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 Unce...
Why did I bother to make you spend Time on this ? <ul><li>Profit Plans are  Key Tools ..They focus attention on the Real Q...
Using Profit Wheel’s to test strategy <ul><li>Prepare a Profit Plan – Be Clear on Assumptions </li></ul><ul><li>Do you hav...
Key Questions a Plan is supposed to answer <ul><li>Does the Strategy Create Economic Value? </li></ul><ul><li>Is there eno...
Budgeting Terms <ul><li>Profit Plan = Master Budget </li></ul><ul><li>Preparing profit plans = budgeting </li></ul><ul><li...
Why Build a Profit Plan <ul><li>Translating the strategy of business into a detailed plan to create value </li></ul><ul><l...
Business Budgeting <ul><li>the following benefits from preparing budgets : </li></ul><ul><ul><li>Makes the strategy concre...
Business Budgeting <ul><li>Characteristic of  business budgets: </li></ul><ul><ul><li>Link between profit, cash and return...
1.Three Wheels of Profit Planning Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity R...
Profit Wheel Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Whe...
Profit Wheel <ul><li>Continues until profit is acceptable </li></ul><ul><li>The role of Controller in the budget review </...
Cash Wheel Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Wheel...
Cash Wheel <ul><li>Ensure cash flow (including borrowing capacity) is positive otherwise revise budget </li></ul><ul><li>H...
ROE Wheel Op. Cash A/R Sales Inventory Op. Expenses Inv in Assets Profits Asset Util. S/H Equity Return on Eq. Cash Wheel ...
ROE Wheel <ul><li>Have to meet risk/return criteria of investors </li></ul><ul><li>ROE  =  Net Income   x  Sales   x  Asse...
2. Formal Budget Process <ul><li>Takes 2-4+ months - involves most levels </li></ul><ul><li>Supervised by the Controller’s...
3. Budgets: Planning vs Control Exercise <ul><li>You are a factory worker making paper planes  </li></ul><ul><li>The week ...
3. Budgets: Planning vs Control <ul><li>Tension between planning vs control </li></ul><ul><li>“ These budget-based systems...
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Chapter reviewnotes mcs-5

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Chapter reviewnotes mcs-5

  1. 1. MCS UNS Chapter 5:Building Profit Plan Chapter Review Notes
  2. 2. 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
  3. 3. Why did I bother to make you spend Time on this ? <ul><li>Profit Plans are Key Tools ..They focus attention on the Real Questions </li></ul><ul><li>His Profit Wheel is pretty Cool . It simplistically connects the thoughts that do flow through Real Life . </li></ul><ul><li>Simons approach is boring but real </li></ul>
  4. 4. Using Profit Wheel’s to test strategy <ul><li>Prepare a Profit Plan – Be Clear on Assumptions </li></ul><ul><li>Do you have enough cash to fund the plan ? </li></ul><ul><li>Make the ROE comparison </li></ul><ul><li>Bring in Dr Doom </li></ul><ul><ul><li>Test the Assumptions again </li></ul></ul><ul><ul><li>Is Damage being done to Core Competencies ? </li></ul></ul>
  5. 5. Key Questions a Plan is supposed to answer <ul><li>Does the Strategy Create Economic Value? </li></ul><ul><li>Is there enough Cash to Survive? </li></ul><ul><li>Is there enough value to be able to tap into other sources of funding? </li></ul>
  6. 6. Budgeting Terms <ul><li>Profit Plan = Master Budget </li></ul><ul><li>Preparing profit plans = budgeting </li></ul><ul><li>Forecasts, Prognoses, Estimates </li></ul><ul><ul><li>generally shorter term, prepared to update budget </li></ul></ul><ul><li>MAY ACTUALS MAY BUDGET MAY ESTIMATE </li></ul>
  7. 7. Why Build a Profit Plan <ul><li>Translating the strategy of business into a detailed plan to create value </li></ul><ul><li>Evaluating whether sufficient resource are available to implement the intended strategy </li></ul><ul><li>Creating a foundation to link economic goal with leading indicators of strategic implementation </li></ul>
  8. 8. Business Budgeting <ul><li>the following benefits from preparing budgets : </li></ul><ul><ul><li>Makes the strategy concrete </li></ul></ul><ul><ul><li>Tests the strategy’s attractiveness </li></ul></ul><ul><ul><li>Assumptions are shared and challenged (are the numbers optimistic, pessimistic, or realistic?) </li></ul></ul><ul><ul><li>Once agreed to, gets everyone on same page </li></ul></ul><ul><ul><li>People learn by discussing/preparing budgets </li></ul></ul><ul><ul><li>Can easily do scenario (what if) analysis </li></ul></ul><ul><ul><li>Not written in stone… </li></ul></ul><ul><ul><li>Provides control tool </li></ul></ul>
  9. 9. Business Budgeting <ul><li>Characteristic of business budgets: </li></ul><ul><ul><li>Link between profit, cash and return is explicit with business budgets </li></ul></ul><ul><ul><ul><li>Profit, Cash and ROE Wheels </li></ul></ul></ul><ul><ul><li>Business budgets are prepared formally </li></ul></ul><ul><ul><li>Potential conflict between using budgets as planning tools and budgets for control in business </li></ul></ul><ul><ul><ul><li>Notes from Chp 4 (67-74) </li></ul></ul></ul>
  10. 10. 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
  11. 11. 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
  12. 12. Profit Wheel <ul><li>Continues until profit is acceptable </li></ul><ul><li>The role of Controller in the budget review </li></ul><ul><ul><li>“ 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?” </li></ul></ul><ul><ul><li>(Simons, 2000: 89) </li></ul></ul>
  13. 13. 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
  14. 14. Cash Wheel <ul><li>Ensure cash flow (including borrowing capacity) is positive otherwise revise budget </li></ul><ul><li>Have to do the cash budget by month </li></ul>
  15. 15. 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
  16. 16. ROE Wheel <ul><li>Have to meet risk/return criteria of investors </li></ul><ul><li>ROE = Net Income x Sales x Assets </li></ul><ul><li> Sales Assets S/H Equity </li></ul>Profitability Ratio Asset Turnover Financial Leverage x x
  17. 17. 2. Formal Budget Process <ul><li>Takes 2-4+ months - involves most levels </li></ul><ul><li>Supervised by the Controller’s Office (or Budget Office in larger firms) </li></ul><ul><ul><li>Coordinates key information inputs (forecasts of price/volume/inv and production) </li></ul></ul><ul><ul><li>Provides macro level guidelines (exchange rates, interest rates, inflation, etc) </li></ul></ul><ul><ul><li>Prepares budget forms and sets timetable </li></ul></ul><ul><ul><li>Offers assistance to divisions </li></ul></ul><ul><ul><li>Analyzes budget for slack and do-ability </li></ul></ul><ul><ul><li>Consolidates all drafts to check if enough profit </li></ul></ul>
  18. 18. 3. Budgets: Planning vs Control Exercise <ul><li>You are a factory worker making paper planes </li></ul><ul><li>The week after the big order, the Plant Manager approaches you regarding next year’s budget </li></ul><ul><li>You have been averaging 300 per week </li></ul><ul><li>She needs to know how many units per week should she budget for next year? </li></ul><ul><li>What do you answer? </li></ul>
  19. 19. 3. Budgets: Planning vs Control <ul><li>Tension between planning vs control </li></ul><ul><li>“ These budget-based systems reward people for lying, and punish them for telling the truth” </li></ul><ul><li>Suggestions as to how to solve this? </li></ul>

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