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Chapter reviewnotes mcs-5
 

Chapter reviewnotes mcs-5

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Management Control System

Management Control System

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    Chapter reviewnotes mcs-5 Chapter reviewnotes mcs-5 Presentation Transcript

    • MCS UNS Chapter 5:Building Profit Plan Chapter Review Notes
    • Internal Controls Chp 13 Business Strategy Core Values Chps 13 Belief Systems Chps 12 & 13 Boundary Systems Strategic Uncertainties Interactive Control Systems Chp 10 Diagnostic Control Systems Chp 10 Core Values Risks to be Avoided Critical Perf Variables Chp 2 Chp 14 Course Map – Where are we? Organizing for Performance Chp 3 Designing Employee Goals and Incentives Chp 11 What to Control Chp 4 Building and Evaluating Budgets Chps 5, 6, 7 Measuring Performance Chps 8 & 9 4 LEVERS OF CONTROL Today’s Topic
    • Why did I bother to make you spend Time on this ?
      • Profit Plans are Key Tools ..They focus attention on the Real Questions
      • His Profit Wheel is pretty Cool . It simplistically connects the thoughts that do flow through Real Life .
      • Simons approach is boring but real
    • Using Profit Wheel’s to test strategy
      • Prepare a Profit Plan – Be Clear on Assumptions
      • Do you have enough cash to fund the plan ?
      • Make the ROE comparison
      • Bring in Dr Doom
        • Test the Assumptions again
        • Is Damage being done to Core Competencies ?
    • Key Questions a Plan is supposed to answer
      • Does the Strategy Create Economic Value?
      • Is there enough Cash to Survive?
      • Is there enough value to be able to tap into other sources of funding?
    • Budgeting Terms
      • Profit Plan = Master Budget
      • Preparing profit plans = budgeting
      • Forecasts, Prognoses, Estimates
        • generally shorter term, prepared to update budget
      • MAY ACTUALS MAY BUDGET MAY ESTIMATE
    • Why Build a Profit Plan
      • Translating the strategy of business into a detailed plan to create value
      • Evaluating whether sufficient resource are available to implement the intended strategy
      • Creating a foundation to link economic goal with leading indicators of strategic implementation
    • Business Budgeting
      • the following benefits from preparing budgets :
        • Makes the strategy concrete
        • Tests the strategy’s attractiveness
        • Assumptions are shared and challenged (are the numbers optimistic, pessimistic, or realistic?)
        • Once agreed to, gets everyone on same page
        • People learn by discussing/preparing budgets
        • Can easily do scenario (what if) analysis
        • Not written in stone…
        • Provides control tool
    • Business Budgeting
      • Characteristic of business budgets:
        • Link between profit, cash and return is explicit with business budgets
          • Profit, Cash and ROE Wheels
        • Business budgets are prepared formally
        • Potential conflict between using budgets as planning tools and budgets for control in business
          • Notes from Chp 4 (67-74)
    • 1.Three Wheels of Profit Planning Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Wheel Profit Wheel ROE Wheel
    • Profit Wheel Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Wheel Profit Wheel ROE Wheel
    • Profit Wheel
      • Continues until profit is acceptable
      • The role of Controller in the budget review
        • “ Good finance people are the ones who can help give real meaning to operating plans. When you say you’re going to get a 6% improvement in productivity, they’re the ones who are suppose to ask where, What are the projects? When are they going to get done? How much money are we providing?”
        • (Simons, 2000: 89)
    • Cash Wheel Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Wheel Profit Wheel ROE Wheel
    • Cash Wheel
      • Ensure cash flow (including borrowing capacity) is positive otherwise revise budget
      • Have to do the cash budget by month
    • ROE Wheel Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Wheel Profit Wheel ROE Wheel
    • ROE Wheel
      • Have to meet risk/return criteria of investors
      • ROE = Net Income x Sales x Assets
      • Sales Assets S/H Equity
      Profitability Ratio Asset Turnover Financial Leverage x x
    • 2. Formal Budget Process
      • Takes 2-4+ months - involves most levels
      • Supervised by the Controller’s Office (or Budget Office in larger firms)
        • Coordinates key information inputs (forecasts of price/volume/inv and production)
        • Provides macro level guidelines (exchange rates, interest rates, inflation, etc)
        • Prepares budget forms and sets timetable
        • Offers assistance to divisions
        • Analyzes budget for slack and do-ability
        • Consolidates all drafts to check if enough profit
    • 3. Budgets: Planning vs Control Exercise
      • You are a factory worker making paper planes
      • The week after the big order, the Plant Manager approaches you regarding next year’s budget
      • You have been averaging 300 per week
      • She needs to know how many units per week should she budget for next year?
      • What do you answer?
    • 3. Budgets: Planning vs Control
      • Tension between planning vs control
      • “ These budget-based systems reward people for lying, and punish them for telling the truth”
      • Suggestions as to how to solve this?