Modern methods in preparing budgets Modern methods in preparing budgets

Part TwoPart Two

Iyad Attari 2009Iyad Attari 2009

Strategic Planning

Types of Planning

• Strategic Planning:

The art & science of formulating, developing, implementing and evaluating cross-functional decisions that enable an organization to achieve its objectives.

Is a course of action to achieve long-range goals.

Reflect the company’s direction and its purpose as stated in its mission statement.

Advantages of strategic planning

• Raise of profitability in the organization.

• Improving the working process.

• Saving both time & efforts.

• Identify Environmental factors effecting organization.

Advantages of strategic planning

• Take advantage of the marketing opportunities.

• Determine administrative, productivity and financial problems.

• All managers & Employees involved in planning and success.

Strategic planning

Financial Strategic plan

Deviation Strategic (Control)

Definition of strategic plan

The concept of strategic planning

Environmental Analysis

(S.W.O.T.)

Tactical PlansOperational plans,

budgets

Monitor Performance Implementation

Master StrategiesVision, mission, strategies,

goals, objectives

Adjust

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Strategic Planning

The art & science of formulating, developing, implementing and evaluatingcross-functional decisions that enable an organization to achieve its objectives

A complete look at how to position the

organization for the future

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Strategic Planning ProcessFundamental decision making/problem solving model Defines where the organization is now, where it wants to be, and how it

will get there Gathers internal and external information. Develops alternative strategies Selects appropriate strategies Implements a plan Evaluates and revises the plan as needed

Strategy

Implementa-

tion

Phase 3

Strategy

Development

Phase 2

Strategy

Formulation

Phase 1

Strategy

Evaluation

Phase 4

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Strategic Planning Process Phase 1: Strategy Formulation

Develop vision & mission statements

Define organizational values

Strategy Formulation

Mission• Who the company is?• What the company do?• Who the company’s

customers are?

Values• Describe what is

important• Dictate employee

behavior

VisionGuiding image of the organizations

desired future

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Vision, Mission, Objectives, and Goals

Vision

• Defines the desired or intended future state of an organization or enterprise in terms of its fundamental

objective and/or strategic direction.

•Vision is a long term view.

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Vision, Mission, Objectives, and Goals

Mission

• Defines the fundamental purpose of an organization or an enterprise.

•Describing why it exists and what it does to achieve its Vision

•A corporate Mission can last for many years, or for the life of the organization.

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Vision, Mission, Objectives, and Goals

Goals

• are general guidelines that explain what you want to achieve in your company.

•They are usually long-term and represent global visions.

•such as “protect public health and safety.”

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Vision, Mission, Objectives, and Goals Objectives

•define strategies or implementation steps to attain the identified goals.

•Unlike goals, objectives are specific, measurable, and have a defined completion date.

•They are more specific and outline the “who, what, when, where, and how” of reaching the goals.

Example

NatHealthVision, Mission, & Values

الرؤيا

اإلعتراف وتحقيق التوسعكمزود والعالمي اإلقليمي

الصحي التأمين لخدمات رئيسياإللكترونية، المطالبات وإلدارةالبطاقة تقنية بإستخدام وذلك

الذكية

الرسالة

من للزبائن متميزة خدمة تقديمذاتية الصناديق ، التأمين شركاتالحكومية والمؤسسات التأمين

الموجودات حماية بهدفمجاالت توسعة على ومساعدتهم

متدنية تكاليف وتحقيق عملهمرفع ضمان مع ، للمطالبات

الطبية الخدمة مستوياتحسب النهائي للمستخدم

المتفق التعاقدية السياساتعليها

قيم نات هيلثالنزاهة واإلستقامة1.اإللتزام والمصداقية2.اإلفصاح والشفافية3.الدقة واإلنضباط4.المحافظة على الممتلكات5.عدم تضارب المصالح6.اللطف والكياسة7.التعامل بمهنية ومسؤولية مع الجميع8.- النظافvvvة والvvvترتيب والمحافظvvvة على 10

البيئة الصحيةحمايvة الملكيvة الفكريvة وأسvرار المؤسسvة 9.

هيلvث ()نvات

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Strategic Planning Process Phase 2: Strategy Development

Conduct a SWOT analysis including environmental scan

Establish long-term objectives (3-5 Ys)

Identify strategies: - corporate - unit & - functional

Strategy Development

S

O T

W

Internal Strengths

Internal Weaknesses

External

Opportunities

External

Threats

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Strengths Weaknesses

Opportunities Threats

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Ex

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SWOT

SWOT Analysis

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S T R E N G T H SS T R E N G T H S

What do you do particularly well? What do you do that is unique in the

“marketplace?” What do your customers/ clients/ patrons ask for

you to do over and over again? What do you have the right tools/ resources to

accomplish?

What do you do particularly well? What do you do that is unique in the

“marketplace?” What do your customers/ clients/ patrons ask for

you to do over and over again? What do you have the right tools/ resources to

accomplish?

W E A K N E S S E S W E A K N E S S E S

What do you not feel as comfortable doing? What needed resources, staff, or skills

do you lack?

What do you not feel as comfortable doing? What needed resources, staff, or skills

do you lack?

Are there new situations coming down the road that you can take advantage of (new programs being offered, new faculty joining the department, new tools available to you)?

Are there gaps in the “market” that you can fill? Are there partnerships that might be fruitful?

Are there new situations coming down the road that you can take advantage of (new programs being offered, new faculty joining the department, new tools available to you)?

Are there gaps in the “market” that you can fill? Are there partnerships that might be fruitful?

Who is your competition and what do they offer that you can’t do as well or at all?

Are there “environmental” changes or situations that could cause problems for you and your programs?

What other roadblocks are being thrown in your path?

Who is your competition and what do they offer that you can’t do as well or at all?

Are there “environmental” changes or situations that could cause problems for you and your programs?

What other roadblocks are being thrown in your path?

O P P O R T U N I T I E SO P P O R T U N I T I E S T H R E A T ST H R E A T S

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SWOT Analysis

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Strategic Planning Process Phase 3: Strategy Implementation

Establish short-term objectives (6 Ms-1 Y)

Develop action plans

Allocate resources

Motivate employees

Strategy Implementation

April 13, 2023 40

Strategic Planning Process Phase 4: Strategy Evaluation

Review strategies

Measure performance

Take corrective action

Strategy Evaluation

Have significant differences occurred?

Activity one:Review strategies

Activity two:Measure performance

Continue present course

Have significant differences occurred?

Activity three:Take

corrective action

No

No

Yes

Yes

Framework to Evaluate Strategies

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Assessing the Internal Environment

InformationTechnology

Operations

Finance andAccounting

Employees

Marketingand Sales

HR

must be able to

Describe the role of each function in the organization. Understand the organization structure & its effect of the implementation of strategic

planning

Understand the perspective of your business partners.

Create communication & collaboration. Identify internal needs & emerging issues.

42

Finance and Accounting

Finance:

Assists other business units in the financial aspects of their business. Pricing products Creating financial models

Accounting:

Balances the checkbook of the company. Accounts receivable Accounts payable

InformationTechnology

Operations

Finance andAccounting

Employees

Marketingand Sales

HR

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Assets, Liabilities & Equity

44

Accounts Payable & Accounts Receivable

The money a company owes to

its vender & suppliers (liability accounts)

Accounts Payable

The money a company’s customers

Owe the company (assets accounts)

Accounts Receivable

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Balance Sheet

Summarizes the firm’s financial position

Assets = Liabilities + Equity Every financial transaction is an exchange, and both sides are

recorded. Only records transactions measured in money. Profit increase equity Cash withdrawal decrease equity

46

Income Statement

A statement explaining revenues, expenses, and profits over a specific period of time

(one year or a quarter)

Gross sales $360,000Less cost of goods sold $240,000Gross profit $120,000Less expenses: $50,000

Salaries $20,000Rent $18,000Utilities $7,200Depreciation $1,800Interest $3,000

Income less expenses $70,000Income tax expense $28,000Net income $42,000

47

Gross Profit Margin

what its costs

to produce a product

Measures the difference between

selling price

48

Marketing and Sales

What the organization sells to make profit

MarketingThe process of planning, pricing, promoting & distributing goods/services

to satisfy organizational objectives

Promotion

Price

Place

Product

KeyElements

4 Ps

Who the product/service will be made available for purchase by customers

A key decision in marketing plan. (large share of the market/ lowest price)

Techniques for communicating information about product/service to customers

Sales:Sell the organization's

product to the marketplace

InformationTechnology

Operations

Finance andAccounting

Employees

Marketingand Sales

HR

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OperationsInformationTechnology

Operations

Finance andAccounting

Employees

Marketingand Sales

HR

The Central Focus

To provide goods and services to customers

Primary responsibility Productivity, quality, cost, delivery & performance

Affected by supply chain management

Control

Inventory Scheduling

Standards

Capacity

Keyconcepts

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Information TechnologyInformationTechnology

Operations

Finance andAccounting

Employees

Marketingand Sales

HR

Enables an organization to use information to support its strategic objectives.

• Strategic information systems are designed to achieve competitive advantages.− Airline reservation systems

• Operational systems focus on reducing costs or improving productivity.− Remote access systems that allow

telecommuting

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EmployeesInformationTechnology

Operations

Finance andAccounting

Employees

Marketingand Sales

HR

52

Increasing Employee Engagement

Employees willingness to “go the extra mile”

Measuring employee engagement How employee describes the organization Whether they choose to remain How they work

53

Investing in Human Capital

Create an organizational culture that develop creative, loyal and empowered employees

HR to play a role in confirming the organization’s return on investment (ROI) in its human capital

Human capital consists of combined knowledge, skills and experience of company’s employees

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Organizational Design

High energy/creativity

Develop products/Services & markets

Experienced staff

Meet or exceed the pay range

No training Basic employee policy

Change & expansion

Backlogs & scheduling problem

Polices, procedures & rules in place

Recruitment & selection increased

Leadership sustains moral/ motivation while building teams

Problem resolved

Staffing & organizational culture stabilized

Additional product & services

Training

Labour cost becomes a factor

No change

Fixed rules & regulations

Leadership resist change

Enhanced product/cost reduction programs (early retirement- closing major facilities- outsourcing- third party contracts- retaining key staff)

Introduction Growth Maturity Decline

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HR Focus:Staffing Compensation, HR planning,

training

Introduction

Staffing andtraining

Change managementOutplacementCross-training

Growth Maturity Decline

Crisis: Leadership

Need:Creativity

Crisis: Delegation

Need: Clear direction

Need:Formal systems

Crisis: Bureaucracy

Crisis: Change resistance

Need:• Streamlined

decision making• Flexibility• Small-company

thinking

Patterns of Organizations Change

Scanning The External Environment

Environmental Scanning

Is a process that systematically surveys & interprets relevant data to identify external opportunities and threats

NowIn the future

External Environment Factors

Demographic FactorsDemographic Factors

Demographic Factors

Age

Gender

Generational differences Geographic

shifts in populations

Ethnicity

Unskilled labor

Nontraditional labor force

Demographic Factors (cont.)Age

Demographic Factors (cont.)Age

Baby boomers

Start to be 60 in 2006

2004

78 million baby boomers

EducatedTrainedLoyal

Dependable

Born between 1946 and 1964

44%

Demographic Factors (cont.)

Gender

47% of 2004 workforce56% of student in college campuses

Family constrain

Inflexible working conditions Occupational

barriers

Gender stereotyping

Demographic Factors (cont.)

Generational differences

Born between 1965 and 1980

Born after 1980

Millennium

Demographic Factors (cont.)

Geographic shifts in populations

Urban centers The suburbs

Demographic Factors (cont.)Ethnicity

Hispanic The largest minority group

in US

Hawaii

Minorities made up the majority of the population

Avoid

discrimination &

harassment

Increase inclusion& engagement

Demographic Factors (cont.)Unskilled labor

Higher education Skilled workers

Training Off shoring

Demographic Factors (cont.)

Nontraditional labor force

Find enabling technology

Create enabling environment

Economic Factors

Interestrates

InflationDisposable

income

CPI

GDP

EconomicFactors

UnemploymentLess investment

EmploymentInvestment

Total value of goods and services produced in a country in a given year

Good economyWage increases

No wage increases Downsizing

Measure the average change over time in the prices paid by the

consumer for goods & services

Consumer Price Index

Gross Domestic Product

The amount of money the consumer have to spend after taxes paid When supply of money is in excess of

the amount of goods and services

Salary compression Increase in starting salary

Other Factors

Political•Legislation and regulatory guidelines

Social•Changing definition of families•Strain on health-care systems

Technological

•Advances•Skills•“Digital divide”•Process changes

Example: Strategic planning

The Budgeting

Iyad Attari

What is Budget• Its an Estimated list of activities and processes

that the management expect to be completed within a specific period.

• It’s a digital translation for the managerial plans.

• It’s a Quantitative plan to make use of the resources within the accounting unit

Budgeting functions

PlanningFunction

CoordinationFunction

MonitoringFunction

Evaluating & following up

Function

Success factors in Budgeting

ParticipationBudgeting Relates To org. Structure

Reality

Comprehensive

Time frame

Flexibility

Predictions & Estimation

Following up &Feed back

Preparing Budgets

Iyad Attari

Characteristics of Preparing Budgets

1st.: Planning for firms activities:

• systematic planning to make use of the resources and predict the future problems to avoid it.

2nd.: Improve the efficiency of communications & coordination's:

• Good tool to improve communications within all levels.

Characteristics of Preparing Budgets

3rd. : quantitative measurement :

• Translate all the goals to numbers.

4th.: Key performance indication tool:

• By comparing the budgeted with actual.

Characteristics of Preparing Budgets

5th. : Regulation :

• Some firms such as the public firms its an obligation to prepare the budgets.

6th.: Gathering efforts to reach goals:

• Because its quantitative and can be measured all levels work together to reach these Numbers.

Types of budgets

Iyad S. Attari

Types of budgets

Depending on Time

Long-Term Budgets

Short-Term Budgets

Continuous Budgets

Types of budgets

Depending on Activities

Capital activities Budgets

Current Activities Budgets

Types of budgets

Depending on Transactions

Financial Budgets

Cash Budgets

Intangible Budgets

Types of budgets

Depending on Accounting unit

Programs Budgets

ProductionBudgets

General Budgets

Opinions towards budgeting

• Positive opinion:

• Managers want to make use of budgets.• Use it as planning ,implementation ,and control tool.

Neutral Opinion

• Imitation of other firms.

• Using it to be modern, and updated.

• No benefits or damages if you use it .

Negative opinion:

• Theoretical tool that cant be applied.• So no need to use it (ignore it).

Statistical forms in budgets

Using Statistical forms for budgets

Statistical forms:

A -Time SeriesB -Linear RegressionC -Changing Avarage

Using Statistical forms for budgets

Statistical forms:

A -Time Series:Statistical data that split the time.

زمنية لفترات تشاهد أو تجمع التي اإلحصائية البيانات هيمتتالية

Example Time Series

Using Statistical forms for budgets

Statistical forms:

B - Linear Regression: الخطي االنحدار طريقة

Using the linesr regression formula

Example: Linear Regression

Using Statistical forms for budgets

Statistical forms:

C - Changing Avarage : التغير متوسط طريقة

Example: Linear Regression

CAPITAL BUDGETSCAPITAL BUDGETS

Iyad S. Attari 2009

Capital Budgets:

Reflecting the managerial decisions about assessing, evaluating, and purchasing capital assets.

Capital Budgets:

Reflecting the managerial decisions about assessing, evaluating, and purchasing capital assets.

Types of Capital BudgetingTypes of Capital Budgeting

Purchasing New AssetsPurchasing New Assets

Replacing Assets

Replacing Assets

ExpandingDecisionsExpandingDecisions

Capital Leasing

Decisions

Capital Leasing

Decisions

Importance of Capital BudgetingImportance of Capital Budgeting

Exchange cash now to create benefits laterExchange cash now to create benefits later

Long Term Investment (more than 1 year)Long Term Investment (more than 1 year)

Expected to create stream returns in futureExpected to create stream returns in future

Characteristics of Capital BudgetingCharacteristics of Capital Budgeting

High Risk High Risk

Difficult to revise the decisionsDifficult to revise the decisions

Needs a continuous evaluations Needs a continuous evaluations

Needs a large Investments.Needs a large Investments.

Information needed to evaluate Capital Investments

• The Expected amounts for capital investment.

• The maturity date & life cycle (NPV).

• The Return on investment (ROI) & cash flow.

• Rate and return formula.

Risk And Return

0

20

40

60

80

100

120

1 2 3 4 5 6

Risk (beta)

Ret

urn

(E

xpec

ted)

SML

Free risk (Sys)

What kind of relationship between return & risk.

Positive relationship .

Steps to evaluate Capital Investment

• What is the goal of investing in capital.

• Write the alternative to reach goals.

• Collect the information for each alternative.

Steps to evaluate Capital Investment

• Estimate the cost & return expected from each alternative.

• Create an Indexes to evaluate results.

• Chose the best alternative upon the above mentioned points.

Standards of evaluating Capital projects

Tradetional Methods

Standards of evaluating Capital projects

• Pay Back Period (PBP):لالستثمار االسترداد فترة

The time needed to Cover the invested amounts.

• Accounting Rate of Return (ARR):المحاسبي العائد معدل

ARR= Yearly return Average Investment Average

Example: Accounting Rate of Return (ARR):

Standards of evaluating Capital projects

Modern Methods

Standards of evaluating Capital projectsModern Methods

• Net Present Value (NPV):الحالية القيمة صافي

Its the net preset value for the returns (cash in flows) and present value for the investment (cash out flow) at a descounted price.

Example:Net Present Value )NPV(

Standards of evaluating Capital projectsModern Methods

• Internal Rate of return (IRR):النقدية التدفقات خصم طريقة

The rate that make the (NPV) of the cash in flows for a project equal zero.

Example: Internal Rate of return )IRR(

Standards of evaluating Capital projectsModern Methods

• Profitability index:( الربحية ( مؤشر الحالية القيمة دليل

The percentage of (Cash in flows) to conpaired to the investment present value (Cash out flow).

Profitability Index = Cash in flows (P.V.) Investment amount

Example: Profitability index:

Control by using Performance Report

Iyad S. Attari 2009

Performance Report

• IT is a regular basis report (usually quarterly or yearly).

• Evaluate the companies performance of reaching pre-determined goals, within the strategic plan and budgets.

The Presentation of the report:

1 -The title (Name of the Co., month).

2 -Presentation of The deviations :a) Between actual & expected for a month or quarter

in the current year.

b) With a similar month or quarter in the past year (Snap shot).

C) From the beginning of the current year up to date.

The Presentation of the report:

3 -Use a charts of comparisons.

4 -The reason of the positive or negative deviations.

The Content of the Performance Report

Operational Profits

Operational Revenues

Operational Expenses

Profitability Analysis:

Net Income(Before Tax)

Other Revenues

Other Expenses

• Here we analyze the deviations and the reason of it.

The Content of the Performance Report

Operational Profits

Operational Revenues

Operational Expenses

Financing Structure Analysis

Net Income(Before Tax)

Other Revenues

Other Expenses

• Here we analyze the deviations and the reason of it.

The Content of the Performance Report

Financing Structure Analysis

Comparison between all the following:

• Equity %.• Long term Loans %.• Short term loans%.

The Content of the Performance Report

Investment Portfolio Analysis

Classifying portfolio to:

• Stocks & Bonds.

• Local & internatianal securities.

• Debend on the GAAP (For trading or to maturity).

Portfolio Risk : Is the risk remaining after allowing for risk reducing effects of combining securities into a

portfolio . Portfolio risk is attributable to the poor balance of risks within the portfolio. There is a limitation for the no. of securities in the portfolio.

1 2 3 4 5 60

20

40

60

80

100

120

Diversification by using portfolio

Size of portfolio

Ris

k

1

3

2

4

The Content of the Performance Report

Financial Ratios & Indexes

The Content of the Performance Report

Financial Ratios & Indexes

The Content of the Performance Report

Financial Ratios & Indexes

The Content of the Performance Report

Financial Ratios & Indexes

The Content of the Performance Report

Financial Ratios & Indexes

The Content of the Performance Report

Financial Ratios & Indexes

The Content of the Performance Report

Financial Statement Items

Present comparison for the statement items

• Income Statement.

• Financial position.

• Cash Flow.

Thank YouIyad S. Attari 2009