UNIT 17 - INTERFACING WITH MANAGEMENT

consider the following 10 Step process for management for planning, problem-solving and decision-making

1 APPRECIATION* -WHERE ARE WE NOW?

2 AIM* -WHERE DO WE WANT TO GO & WHY?

(includes mission, role, purpose, direction, business scope/definition, objectives, goals)

3 ALTERNATIVES* -WHICH WAYS MIGHT WE GO?

(includes strategies).

4 ANALYSIS* -WHAT WAYS CAN WE GO?

5 DECIDE -WHICH WAY WILL WE GO AND WHY.

6 PLAN -WHAT, HOW, WHO, WHEN, WHERE

(Action plan and budget)

7 ORGANISE -STRUCTURE, PHYSICAL & FINANCIAL

8 STAFFING -SELECTION, MOTIVATION, DEVELOPMENT

9 DIRECTION -TASK AND PEOPLE SKILLS

10 CONTROL -OPERATING & BUDGETARY CONTROL (Review, correct, re-plan)

Think about the following questions

how well might the financial objectives liquidity, profitability and security fit with corporate objectives?

how well might corporate strategy be expressed in a budget in terms of direction, resource allocation and responsibility?

what is the value of a business plan without a budget?

what is the value of a budget without the supporting logic of a business plan?

how are elements of the marketing mix reflected in financial statements (budget and actual)?

how are competitive standards used in financial analysis?

what is the role of a financial manager in planning and budgeting?

what financial skills are required by line management?

what is the value of the computer for financial modelling and screening of investment proposals

Organisational and job design

there is a relationship between organisation structure and profit centres

assets can be divided across profit centres to allow accountability for return on investment

financial outcomes can be built into job descriptions?

Management by objectives

it is important and possible to quantify objectives

it is desirable and possible to have a hierarchy of objectives starting with ROI at the top with delegation of responsibility throughout the structure. Even the desired outcomes for the lowest job can be shown to fit with overall objectives

Performance appraisal and accountability

quantitative appraisal (eg using “outputs” like financial outcomes) can integrate well with qualitative appraisal (eg of “inputs” like attitude and other qualities)

accountability for variations and responsibility for re-planning and corrective action is important

Programme and zero based budgeting

there are weaknesses in a “line item” budgeting approach for large organisations

large complex businesses can be segmented first by product, market, geography or management function and then by another segmentation variable and /or by inputs

activities with a common goal can be grouped under one programme eg provide customer service

the essentials of the concept of zero-based budgeting are

that it attempts to be an objective approach to resource allocation

all bids for resources have to be justified in terms of outputs or programmes

no area is excluded from the analysis because of historical commitment

each round of planning starts with a zero-base or clean sheet

all programs have to be prioritised with a clear delineation as to what programs or service levels would cease with a certain level of budget cuts eg if we cut 10% off the budget what lowest priority programs (not inputs) would cease

it allows comparison of costs and benefits across departmental boundaries eg “if that’s what its costing for that Priority D programme in that area we’ll shift the funds to Department B to allow them to attempt that new Priority B program”

it is not a popular technique because of the amount of work involved for its comprehensive implementation and because of the fear that it creates among line managers who want to maintain well-entrenched and traditional spending programmes and departmental structures.

despite its lack of popularity it is conceptually brilliant. What could be more healthy than all areas of an organisation having to justify their existence on a clean-sheet basis. It assumes a quality of thinking as if the organisation is making a fresh start each year and no area of the business (or government department) can assume favourable resource allocation until a case is made and compared with competing bids for scarce resources

the steps in the zero base planning and budgeting process are as follows:-

Step 1 Develop Planning Assumptions

Based on the “Situation Analysis” component of the business planning process

Includes service level requirements of allied departments

Step 2 Identify Decision Units

Groups of activities that hold something in common (area, function, product, project)

Cost or profit centres, product groups, SBU’s, projects, programmes

It is desirable that decision units to be of comparable size in terms of human resources and dollars

Step 3 Analyse Each Decision Unit

Clarify role and objectives for the decision unit eg “The objective for the corporate sales decision unit is to manage all domestic sales to achieve high customer service and to reach the following targets this year; a 12% increase in gross margins, increase sales to new customers by 20% and a minimum contribution margin of double the fixed cost of sales staff.”

Describe the unique resources used eg “One sales manager, nine salaried sales-people (each with their own territory), two in the warehouse, one part-time office clerk, one secretary.”

Describe the flow of work operations eg “first we meet cold canvass customer prospects by telephone .......”

Develop work load and performance measurements to help assess the strengths and weaknesses of the current approach and to amplify the objectives eg “Our qualitative standards are the number of customer complaints we receive per month and the number of days delay in order processing. Our quantitative standards are gross sales revenue, new customer sales and dollar contribution margin.”

Consider ways to improve the process eg “We could use commissioned sales representatives but we would have to retain one salaried staff-member to provide technical advice and services.”

Consider the advantages and disadvantages of alternative ways of operating eg

Centralise the function

Decentralise the function

Contract the function out

Combine it with another function

Eliminate it

Incremental analysis

Decide the most important service level. This is the one with the highest priority need, the one that must be done and without it, it would be impossible to provide any meaningful service. This is the first increment of service and is expressed as a % of current level of services. It provides a real reduction in the quantity and/or quality of service. Eg the qualitative and quantitative standards are defined as follows:-

Increment No.	Complaints	Days delay in	Sales Revenue	New customer	Contribution
	Per month	order processing	$’000	sales $’000	Margin $’000
Last Year	5	3	4,400	900	750
1 of 4	9	8	4,000	600	700
2 of 4	7	10	5,000	1,100	840
3 of 4	5	3	5,000	1,100	840
4 of 4	3	3	5,400	1,400	880

Develop the next incremental levels until the current service level is reached at 100% and beyond if necessary eg “compared to last year’s cost of $295,100

1^st level $280,000 (95% of last year’s expense) which assumes 1 sales manager, 7 salespersons, 2 in the warehouse and 1 secretary

2^nd level $346,500 (117%) add $66,500 for 2 more salespersons

3^rd level $356,700 (121%) add $10,200 for 1 part-time office clerk

4^th level $387,700 (131%) add $31,200 for 1 more salespersons”

each budget level would be itemised by account. Each account such as salaries, travel, accommodation and postage etc would have separate columns, one column for the amount expected for each increment level as well as a total column.

Provide the decision unit analyses to top management.

Step 4 Review and Re-allocate Resources

Top managers receive the decision unit analyses from all units and start the resource allocation ranking process eg

Decision Unit Ranking	Increment No	Proposed	Proposed Cumulative	Last Year	% compared with last year
Corporate Sales	1 of 4	280,000	280,000	295,100	60%
2. Advertising	1 of 3	85,000	365,000	104,000	78%
3. Marketing Admin	1 of 3	62,100	427,100	71,100	91%
4. Corporate Sales	2 of 4	66,500	493,600		105%
5. Advertising	2 of 3	24,600	518,200		110%
6. Corporate Sales	3 of 4	10,200	528,400		112%
7. Marketing Admin	2 of 3	13,400	541,800		115%
8. Advertising	3 of 3	17,600	559,400		119%
9. Corporate Sales	4 of 4	31,000	590,400		126%
10. Marketing Admin	3 of 3	12,500	602,900		128%
TOTAL		602,900	602,900	470,200	128%

if top management decides to only fund through to level 6 for $528,400 then corporate sales would only get $346,500 an increase of 17.5% more than last year’s $295,100.

the ranking is discussed and each increment is put into competition with other increments on the basis of costs and benefits to the overall organisation. This process improves resource allocation choices and communication.

the zero-base process therefore puts all activities to the same test as any additional budget request. It guards against the status quo being justified just because it has been done for years. Instead each year we start with a clean sheet, a zero-base, and all activities have to be justified in absolute and relative terms.

Step 5 Prepare Detailed Budgets

these are in the same form a normal budgets

Step 6 Evaluate Performance

two types of data are available to monitor performance, detailed performance standards and budgets.

several methods of evaluation are recommended

traditional monthly financial review of actual vs budget

quarterly output review of each decision unit using the detailed performance standards

quarterly plan and budget revisions

Value adding sensitivity analysis

areas where value can be added to help boost price and/or market share

value is determined not only by the cost of inputs but by the perceived incremental satisfaction to consumers

value engineering techniques are used in product design

all component parts can be viewed in functional terms

product costs can be analysed and summarised in terms of function (“perform well”) and aesthetics (“look good”)

trade-offs and cost savings are possible

detailed cost and benefit variables can be built into a computerised budgeting approach for sensitivity analysis eg a 10% increase in quantity of material as a value-adding exercise, combined with a 5% cost-price saving of this material could lead to a 20% increase in sales quantity (based on a market share improvement of 10% at the expense of Competitor A) with a 7% improvement in price.

a key question is “how can we add value in this area?”

Financially oriented group decision making

planning, problem solving and quality and service improvement can all involve team-work and group decision-making

“matrix-management” which combines the formation of project teams within a functional organisation may be desirable in some situations

project teams may be useful for preparing business plans or marketing plans

a financially computer literate manager is of great value for sizing up options through preliminary sensitivity analysis. Try to illustrate a multi-disciplinary group in action being facilitated by such a manager who can deal with issues and questions like :-

“if only we could do ………then our ROI could be improved by …%”

“what would it take to stimulate industry demand by 10%”

“what would it take to win 5% market share in market segment A from Competitor B?”

“if we could build three stories for this development instead of two the impact on our ROI would be ….”.

“if we could lift occupancy by 5% or liquidity ratio problem could be solved within 3 months”

Copyright © Bill Wright 1994

 

Copyright © 2000 Genesis Management Services Pty Ltd
Last modified: July 18, 2006