sell and has calculated all the costs associated with the production of those units. The company will sell some units from the preceding period's inventory, others will be goods previously in process, and the remainder will be produced. After deciding the most likely mix of units, the company constructs the budget of the cost of goods sold by multiplying the number of units by their production costs. ADMINISTRATIVE EXPENSE BUDGET In the administrative expense budget the company presents how much it expects to spend in support of the production and sales efforts. The major expenses accounted for in the administrative budget are: officers' salaries, office salaries, employee benefits for administrative employees, payroll taxes for administrative employees, office supplies and other office expenses supporting administration, losses from uncollectible accounts, research and development, mortgage payments, bond interest and property taxes, and consulting and professional services. Generally, these expenses vary little or not at all for changes in the production volume that fall within the budgeted range. Therefore, the administrative budget is a fixed budget. There are some expenses, however, that can be adjusted during the period in response to changing market conditions. A company may easily adjust some costs, such as consulting services, R&D, and advertising, because they are discretionary costs. Discretionary costs are partially or fully avoidable if their impact on sales and production is minimal. A company, however, cannot avoid such costs as mortgage payments and property. These committed costs are contractual obligations to third parties who have an interest in the company's success. Finally, a company has variable costs that it adjusts in light of cash flow and sales demand. These costs include such items as supplies, utilities, and the purchase of office equipment. BUDGETED INCOME STATEMENT A budgeted income statement combines all the preceding budgets to show expected revenues and expenses. To arrive at the net income for the period, the company includes estimates of sales

returns and allowances, interest income, bond interest expense, the required provision for income taxes, and a number of nonoperation income and expenses, such as dividends received, interest earned, nonoperation property rental income, and other such items. Net income is a key figure in the profit plan for it reflects how a company commits the majority of its talent, time, and resources. FINANCIAL BUDGET The financial budget contains projections for cash and other balance sheet itemsassets and liabilities. It also includes the capital expenditure budget (see Table A). It presents a company's plans for financing its operating and capital investment activities. The capital expenditure budget relates to purchases of plant, property, or equipment with a useful life of more than one year. On the other hand, the cash budget, the budgeted balance sheet, and the budgeted statement of cash flows deal with activities expected to end within the 12-month budget period. CAPITAL EXPENDITURES BUDGET Capital expenditures budgets outline major investment goals often over a 5- to 10-year period. Companies rely on capital budgeting to identify, evaluate, plan, and finance major investment projects through which it converts cash (short-term assets) into long-term assets. A company uses these new assets, such as computers, robotics, and modern production facilities, to increase productivity, increase market share, and bolster profits. A company purchases these new assets as alternatives to holding cash because it believes that, over the long term, these assets will increase the wealth of the business more rapidly than cash balances. Therefore, the capital expenditures budget is crucial to the overall budget process. Capital budgeting seeks to make decisions in the present that determine, to a large degree, how successful a company will be in achieving its goals and objectives in the years ahead. Capital budgeting differs from the other financial budgets in that:

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Capital expenditures require relatively large commitments of resources whose dollar value may exceed annual net income. Capital expenditures extend beyond the 12-month planning horizon of the other financial budgets. To replace equipment may take 18 months. To build a new plant could involve years of planning and construction.

Capital expenditures involve greater operating risks. A company encounters more difficulties in the long-term projecting of revenues, expenses, and cost savings. In addition, capital projects divert employee energies away from daily operations.

Capital expenditures increase the financial risks by adding long term liabilities. A company's short-term liabilities, in the form of mortgage or bond interest, increase long before the project becomes an earning asset.

Capital expenditures require clear policy decisions that are in full agreement with the company's goals since a company has less flexibility to modify or cancel a project in midstream without serious potential consequences.

THE CASH BUDGET

51 In the cash budget a company estimates all expected cash flows for the budget period by: stating the cash available at the beginning of the period, adding cash from sales and other earned income to arrive at the total cash available, and subtracting the projected disbursements for payables, prepayments, interest and notes payable, income tax, etc. The cash budget is an indication of the company's liquidity or its availability of cash, and, therefore, is a very useful tool for effective management. Although profits drive liquidity, they do not necessarily have a high correlation. Often when profits increase, collectibles increase at a greater rate. As a result, liquidity may increase very little or not at all, making the financing of expansion difficult, and the need for short-term credit necessary. Managers optimize cash balances by having adequate cash to meet liquidity needs, and by investing the excess until needed. Since liquidity is of paramount importance, a company prepares and revises the cash budget with greater frequency than other budgets. For example, weekly cash budgets are common in an era of tight money, slow growth, or high interest rates. THE BUDGETED BALANCE SHEET A company derives the budgeted balance sheet, often referred to as the budgeted statement of financial position, from the budgeted balance sheet at the beginning of the budget period and the expected changes in the account balances reflected in the operating, capital expenditure, and cash budgets. (Since a company prepares the budgeted balance sheet before the end of the current period, it uses an estimated beginning balance sheet.) The budgeted balance sheet is a statement of the assets and liabilities the company expects at the end of the period. The budgeted balance sheet is more than a collection of residual balances resulting from the foregoing budget estimates. During the budgeting process, management ascertains the desirability of projected balances and account relationships. The outcome of this level of review may require management to reconsider plans that seemed reasonable earlier in the process. BUDGETED STATEMENT OF CASH FLOWS The final phase of the master plan is the budgeted statement of cash flows. This statement anticipates the timing of the flow of cash revenues into the business from all resources, and the outflow of cash in the form of payables, interest expense, tax liabilities, dividends, capital expenditures, and the like. The statement of cash flows includes:

The amount of cash the company will receive from all sources, including nonoperation items, creditors, and the sale of stocks and assets. The company includes only those credit sales for which it expects to receive at least partial payment.

The amount of cash the company will pay out for all activities, including dividend payments, taxes, and bond interest expense. The amount of cash the company will net from its operating activities and investments.

The net amount is a clear measure of the ability of the business to generate funds in excess of cash outflows for the period. If anticipated cash is less than projected expenses, management may decide to increase credit lines or to revise its plans. Note that net cash flow is not the same as net income or profit. Net income and profit factor in depreciation and non- operating gains and losses that are not cash-generating items. SUMMARY Budgeting is the process of planning and controlling the utilization of assets in business activities. It is a formal, comprehensive process that covers every detail of sales, operations, and finance, thereby providing management with performance guidelines. Through budgeting, management determines the most profitable use of limited resources. Used wisely, the budgeting process increases management's ability to more efficiently and effectively deploy resources, and to introduce modifications to the plan in a timely manner. 5 Alternative Sources of Capital for Your Small Business FEB 13, 2012 | WRITTEN BY: MARSHALL LEE

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As a small business owner, you may be relying heavily on your personal and business credit cards as key sources of financing. When your business needs a capital infusion, you may turn to your bank or another traditional lending institution. But in the event that your spending limits are slashed and your bank refuses to lend you additional capital you need to know where to look for alternative sources of financing. Luckily, there are plenty of places for small businesses to secure the money they need to operate efficiently. Self-Financing and Personal Loans In a pinch, your savings, assets, and investments can be a reliable source of capital for your small business. As always, you want to be extremely careful when borrowing against your own investments, or risking your personal assets. You can also consider approaching friends, colleagues, or professional contacts who may have money to invest. Wealthy individuals who provide capital to start-ups and struggling businesses are known as angel investors. In exchange for a fairly high rate of return, angel investors are typically very flexible with their terms and demands. Many angel investors are retired executive looking to share their expertise and advice. Peer-to-Peer Lending Peer-to-Peer lending is a relatively new phenomenon based largely around online communities of investors. Websites such as lendingclub.com match individual investors with businesses seeking

capital. Typically, the site will assign your business a grade or score based on your creditworthiness, and your interest rate will vary depending on your scare and the amount of interest you are able to generate. Here is a where a good story or a great pitch can make all the difference. Venture Capital Although venture capitalists rarely invest in businesses that have no intention of going public, your small business may have many of the qualities that a venture capitalist values: a solid business plan, passionate employees, strong management, and a clear plan to pay down debt and build revenue. If you believe your business plan could excite a group of venture capitalists, then you can search for VC investors through online networks such as the National Venture Capital Association. Factoring Factoring, also known as accounts receivable financing, is a method of generating cash quickly by selling your accounts receivable for 75-80% of their face value. A factoring agent has the right to collect the full amounts that your business is owed as the payments arrive. Essentially, this is a way of borrowing from yourself; you are taking out an advance on your own money.

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OPERATING LEVERAGE
Operating leverage is the ratio of a company's fixed costs to its variable costs. How It Works/Example: Here is the formula for operating leverage: Operating Leverage = [Quantity x (Price - Variable Cost per Unit)] / Quantity x (Price - Variable Cost per Unit) - Fixed Operating Cost To see how operating leverage works, let's assume Company XYZ sold 1,000,000 widgets for $12 each. It has $10,000,000 of fixed costs (equipment, salaried personnel, etc.). It only costs $0.10 per unit to make each widget. Using this information and the formula above, we can calculate that Company XYZ's operating leverage is: Operating Leverage = [1,000,000 x ($12 - $0.10)] / 1,000,000 x ($12 - $0.10) - $10,000,000 = $11,900,000/$1,900,000 = 6.26 or 626% This means that a 10% increase in revenues should yield a 62.6% increase in operating income (10% * 6.26). Why It Matters: In a sense, operating leverage is a means to calculating a company's breakeven point. However, it's also clear from the formula that companies with high operating leverage ratios can essentially make more money from incremental revenues than other companies, because they don't have to increase costs proportionately to make those sales. Accordingly, companies with high operating leverage ratios are poised to reap more benefits from good marketing, economic pickups, or other conditions that tend to boost sales.

Likewise, however, companies with high operating leverage are more vulnerable to declines in revenue, whether caused by macroeconomic events, poor decision-making, etc. It is important to note that some industries require higher fixed costs than others. This is why comparing operating leverage is generally most meaningful among companies within the same industry, and the definition of a "high" or "low" ratio should be made within this context.

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