Planning & Budgets

IS 207

Acknowledgements --Several of the slides in this presentation have been "borrowed" from a variety of sources:• Gary Dessler, Management (2nd ed.)• Peter Lyman• Tom Lucke

First: An Introduction to Planning

Planning Is part of the "Strategic Management

Process" Should be tied to the mission and goals

of the organization Aligns the organization's internal

capabilities and the external demands of its environment (market, regulation, etc.)

The Strategic Management Process

Define the Define the Business andBusiness andSet a MissionSet a Mission

StatementStatement

Step 1Step 1

Set StrategicSet StrategicGoalsGoals

Step 2Step 2

FormulateFormulatea Strategya Strategy

Step 3Step 3

ImplementImplementthe Strategythe Strategy

Step 4Step 4

EvaluateEvaluateand Correctand Correctas Neededas Needed

Step 5Step 5

StrategicStrategicPlanningPlanningStrategicStrategicPlanningPlanning

FunctionalFunctionalFunctionalFunctionalCorporateCorporateCorporateCorporateCompetitiveCompetitiveCompetitiveCompetitiveT

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Our approach

A. IT and strategic management issues

B. Business models • (shorthand for "what you have if you

don't have a business plan")

C. Budgets

D. Accounting as a planning and management tool (if time permits)

A. IT and strategic management

“We still lack a well-defined model or theory for the kind of organization now emerging. So managers are confused over the enormous task of restructuring operations for a new era.” Halal

Therefore, managers must balance between today’s operations and strategic planning for the future.

Venkatraman on information management

Management is evolving from a command paradigm to the communications paradigm; from hierarchy to flatter organizations, with more local team autonomy; management by coordination is replacing command and control

Information management has rationalized the organization, but real time network communication is changing it fundamentally --from hierarchy to enterprise (networks of self managed enterprises that operate like an internal market system).

Budgeting is the language & medium of coordination.

B. Business models (in six "easy" steps)

1. The value proposition

2. Technological innovation

3. The competitive environment & differentiation

4. The revenue model

5. Source of investment

6. The competent team

1. The value proposition

How (exactly) does IT innovation add value? To whom does it add value? Think

in terms of value chain. Who is the customer? Think about

internal and external markets

Value Chain

- a linked set of value creating activities- from raw material to end use product

Procurement R&D Manufacturing Marketing Distribution Service Customer

Value chain Customer Basis

Source: Marius Leibold, Gibert J. B. Probst & Michael Gibbert

For additional information, see the complete lecture at:

http://www.sims.berkeley.edu/~bigyale/koethen/km/english/chains.htm

Branding & differentiation...

The brand: Why will the customer adopt your solution / return? Are online transactions more cost

effective and/or economies of scale or scope and/or larger revenue?

Differentiation: How will this business stand out? What will make it one of the best in this market?

2. Technological innovation

Means/ends. Is the technology about reducing costs or increasing revenue? Or developing competency? Or competitive factors? Or quality of service? Or what?

How can the costs & benefits be measured? When? (covered last week)

Why is this innovation likely to succeed?

3. The environmental scan

What is the competition doing?Are online extensions of brick & mortar

business stronger (Amazon vs. Barnes & Noble)? Or, are they less able to innovate?

Might competing value chains emerge? (Is our business model sustainable?)

What do we have to do to learn about/ develop competencies in future innovations?

4. The revenue model

How does your innovation control costs and/or create economies of scale and/or scope and/or produce revenue compared to traditional models?

What are the costs of building, implementing, sustaining the new technology?

5. Investment source

IT projects are investments. Understand the business model, culture and decision making process of your organization to figure out the politics of IT investment.

(a) internal reallocation

(b) loans (what cost of funds?)

(c) venture capital

6. The team: attracting and retaining talent

How do you find people who can function in an environment of continuous change?

How do you recruit & retain them?

Note: The team is often the key to finding investors, since every other aspect of the business plan continuously changes.

Who makes the decisions?(The transition between the team & the role

of budgets)Does the organization have a strategic

decision making process?

If so, how does it work?

If not, how do IT projects get authorized and implemented?

What and who determines the success of an IT project?

Note: Institutional history and culture are as important as org charts (“informal organization”).

C. Budgets: Allocation and/or Reallocation

Operating budgets are cut to create one-time or recurring funding for investment

Innovation in one place creates reduction of resources (people, projects, money, attention) in others. This may become a diffusion of innovation problem.

What are the organizational functions of budgets?

1. Budgets as a planning process

2. Budgets as a priority setting process

3. Budgets as a resource allocation process

4. Budgets as a responsibility allocating process

5. Budgets as an evaluation process

Uses of Budgets

Budgets can be useful To provide overview To help allocate resources To determine leverage points In financial control

Budgets have a political side

Budgets are political documents and are often part of political processes—internal & external

Especially in choice of aggregation In focus—changes versus totals

– Accept the status quo vs.

– Zero-based budgets

Functional vs. Divisional

Role of Costs (again)

Budgeting often involves (arbitrary) allocations of joint costs Frequently through the use of

"overhead rates"

Budgeting Costing Pricing (Remember the telephone leased line

example) UCB per-line telephone and per-node

data charges

Budgets reflect industry type

1. Governmental agencies & non-profits

2. For-profits

3. Startups

Agency & non-profit budgets

1. The Civil Service Model: most of the resources are committed to staff, therefore the budget issues tend to concern priorities for one-time money (grants, gifts, capital spending).

2. Budget cycle once a year Causes difficulties for strategic (multi-

year) planning Digression: Why treat the Navy

differently from the Army? (Art. I, Sec. 8)

3. Implementation decentralized to "professionals”

For-profit enterprises

1. Two flavors of money: revenue and investment.

2. Budgets do not allocate "money," but allocate revenue projections.

3. Quarterly review of revenue vs. projections, continuous evaluation and problem solving.

4. Performance against the budget determines rewards.

A startup model

Funding from VC in a series of “rounds of funding” -- each with defined, measurable goals -- through an evolutionary path.

Friends & family Angel First round, second round buyout or IPO

CEO goal: “drive valuation”

“Flavors of money”

Source and restrictions

One time and recurring

Technology budgeting

1. Startup: Defining the product

Differentiating brand

2. For-profit: Controlling/reducing costs

Analysis of what’s going on

New products

3.Agency & n-p: Improving service

Controlling/reducing costs w/o reducing staff

Planning horizon: motivation

1. Startup: differentiating brand

creating market

2. For-profit:controlling costs and maximizing profit for

shareholders

3. Agency & n-p:Quality of service, asdefined by professionals,

notcustomers

Incentives

1. Startup:Valuation of options

2. For-profit: Bonus

Raises

Promotion

3. Agency & n-p:Professional ethics, job security

D. The Role of Accounting

Provide useful information to Owners Managers Potential investors Regulators

What would be in the introductory parts

of a financial management course

• Background/Objectives

• Key Financial Accounting Concepts

• The Financial Statements

• Interpretation and Analysis

What Are We Talking About?

What do accountants do? How do they do it? Who cares about what they do and how it’s done?

• Financial Accounting

– Preparation of financial statements

– Audit

– Control

• Managerial (or Cost) Accounting

– Budgets and variances

– Analysis for management decisions

– Cost and profitability assessment

What Would We Cover?The objective is not to turn you into accountants . . . Just to give you the basic concepts and let you see how to apply them in your work

Typical Questions:

• How profitable is XYZ?

• What is the value of GGG’s embedded network, on a per access line basis?

• Is is reasonable to expect 30% EBITDA in the LD industry?

• Are small business customers profitable for a LEC?

Objectives of Financial Reporting

. . . to help present and potential investors and creditors and other users in assessing the amount, timing, and uncertainty of future cash flows.

(FASB Statement of Financial Accounting Concepts No. 1)

. . . to present a true and fair view of the company’s results and financial position

(Accounting Act, Finland—post 1993)Note the crucial distinction between GAAP and "Pro Forma" statements – procedures and assumptions do matter.