Part 2 Essenial Budgeting
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Modern methods in preparing budgets Modern methods in preparing budgets
Part TwoPart Two
Iyad Attari 2009Iyad Attari 2009
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Strategic Planning
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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.
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Advantages of strategic planning
• Raise of profitability in the organization.
• Improving the working process.
• Saving both time & efforts.
• Identify Environmental factors effecting organization.
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Advantages of strategic planning
• Take advantage of the marketing opportunities.
• Determine administrative, productivity and financial problems.
• All managers & Employees involved in planning and success.
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Strategic planning
Financial Strategic plan
Deviation Strategic (Control)
Definition of strategic plan
The concept of strategic planning
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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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Enter your footer herePage 9
MatrixorganisationCEO
MKT
H.R.
Q.A.
INS Eclm HDSSIF
ICT
R&D
PMC OPD SubNW Core
Fin.
Su
pp
ort
Sales Technical
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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.
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Example
NatHealthVision, Mission, & Values
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الرؤيا
اإلعتراف وتحقيق التوسعكمزود والعالمي اإلقليمي
الصحي التأمين لخدمات رئيسياإللكترونية، المطالبات وإلدارةالبطاقة تقنية بإستخدام وذلك
الذكية
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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
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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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Page 21YOUR LOGO
Placeholder for your own sub headline
Strengths Weaknesses
Opportunities Threats
!
Inte
rna
l an
aly
sis
Ex
tern
al a
na
lys
is
SWOT
SWOT Analysis
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Page 22YOUR LOGO
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
Placeholder for your own sub headline
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
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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.
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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
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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
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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
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Gross Profit Margin
what its costs
to produce a product
Measures the difference between
selling price
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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
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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
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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
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Scanning The External Environment
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Environmental Scanning
Is a process that systematically surveys & interprets relevant data to identify external opportunities and threats
NowIn the future
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External Environment Factors
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Demographic FactorsDemographic Factors
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Demographic Factors
Age
Gender
Generational differences Geographic
shifts in populations
Ethnicity
Unskilled labor
Nontraditional labor force
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Demographic Factors (cont.)Age
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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%
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Demographic Factors (cont.)
Gender
47% of 2004 workforce56% of student in college campuses
Family constrain
Inflexible working conditions Occupational
barriers
Gender stereotyping
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Demographic Factors (cont.)
Generational differences
Born between 1965 and 1980
Born after 1980
Millennium
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Demographic Factors (cont.)
Geographic shifts in populations
Urban centers The suburbs
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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
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Demographic Factors (cont.)Unskilled labor
Higher education Skilled workers
Training Off shoring
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Demographic Factors (cont.)
Nontraditional labor force
Find enabling technology
Create enabling environment
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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
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Other Factors
Political•Legislation and regulatory guidelines
Social•Changing definition of families•Strain on health-care systems
Technological
•Advances•Skills•“Digital divide”•Process changes
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Example: Strategic planning
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The Budgeting
Iyad Attari
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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
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Budgeting functions
PlanningFunction
CoordinationFunction
MonitoringFunction
Evaluating & following up
Function
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Success factors in Budgeting
ParticipationBudgeting Relates To org. Structure
Reality
Comprehensive
Time frame
Flexibility
Predictions & Estimation
Following up &Feed back
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Preparing Budgets
Iyad Attari
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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.
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Characteristics of Preparing Budgets
3rd. : quantitative measurement :
• Translate all the goals to numbers.
4th.: Key performance indication tool:
• By comparing the budgeted with actual.
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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.
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Types of budgets
Iyad S. Attari
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Types of budgets
Depending on Time
Long-Term Budgets
Short-Term Budgets
Continuous Budgets
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Types of budgets
Depending on Activities
Capital activities Budgets
Current Activities Budgets
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Types of budgets
Depending on Transactions
Financial Budgets
Cash Budgets
Intangible Budgets
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Types of budgets
Depending on Accounting unit
Programs Budgets
ProductionBudgets
General Budgets
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Opinions towards budgeting
• Positive opinion:
• Managers want to make use of budgets.• Use it as planning ,implementation ,and control tool.
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Neutral Opinion
• Imitation of other firms.
• Using it to be modern, and updated.
• No benefits or damages if you use it .
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Negative opinion:
• Theoretical tool that cant be applied.• So no need to use it (ignore it).
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Statistical forms in budgets
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Using Statistical forms for budgets
Statistical forms:
A -Time SeriesB -Linear RegressionC -Changing Avarage
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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
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Example Time Series
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Using Statistical forms for budgets
Statistical forms:
B - Linear Regression: الخطي االنحدار طريقة
Using the linesr regression formula
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Example: Linear Regression
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Using Statistical forms for budgets
Statistical forms:
C - Changing Avarage : التغير متوسط طريقة
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Example: Linear Regression
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CAPITAL BUDGETSCAPITAL BUDGETS
Iyad S. Attari 2009
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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.
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Types of Capital BudgetingTypes of Capital Budgeting
Purchasing New AssetsPurchasing New Assets
Replacing Assets
Replacing Assets
ExpandingDecisionsExpandingDecisions
Capital Leasing
Decisions
Capital Leasing
Decisions
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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
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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.
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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.
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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 .
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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.
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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.
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Standards of evaluating Capital projects
Tradetional Methods
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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
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Example: Accounting Rate of Return (ARR):
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Standards of evaluating Capital projects
Modern Methods
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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.
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Example:Net Present Value )NPV(
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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.
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Example: Internal Rate of return )IRR(
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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
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Example: Profitability index:
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Control by using Performance Report
Iyad S. Attari 2009
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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.
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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.
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The Presentation of the report:
3 -Use a charts of comparisons.
4 -The reason of the positive or negative deviations.
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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.
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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.
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The Content of the Performance Report
Financing Structure Analysis
Comparison between all the following:
• Equity %.• Long term Loans %.• Short term loans%.
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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).
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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
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The Content of the Performance Report
Financial Ratios & Indexes
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The Content of the Performance Report
Financial Ratios & Indexes
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The Content of the Performance Report
Financial Ratios & Indexes
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The Content of the Performance Report
Financial Ratios & Indexes
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The Content of the Performance Report
Financial Ratios & Indexes
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The Content of the Performance Report
Financial Ratios & Indexes
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The Content of the Performance Report
Financial Statement Items
Present comparison for the statement items
• Income Statement.
• Financial position.
• Cash Flow.
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Thank YouIyad S. Attari 2009