17 Planning and Forecasting

7/31/2019 17 Planning and Forecasting

1/13

Planning and ForecastingTopic Gateway Series

1

Planning and ForecastingTopic Gateway Series No. 17

Prepared by Louise Ross and Technical Information Service October 2006


2/13


About Topic Gateways

Topic Gateways are intended as a refresher or introduction to topics of interest

ew and a fuller

st some further resources

ers only in the CPD

bsite, along with a number of electronic resources.

ormation Service

s and accounting specialists work closely together to

resolve their work

information needs. Additionally, our accounting specialists can help CIMA

n financial reporting,

management and performance management, as defined in the CIMA

rminology2005 edition.

s and students should sign into My CIMA to access these services

of Management Accountants26 Chapter StreetLondon SW1P 4NPUnited Kingdom

T. +44 (0)20 8849 2259F. +44 (0)20 8849 2468

[email protected]

to CIMA members. They include a basic definition, a brief overvi

explanation of practical application. Finally they signpo

for detailed understanding and research.

Topic Gateways are available electronically to CIMA Memb

Centre on the CIMA we

About the Technical Information Service

CIMA supports its members and students with its Technical Inf

(TIS) for their work and CPD needs.

Our information specialist

identify or create authoritative resources to help members

related

members and students with the interpretation of guidance o

financial

Official Te

CIMA member

and resources.

The Chartered Institute

2


3/13


3

Planning and Forecasting

formulation, evaluation and selection of

the policies, strategies, tac chieve them. Planning

term/strategic planning and short term/operational planning. The

l Terminology, 2005

r planning purposes.

erminology, 2005

agement (cost

planning) and paper 5, Integrated Management (scenario planning). Students

covered in managerial level paper 1, Management Accounting

aper 4,

arket forecasting).

anagement

eting and Cash

r topic gateways.

Related concepts Budgeting: Like planning, budgeting looks into the future beyond the

immediate timeframe. Planning is an attempt to shape the organisations

future, while budgeting aims to predict what resources the organisation can

use and might expend. Budgets are an essential, more detailed element of

planning. They are not effective when divorced from the planning context

JIT (Just in Time): This relies on detailed forward planning to schedule when

parts will be needed to reduce inventory and speed up response times to

customers.

Definition and conceptPlanning is defined as:

'The establishment of objectives, and the

tics and action required to a

comprises long

latter is usually for a period of up to one year.

CIMA Officia

A forecast is defined as:

'A prediction of future events and their quantification fo

CIMA Official T

Plans often incorporate forecast data.

ContextPlanning is covered in Managerial level paper 2, Decision Man

also study planning in the Strategic level paper 6, Business Strategy.

Forecasting is

Performance Evaluation, paper 2, Decision Management and p

Organisational Management and Information Systems (m

Students also study forecasting in strategic level paper 6, M

Accounting Business Strategy.

This topic gateway only mentions Strategic Planning, Budg

Forecasting briefly as these topics will be covered by othe


4/13


4

Overview - Planning

Planning is a universal management activity, inherent in every business

lanning is an analytical activity, and is:

breaking down a goal or set of in ormalising those steps

d articulating the

enry Mintzberg, 1994

, that is, in the context of plans at other

levels in the hierarchy. Strategic plans usually take a long term view, five or more

ture. Tactical plans (also known as functional plans) look two to

ead. Operational plans, which include budgets, have an annual

of plan in the business context include:

lanning

scenario planning

lanning

rmulated in advance, to be implemented upon the occurrence of

l Terminology, 2005

identifying possible problems as far as

is practicable. It considers what actions could prevent or ameliorate the impact ofthose problems. Contingency planning involves monitoring if the trigger points

for those problems occur.

Scenario planningThis is similar to contingency planning in that it also scopes out a limited number

of possible futures in the context of high uncertainty. However, scenario planning

is used to generate a population of possible futures to help long term plans

remain flexible, rather than to prepare for the worst.

proposition. A plan exists when an objective is framed and a sequence of events

identified to reach that objective. P

tentions into steps, f

so that they can be implemented almost automatically an

anticipated consequences or results of each step.

H

Plans are usually prepared in a cascade

years into the fu

four years ah

scope.

Specific types

contingency p

the business plan.

Contingency p

A plan, fo

certain specific future events.

CIMA Officia

The contingency planning process includes


5/13


5

Business plan

A business plan outlines the companys expected course of action for the

medium term. This should be in the context of the industry, market, products,

one-off exercise, but a

ent which is regularly used and revised. Its purpose is to help the business:

meet the expected and and obstacles the future

a guide to navigate successfully through its unique competitive

Harvard ManageMentor, 2006

d on available past

dgement. There are

basic forecasting methods.

analysis and projection

uch as trends, seasonality

hich is not caused by

ding this trend into the future using those

s.

Qualitative techniques

the accuracy or relevance of

forecasts. Mintzberg refer

techniques include the Delphi method where pr ictions and analysis from

Causal methods

In which:

Theory, prior research and expert domain knowledge are used to specify

relationships between a variable to be forecast and explanatory variables.

Forecasting Principles, Methodology Tree

http://www.forecastingprinciples.com/methodologytree.html

policies, capacity and resources. It should not be a

docum

unexpected opportunities

holds

environment.

ForecastingForecasting is an attempt to estimate the future. It is base

data, the extrapolation of trends and the application of ju

three

Time series

The analysis of past data is used to identify patterns, s

or cycles. A trend is an upward or downward pattern w

seasonality. Projection is about exten

observation

Where non-numerical information is used to improve

s to such information as soft information. These

ed

experts are collected, moderated and summarised.


6/13


6

Application

Planning helps organisations articulate, share and imp

assists in the allocation of resources and in monitoring their us

Forecasts are used by many functions within the organisatio

application

lement their strategies. It

e.

n. One specific

, the cash forecast, is prepared by the Finance department. This

forecast predicts the size and timing of inflows and outflows of cash over a

monthly forecast for

etailed annual forecast for

ears.

her budgets will be

are. Similarly, profit and

isation, given

projected sales and costs.

tion, and for

o increase capacity.

ecasts to set targets and quotas for salespeople.arketing departments, the

r example, Marketing

economic and perhaps social trends.

Marketing will also consider how the organisations share of that market might

based on customer trends and intentions, as well as

market testing and competitive data results.

ialist forecasting

resource in the organisation. This helps ensure that different departments base

their forecasts on common data. It also facilitates the sharing of results and good

practice

Reported benefits of planning and forecastingAlthough there are many types of plan with different purposes and planning

horizons, in general planning may:

help management to think about the business logically and strategically

identify milestones towards the achievement of objectives (clarity and focus)

defined period. Typically, the Finance department prepares a

the first two years. This is usually followed by a less d

the next three y

The Finance department also uses forecasts to anticipate whet

met. If not, Finance can analyse where the problem areas

loss forecasts predict the trading performance of the organ

Operational departments use forecasts to schedule produc

purchasing and logistics. If there is insufficient capacity, forecasts can be used to

determine the timing and amount of capital expenditure t

The Sales department uses forForecasts are mainly generated from the Finance and M

latter frequently including external data in its forecasts. Fo

might estimate how the market for its products will develop. This would involve

looking at market potential, based on

develop. This would be

It is helpful (some argue essential) to have a dedicated spec


7/13


7

enable management to chart progress against the plan

monitoring)

(performance

ed and when (resource

help management inform employees of the direction and intentions of the

ion, communication and involvement).

ess plan may also:

nders or potential investors.

ith analysts. For example, this might regard profit and

loss forecasts

abling more efficient production scheduling and

istics forecasts)

ation to predict when it

ill have most impact

gplanning as for

o maintain any

usefulness. A large proportion of users report a lack of satisfaction with the

process. Cranfield Management Schools Centre for Business Performanceadvises that there is widespread dissatisfaction from practitioners, who conclude

that the effort spent on planning and budgeting is simply not justified by the

results.

In June 2006, CIMA Insightpublished a survey on business performance

management techniques. Over half of respondents criticised their own planning

for not relating to strategy, echoing the views of management theorist Henry

Mintzberg.

ensure that strategies specify what resources are need

allocation and scheduling)

business (co-ordinat

A busin

provide an overview of essential information to inform the decision making

of le

Forecasts may:

help manage financial market expectations by enabling management to

better communicate w

reduce costs by en

minimisation of stock holding (production and log

reduce the cost of borrowing by enabling the organisneeds finance (cash flow forecasts)

helps focus marketing effort to those areas where it w

(forecastsof market potential).

Reported drawbacks of planning and forecastin

Critics of planning report many of the same drawbacks for

budgeting. It is time-consuming and plans need to be updated t


8/13


8

Mintzberg felt that planning and strategy were mutually

characterised planning as the mere codification and opestrategies. Mintzberg acknowledged planning had a vital r

process which stifled innovation and c

exclusive activities. He

rationalisation of existingole, but felt it was a

ommitment. He believed planning was

mble the past. It also under

alyse, but providing the

planning process.

n average six planning systems compared to the typical

Group, quoted in an article in BusinessFinancemag.com. Those best practice

l to

tp://www.businessfinancemag.com/magazine/archives/article.html?arti

82andhighlight=planning

The inaccuracy can

lity data, faulty assumptions or weaknesses in

methodology. Analysing the cause of the problem can help improve future

forecasts.

Planning process

Planning is a cycle (with a feedback loop) rather than a process. It shouldnt be a

periodic intellectual exercise but something against which performance is

regularly monitored and analysed.

based on a faulty assumption that the future will rese

appreciated the role of soft data, hard to gather and an

essential insight and wisdom. [Henry Mintzberg, 1994]

Some dissatisfaction may stem from deficiencies in the

Organisations have o

three of best practice organisations. This is according to consultants The Hackett

companies generate 48% fewer reports. So there seems to be potentia

streamline the planning process.

ht

cleID=146

Forecasts come in for criticism if they are routinely inaccurate.

be caused by poor qua


9/13


9

Source: Mindtools (2006)

The analysis of opportunities can be made using several well-known approaches

ateway) such as Porters

analysis and strategic

w.bized.co.uk/educators/16-

ss is to start with a sales

values. All other

nd so on are based on activity

ales forecast. For not-for-profit organisations or cost

centres, the proxy for sales will be an indicator of demand for services. For

example, visitor numbers, number of visa application numbers or volume of calls

to the IT helpdesk.

The advantage of this approach is that it highlights the sales volume element

which needs to be forecast. Strictly speaking, the other forecasts are only

estimation the application of logic and arithmetic. By linking all the forecasts, it

is possible to flex the assumptions in the sales forecast. This enables forecasters

to see how the forecast filters through and affects all the subsequent

estimations. [Richard Stutley, 2003]

(discussed in more detail in the Strategic Planning topic g

Five Forces, SWOT analysis or PEST and its derivatives.

A useful mindmapof the issues in relation to strategic

planning can be found at the Bized website.

http://ww

19/business/strategy/presentation/strategic1_map.htm

The suggested best practice for the forecasting proce

forecast. This should be expressed in quantities rather than

forecasts such as production, income, net profit a

levels assumed in the s


10/13


11/13


11

Cooper, T. and Gould, S.Can we all go beyond budgeting?CIMA Insight,

sight

ur finance function.

global.com/insight

ber 2007].

CIMA Insight, January

m: www.cimaglobal.com/insight

November 2007].

way to do business. CIMA Insight,

e from: www.cimaglobal.com/insight

er articlesIMA

a

ugh businesses within

ablished organizations. Harvard Business Review, May 2005, Volume 83, Issue

ed? Business Finance,

forecasting package.

SupplyChain Management Review, September 2002, Volume 6, Issue 5,

sourcesDugdale, D., Jones, C. and Green, S. (2005). Contemporary management

accounting practices in UK manufacturing. CIMA Research Executive Summary.

London: CIMA Publishing. Available from:

www.cimaglobal.com/researchexecsummaries

[Accessed 6 November 2007].

A survey of practices in 41 UK companies showed that most made regular

forecasts. However, the authors characterised the methods adopted as typically,

relatively unsophisticated.

January 2004. Available from: www.cimaglobal.com/in[Accessed 6 November 2007].

Higgins, L. Financial fitness: upping the performance of yo

CIMA Insight, June 2006. Available from: www.cima

[Accessed 6 Novem

Nurdin, Georges. Most forecasting is useless and archaic.

2006. Available fro

[Accessed 6

Starovic, Danka. Place your bets on a new

March 2004. Availabl

[Accessed 6 November 2007].

Oth

Abstract from Business Source Corporate through My C

www.cimaglobal.com/mycim

Govindarajan, Vijay and Trimble, Chris. Building breakthro

est5, pp 58-68.

Leahy, Tad. Can the budgeting competency be narrow

February 2006, Volume 12, Issue 2, pp 39-43.

Tyagi, Rahul. How to evaluate a demand planning and

pp 48-55.

CIMA online
http://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insight


12/13


12

'For example, most companies made forecasts only t

year. O

o the end of the financial

ne company was felt to be exceptional in developing its forecasts to

Contemporary management accounting practices in UK manufacturing

e Corporate (BSC) has the full text of several planning and

forecasting journals, including.

ces.

usiness Forecasting Methods and Systems.

Journal of Forecasting.

dustry profiles. These

for forecasting. On

les from futurologists

affect the way we live, in the journal

ist.

Driving value through strategic planning and budgeting. (PDF 468 KB). This is

and Accenture.

on planning and

budgeting, interviewed senior executives from 15 companies and many

analysts. www.som.cranfield.ac.uk/som/research/centres/cbp/downloads/

Research_Report.pdf

Websites

Bized

Website for educators and students of accounting, business and related

commercial fields. Contains useful material for CPD such as topic overviews,

resource lists and cases. www.bized.co.uk

include the remainder of the current financial year and the whole of the

following year'.

Business Sourc

Decision Scien

Journal of Business.

Journal of B

Business Strategy Review.

Business Change and Re-engineering.

BSC also contains thousands of company, country and in

include forward-looking information which would be valuable

a more general note, BSC also includes downloadable artic

on trends and developments likely to

Futur

a joint research report from Cranfield School of Management

(2001). Accenture reviewed more than 100 publications


13/13

Planning and Forecasting

13

Topic Gateway Series

Cranfield School of Management Centre for Bu nceSpecialises in the development of predictive perform

events.

www.som.cranfield.ac.uk/som/research/centre

Forecasting principlesPortal provided

terminology, methodology, and solutions. Includes a diagnostic

userof commercial software and some freeware. D

for the serious forecaster.

www.forecastingprinciples.com/w

Mind tools

Useful site with many tip

manager, including those

www.mindtools.com

Prepare a

Business Links step by step guide to pr

entities. www.businesslink.gov.u

ership organisation which publishes research and other mater

i ed to bridge the gap between academics and practitioners.

www.sps.org.uk

Value-based Management

ludes useful material on

.valuebasedmanagement.net

siness Performaance measures,

among other areas. The site includes articles, research papers and

s/cbp/research.asp

by the International Institute of Forecasters. Provides

to help

s identify weak areas in their forecasting systems. Also gives reviewsefinitely worth exploring

elcome.html

s, tools and techniques for the business

for decision making and project planning.

Business Plan

eparing a business plan for small

k

Strategic Planning Society

Memb ial

ntend

Site inc scenario planning.

www

Copyright CIMA 2006

First published in 2006 by:

The Chartered Instituteof Management Accountants26 Chapter StreetLondon SW1P 4NPUnited Kingdom

Printed in Great Britain

No responsibility for loss occasioned to any person acting or refraining fromaction as a result of any material in this publication can be accepted by theauthors or the publishers.

All rights reserved. No part of this publication may be reproduced, storedin a retrieval system, or transmitted, in any form or by any means methodor device, electronic (whether now or hereafter known or developed),mechanical, photocopying, recorded or otherwise, without the priorpermission of the publishers.

Permission requests should be submitted to CIMA at: [email protected]

17 Planning and Forecasting

Documents

Transcript of 17 Planning and Forecasting