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Management Control Systems CF2003
Management Control Systems
Class 22.1 The budget process
1
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Strategy FormulationBusiness units strategies
2
1. Its mission: What are its overall objectives?
- BCG model and GE model provide a guide to corporations toselect its mission.
2. Its competitive advantage: How should the business unit competein its industry to accomplish its mission?
- Michael Porter Industry analysis and Value Chain analysis
Business units strategies depend on two aspects:
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Strategy Formulation
Value Chain Analysis
3
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
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Management Planning and Control SystemsCF2013
Strategic planning process
Current Strategies
4
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
VALUE CHAIN ANALYSIS- MICHAEL PORTER:
Value chain analysis objective:Move materials from vendors, through production, and tothe customer at the LOWEST COST, in the SHORTEST TIME and with GOOD QUALITY
Companies must improve their efficiency!
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Management Planning and Control SystemsCF2013
Strategic planning process
Current Strategies
5
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Reducing the number of vendorsComputarized system to place orders automaticallyLimiting deliveries to Just in timeHolding vendors responsible for quality
HOW TO IMPROVE ON THE INBOUND?
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Management Planning and Control SystemsCF2013
Strategic planning process
Current Strategies
6
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Increasing automationRearranging machinesBetter production contrl systems
HOW TO IMPROVE ON MANUFACTURING?
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Management Planning and Control SystemsCF2013
Strategic planning process
Current Strategies
7
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
MarginProcurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
Having customer place orders electronicallyChanging locations of warehousesChanging channels of distributionImproving the efficiency or warehouses operationsOwn fleet versus outsourced distribution
HOW TO IMPROVE ON THE OUTBOUND?
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Strategy Formulation
Value Chain Analysis
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1. Can we reduce costs in this activity, holding value (revenue) constant?
2. Can we increase value (revenue) in this activity, holding costs constant?
3. Can we reduce assets in this activity, holding revenues constant?
4. Most importantly, can we do (1), (2) and (3) simultaneously?
Procurement
Technology Development
Human Resource Management
Firm Infrastructure
MarginProcurement
Technology Development
Human Resource Management
Firm Infrastructure
Margin
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Strategic planning process
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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 strategiesDecide assumptions and guidelines, which guidelines?First review of new strategic planAnalysisSecond review of new strategic planFinal review and approval
BENEFITS:
It is the framework for developing the budgetMeans of aligning Managers with corporate strategies
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Management Planning and Control SystemsCF2013
Strategic planning process
Diagrama
10
BUDGETING
STRATEGICPLANNING
BUDGETING
Strategic option A
Strategic option B
Strategic option C
Strategic option D
Strategicoption A
Strategicoption C
Strategic option A
Strategic option B
Strategic option C
Strategic option D
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Management Planning and Control SystemsCF2013
Strategic planning process
New strategies
11
Some useful technics, not always used:
Net present value of the project (NPV):The excess of the presentvalue of the estimated cash inflows over the amount of theinvestment required.
The internal rate of return (IRR) implicit in the relationshipbetween inflows and outflows
Payback period
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Management Planning and Control SystemsCF2013
Budget Preparation
Nature of a Budget
12
A budget estimates the profit potential of the corporationIt is stated in monetary terms $$$$It is detailed by month and by type of income/expense
Generally covers a period of one yearIt is reviewed and adjusted several times according to a corporationobjectivesIt is prepared usually six months before the start of the budgeted yearRequires the involvement of all areas of the companyIt 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 eachquarter.
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Management Planning and Control SystemsCF2013
Budget Preparation
Use of a budget
13
Fine-tune the strategic plan with better information
Inconsistencies in the organization showed upAssigns responsability to managers on the amounts of money that
they can spend
Evaluates performance
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Management Planning and Control SystemsCF2013
Budget Preparation
Content of an operating budget
14
+Revenues
-Production costs and costs of salesGross Margin
-Marketing expenses-Logistic expense
-General and administrative
-Research and developmentOperating Margin
-Income taxesNet income
PROFIT & LOSS STATEMENT (P&L)
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Management Planning and Control SystemsCF2013
Budget Preparation
Revenues
15
UNIT SALES X EXPECTED SELLING PRICES
ASSUMPTIONS:Economic assumptions such as Inflation, GDPPolitical assumptionsPrices impactsMarket growthProduction constraintsCannibalizationCompetition
SeasonalityHistorical dataProduction constraintsCustomers level of inventoriesImportant events (World cups, Olimpic games, etc)
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Management Planning and Control SystemsCF2013
Excel- Basics
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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 befound
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 &
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Management Planning and Control SystemsCF2013
Excel- Basics
Validation- Function
17
LEFT/ RIGHT(Cell, number of characters to get)
PROTECTION(FormatProtection)
CHARTS
REPLACE / FIND(Ctrl+F, Ctrl+B)
IFERROR(SI.ERROR)(Value, Value if there is an error)
VALIDATION(Data-Validation)
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Management Planning and Control SystemsCF2013
Excel- Basics
Verification and Validation
18
Verification - does my model run correctly?Validation - does my model correspond to reality well?
Conduct random spreadsheet auditsBuild 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 readablefrom top to bottom.Design sheet BEFORE building itBuild in modulesHave someone else check overChange input parameters & observe model behavior
e.g., crank up mean to stress systemSanity checks on output - does it all make sense?
DO NOT FORGET THE FORMAT
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