Management Control Systems

Class 2
2.1 The budget process
Management Control Systems CF2003

Strategy Formulation
Business units strategies
Business units strategies depend on two aspects: 1. Its mission: What are its overall objectives? BCG model and GE model provide a guide to corporations to select its mission.

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

Michael Porter Industry analysis and Value Chain analysis

Strategy Formulation Value Chain Analysis

Firm Infrastructure Human Resource Management Technology Development Procurement Margin

Strategic planning process Current Strategies

VALUE CHAIN ANALYSIS- MICHAEL PORTER:
Value chain analysis objective: Move materials from vendors, through production, and to the customer at the LOWEST COST, in the SHORTEST TIME and with GOOD QUALITY Companies must improve their efficiency!

Firm Infrastructure Human Resource Management Technology Development Procurement Margin

Management Planning and Control Systems CF2013

Strategic planning process Current Strategies

Firm Infrastructure Human Resource Management Technology Development Procurement Margin

HOW TO IMPROVE ON THE INBOUND? Reducing the number of vendors Computarized system to place orders automatically Limiting deliveries to Just in time Holding vendors responsible for quality
Management Planning and Control Systems CF2013

Strategic planning process Current Strategies

Firm Infrastructure Human Resource Management Technology Development Procurement Margin

HOW TO IMPROVE ON MANUFACTURING? Increasing automation Rearranging machines Better production contrl systems
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Management Planning and Control Systems CF2013

Strategic planning process Current Strategies

Firm Infrastructure Human Resource Management Technology Development Procurement Margin

HOW TO IMPROVE ON THE OUTBOUND? Having customer place orders electronically Changing locations of warehouses Changing channels of distribution Improving the efficiency or warehouses operations Own fleet versus outsourced distribution
Management Planning and Control Systems CF2013

Strategy Formulation Value Chain Analysis

1. 2. 3. 4. Can we reduce costs in this activity, holding value (revenue) constant? Can we increase value (revenue) in this activity, holding costs constant? Can we reduce assets in this activity, holding revenues constant? Most importantly, can we do (1), (2) and (3) simultaneously?

Firm Infrastructure Human Resource Management Technology Development Procurement Margin

Strategic planning process

DEFINITION: Process in which an organization decides on the STRATEGIES (plans to achieve organization goals) PARTICIPANTS: Top-management authorities WHAT DO THEY DO? Analyze current strategies or programs Decide on new strategies Decide assumptions and guidelines, which guidelines? First review of new strategic plan Analysis Second review of new strategic plan Final review and approval BENEFITS: It is the framework for developing the budget Means of aligning Managers with corporate strategies

Strategic planning process Diagrama

Strategic option A Strategic option B Strategic option C Strategic option D

BUDGETING

Strategic option A Strategic option B Strategic option C Strategic option D

Strategic option A

STRATEGIC PLANNING
Strategic option C

BUDGETING

Management Planning and Control Systems CF2013

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Strategic planning process New strategies

Some useful technics, not always used:

Net present value of the project (NPV): The excess of the present value of the estimated cash inflows over the amount of the investment required.
The internal rate of return (IRR) implicit in the relationship between inflows and outflows Payback period

Management Planning and Control Systems CF2013

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Budget Preparation Nature of a Budget

A budget estimates the profit potential of the corporation It is stated in monetary terms $$$$ It is detailed by month and by type of income/expense Generally covers a period of one year It is reviewed and adjusted several times according to a corporation objectives It is prepared usually six months before the start of the budgeted year Requires the involvement of all areas of the company It is regularly one of the managers objectives Actual financial performance is compared to budget. Updates of the budget are presented during the year. Usually after each quarter.

Management Planning and Control Systems CF2013

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Budget Preparation Use of a budget

Fine-tune the strategic plan with better information Inconsistencies in the organization showed up Assigns responsability to managers on the amounts of money that they can spend Evaluates performance

Management Planning and Control Systems CF2013

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Budget Preparation Content of an operating budget

PROFIT & LOSS STATEMENT (P&L)
+Revenues -Production costs and costs of sales Gross Margin -Marketing expenses -Logistic expense -General and administrative -Research and development Operating Margin -Income taxes Net income
Management Planning and Control Systems CF2013

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Budget Preparation Revenues

UNIT SALES X EXPECTED SELLING PRICES
ASSUMPTIONS: Economic assumptions such as Inflation, GDP Political assumptions Prices impacts Market growth Production constraints Cannibalization Competition Seasonality Historical data Production constraints Customers level of inventories Important events (World cups, Olimpic games, etc)
Management Planning and Control Systems CF2013

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Excel- Basics
PIVOT TABLES (TABLA DINAMICA) VLOOKUP (BUSCARV) (What I am looking for, where, what I want back, False(exact) True (close) The first column in which I am looking must be the column where the value will be found IF (SI) (Condition, value if the condition is true, value if the condition is false) Accepts only 7 conditions SUMIF (SUMAR.SI) (range in which I will look, condition, column to sum) TEXT TO COLUMNS (Data- Text to columns)

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

Management Planning and Control Systems CF2013

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Excel- Basics Validation- Function

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

CHARTS
REPLACE / FIND (Ctrl+F, Ctrl+B) IFERROR (SI.ERROR) (Value, Value if there is an error) VALIDATION (Data-Validation)

Management Planning and Control Systems CF2013

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Excel- Basics Verification and Validation

Verification - does my model run correctly? Validation - does my model correspond to reality well?
Conduct random spreadsheet audits Build protection into spreadsheet e.g., unlock any cell that is allowed to be changed (under Format->cell>protection) then protect spreadsheet. Clearly document formulas and name cells. Spreadsheet should be readable from top to bottom. Design sheet BEFORE building it Build in modules Have someone else check over Change input parameters & observe model behavior e.g., crank up mean to stress system Sanity checks on output - does it all make sense?

DO NOT FORGET THE FORMAT

Management Planning and Control Systems CF2013

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