Chapter 01. Introduction to Strategic Financial Planning

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2 Chapter 01 Introduction to Strategic Financial Planning

3 Learning Objectives After studying this chapter, the student will be able to describe: 1. The concept of Strategic Financial Management 2. The difference between accounting and budgeting 3. The role of management 4. The essence of managerial planning and control

4 1. Introduction and Purpose Strategy is a plan that aim to give the enterprise a competitive advantage over rivals through differentiation. Strategy is about understanding what you do, what you want to become, and - most importantly- how you plan to get there. David J. Collins Harvard Business Essentials

5 Financial Planning: Other Names Comprehensive profit planning and control Business budgeting Managerial budgeting Budgeting

6 o Oxymoron A figure of speech by which a locution produces an incongruous, seemingly selfcontradictory effect, as in cruel kindness or to make haste slowly. Strategic - Financial Planning Reading: The fall and rise of strategic planning by Henry Mintzberg.

7 o The Strategy Process Source: David J. Collins (2005). Strategy. Harvard Business Press.

8 Morgan M., Levitt R. & Malek W. (2007). Executing your Strategy. Harvard Business School Press.

9 2. Budget Definition Steven Bragg (2013). Budgeting: The comprehensive Guide 2 nd e.

10 Purpose The purpose of this session is to give and overview of the management process and to establish that process, along with the related organizational structure of the entity, as the foundation for the effective planning and control system.

11 Difference Between Budgeting and Accounting

12 o Difference Between Budgeting and Accounting (cont.) Accounting Budgeting Deals with recording, summarizing, interpreting and reporting financial transactions Accounting asks questions such as: Did we make a profit? Where did we spend our money? What sales did we make? Numbers must be real and not rounded Is mostly about predicting the future. Businesses need to look into the future and predict the financial consequences of business decisions Budgeting asks questions such as: Where will our income come from? What money will we need to expend? Will we have a viable business? Numbers are estimated and rounded for final presentation

13 3. The Role of Management Management can be defined as the process of defining entity goals and implementing activities to attain those goals by efficient use of human, material, and capital resources.

14 Goal Orientation Primary goal orientation for business endeavors: 1. Return on investment 2. Contribution to the economic and social improvement of the broader environment

15 Functions of Management 1. Planning 2. Organizing 3. Staffing and human resource management 4. Leading and interpersonal influence 5. Controlling

16 Some Conceptual Views about the Role of Management Philosophical disagreement of the role of management in business and nonbusiness entities. Market theory views the managerial role basically as comprising reactive decisions that respond to environmental events as they occur. In contrast, the planning and control theory views the managerial role essentially as an active one that attempts to condition the states of the enterprise.

17 Theoretical Views of the Role of Management Market Theory 1.Management is solely at the caprice of prevailing economic, social, and political forces (environment). 2. As a consequence, management essentially fills the role of a fortune tellerreading the environment. 3. When the environment is read, reactive managerial decisions are made. 4. Therefore, managerial competence (success) depends on an ability to read the environment and react wisely. Reactive (Ex Post) Decisions: Management reads events and then reacts to them. Planning and Control Theory 1. The future destiny of the enterprise can be manipulated; hence, it can be planned and controlled by the management. 2. Good managers can plan realistic ways to achieve the objectives. 3. Management can manipulate the controllable variables and plan for the noncontrollable variables. 4. Therefore, the quality of managerial planning decisions determines managerial competence. Active: (Ex Ante) Decisions: Management anticipates future events and plans for the future.

18 4. The Essence of Managerial Planning Management planning is a process that includes the following five phases: 1. Establishing enterprise objectives and goals 2. Developing premises about the environment in which they are to be accomplished 3. Making decision about course of action for accomplish the objectives 4. Initiating activities necessary to translate plans into action 5. Evaluating performance feedback for replanning.

19 Decision Making Process Rational Approach Decision making process involves a commitment or resolution to do or to stop doing and act, or to adopt or reject an attitude. Sound decision making requires creativity and confidence. It is surrounding by risk, uncertainty, criticism, and estimations.

20 Steps in Decision Making Process Stanford Approach

21 Common Impediments to Decision Quality Stanford Approach

22 Bounded Rational Decision Making The organization members best intentions may be to make rational decisions, but the real life conditions place boundaries or constrains on their abilities to act rationally The result of bounded rational decision making is satisficing A satisficing outcome is one of lesser quality than a utility maximizing outcome

23 Garbage Can Decision Making Deals with the pattern or flow of multiple decisions within organizations Organized Anarchy. The garbage can model was developed to explain the pattern of decision making in organizations that experience extremely high uncertainty

24 o Organized Anarchy Characteristics 1. Problematic preferences. Goals, problems, alternatives, and solutions are ill defined. Ambiguity characterizes each step of a decision process. 2. Unclear, poorly understood technology. Cause-and-effect relationships within the organization are difficult to identify. An explicit database that applies to decisions is not available. 3. Turnover. Organizational positions experience turnover of participants. In addition, employees are busy and have only limited time to allocate to any one problem or decision. Participation in any given decision will be fluid and limited.

25 o The Four Streams Relevant to Organizational Decision Making are as Follows 1. Problems 2. Potential solutions 3. Participants 4. Choice opportunities o Consequences 1. Solutions may be proposed even when problems do not exist 2. Choices are made without solving problems 3. Problems may persist without being solved 4. A few problems are solved

26 Planning Inflows and Outflows of an Enterprise

27 The Essence of Managerial Control Controlling can be define as the process of measuring and evaluating actual performance of each organizational component of an enterprise, and initiating corrective action when necessary to ensure efficient accomplishment of enterprise objectives, goals, policies and standards.

28 The Control Process 1. Establishing goals and standards 2. Comparing measured performance against the established goals and standards 3. Reinforcing successes and correcting shortcomings

29 Types of Control 1. Preliminary control (feed forward). Used prior to action to ensure that resources and personnel are prepared and ready to start activities. 2. Concurrent control. Monitoring of current activities to ensure that goals are being met, and policies and procedures are being followed, during action. 3. Feedback control. Ex post focusing on past results to control future activities.