Analyse the Key Functions of Financial Planning and Control

Business Management Techniques By Brendan Burr

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Table of Contents
TABLE OF CONTENTS...........................................................2 TASK 1................................................................................3 Identify and describe appropriate financial planning processes. Look at short, medium and long term plans, strategic plans, operational plans, financial objectives and organisational strategy.......................................................3 Solution:-.........................................................................................3 TASK 2................................................................................6 Examine the factors influencing the decision-making process during financial planning.....................................................6 Solution:-.........................................................................................6 TASK 3................................................................................9 Apply standard costing techniques and analyse deviation from planned outcomes.......................................................9 Solution:-.........................................................................................9 EVALUATION.....................................................................12 CONCLUSION.....................................................................12 Books...............................................................................13 Catalogues........................................................................13 Websites...........................................................................13

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Task 1
Identify and describe appropriate financial planning processes. Look at short, medium and long term plans, strategic plans, operational plans, financial objectives and organisational strategy. Having established a price for your new product and identified the potential market, the finance department have asked you to meet them and discuss the financial planning process. Solution:Financial planning is essential for the business to achieve the necessary objectives and targets. To formulate a financial plan, we will generally have to do the following: a) Work out the Company policy, profit targets, and long term plans. b) Prepare forecasts for sales, production, stocks, costs, capital expenditure, and cash. c) Compile these separate forecasts into a master forecast. d) Consider all the alternatives available and select the plan which gives the best results. e) Review limiting factors and the principal budget factor. f) Prepare individual budgets and finally the master budget which includes a forecasted profit and loss account, and balance sheet. There are numerous considerations to look at when determining the financial plan, breaking them down into sub-categories will help me explain how each is relevant. Short, Medium and Long Term Plans The Companys Board of Directors will have determined the direction the Engineering Company needs to be heading in. The objectives are set by the highest officials in the Company to ensure clear orders are given to all members of staff. This motion is the Companys Long Term Plan, and it could be achievable in a time frame such as 3-5 years or even more. From this Long Term Plan, smaller stepping stones need to be identified, to ensure the Company is maintaining the same direction whilst completing projects. So for example a Company may be aiming to increase its profit margins over a five year period ensuring profit can be generated in the future. To do this the company may need to upgrade its facilities to improve the quality of products, ensuring that more revenue can be generated from each unit. This would be based across a time period of 3-4 years making it a middle term plan. Then individual products may need to be redesigned in the short term, 0 2 years. Short, Medium and Long Term Plans do not have fixed time periods and are completely determinable by project itself. This type of planning is often used in the various sectors of an engineering company, so for my example above it may be set by the Customer Services sector. 3

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

This will allow financial budgets to be set accordingly, as financing all of the Short Term Plans should cover the costs of achieving the Long Term Plans. It is however, likely that the Short Term Plans will not all happen at the same time, so it is important to note that finances do not have to be delivered entirely at the start. Strategic Plans Strategic Plans generally cover the company as a whole, and will include all of the Long Term Plans of all the sectors. A common strategic plan for most companies is to be the best at what they do, and beating all of the other companies who provide a similar service. The way they will do this is by being at the cutting edge of technology for example, by heavily investing in something which could provide the best service. The company will predict future trends in the markets and customer requirements and then base their planning on this. So for example a book publisher will print millions of copies of a new book, with the prediction that they will sell. If they do not then the publisher has created a deficit which may create devastating consequences for their company. On a similar basis an engineering company may invest in building new facilities based on future demands, if these demands to not arise then the engineering company may find themselves with financial difficulties. Financially a company will invest money that has been accumulated from profits on other products, to ensure that the future development of others is capable. However sometimes companies will use loans to produce new facilities, where a deficit caused by lack of sales would result in the company potentially becoming bankrupt.

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Operational Plans Operational Plans should establish the activities and budgets required for each part of the company for the next 1-3 years. The Op Plans should ask four basic questions: o Where are we now? o Where do we want to be? o How do we get there? o How do we measure our progress? The plans should be prepared by the people who will be involved in the implementation of the tasks. Also it is likely that there will need to be interdepartmental discussions, as the processes from one department are likely to have an impact on other departments. The Op Plans will enable the required actions to be considered and therefore put in place. This will mean that financially the budget will be set up accurately from the outset, preventing wasted expenditure as well as time. Financial Objectives The main financial objective is for the company to make money. Unfortunately it is more complicated as this process will need to be broken down into smaller requirements. The company may be facing a time of financial recession, so the objective may be to keep earning a stable income throughout this time. Other objectives include an increase in revenue in a year, or even an increase in share dividends. The aim of the financial objectives is to make the company financially stronger within a certain time period (usually within a financial year). Organisational Strategy Using organisational strategy the company will decide which areas require financial support at certain times. For example the Design phase will occur at the beginning of a project, with the marketing of the finished item not beginning until the product is nearly or entirely finished. This will allow for money to be freed up to the desired departments at the required time. It is important for companies to have this area running as efficiently as possible, so that the when one project has moved past the design phases, it can be replaced with a new project with a new budget.

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Task 2
Examine the factors influencing the decision-making process during financial planning. Solution:There are multiple factors which need to be taken into consideration during the decision making process of the financial planning stages. We will need to determine what type of finance option we will have available to us, to be able to plan accordingly. Beginning with working capital management; the current fixed assets such as plant and equipment are compared against the current liabilities such as financial loans. This is known as working capital management and involves managing the relationship between the assets and liabilities, ensuring that a company is able to continue its operations and that it has sufficient cash flow to cover both maturing short-term debt and future operational expenses. Working capital is the amount of capital which is readily available to the company, because of this it is only used for planning over a short term basis. We will have to take into account things like the cost of raw materials and how long it will take to receive this money back from sales. By comparing and evaluating the amount of money it is costing to manufacture a product or deliver a service we should be able to successfully put a price on each unit and the amount of units required to cover our costs. This would be done through a break even chart (which has been explained and exampled in Assignment 2 of this Unit), enabling us to put a price per unit with relative accuracy within a fixed environment. However in the business world it is not a fixed environment and external factors can easily have an effect on our products, even if they arent directly related to us. An example would be; an air transport company suffers from an increase in fuel prices and therefore increases its delivery charge to its customer, the same customer which imports materials to produce components are our supplier and therefore the cost of manufacturing our product will be increased because of the initial fuel price hike. Overall we may have to find ways of reducing our manufacturing costs, find a new and cheaper alternative, or increase the price of our product to accommodate for the change. Changes in pricing and sales and then revenue generated from these sales can take months at a time, so it is important to have good credit control management to ensure that they are always in the position to apply for a short term loan or overdraft system if the company suffers a bad period. It is impossible to predict the outcome of a business venture as there are so many variables, so it is good to have the availability of a get out clause, just as long as the revenue does begin to flow in again, otherwise the company will find itself in a large deficit where it owes more than the value of its assets. 6

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Expansion and contraction of the economy is also a factor which may need to be considered. Expansion is where there is an increase in the pace of economic activity, whereas contraction is where there is a decrease. When there is a decrease which is severe enough, it will cause a recession. This will have an adverse effect on the company as exchange rates will be less favourable for exporting goods, and overall it is regarded as a time for desperate measures which may cripple a company. The value of the company is in the interests of the company owners, which may also stretch to shareholders. There are various factors concerning a company valuation, however the most basic approach of explaining the process is by a financial analysis of the companys situation, for example liquidity, turnover, profitability and then comparing this to other companies in the same industry. A company valuation could be considered a way of tracking the successfulness of a company, however there usually has to be good reason for getting a company valuation. In brief with budgetary planning the company can take monthly revenue to pay for the previous months expenditures through the creation and monitoring of budgets. Again, it is not as simple as this as there is a breakdown of requirements which all need to balance out to ensure that the company will make a profit rather than a loss on a monthly basis, or if there is a loss then it will be covered for in the near future by taking the necessary action when the problem arises. Within the breakdown of requirements, I will begin by explaining briefly zero-based systems. This is where every function within a company is reviewed when regarding a new project, rather than basing future income and expenditure on previous outcomes. A similar approach is taken by individuals when dealing with personal finances. When a new expenditure arises an evaluation of current incomes and expenditures are considered, and then appropriate actions taken; like reducing the amount of a standing order into a savings account accommodating for the new outgoing. An advantage of this system is that it keeps the allocation of finances very lean, however a disadvantage of this system is that the process is very exhaustive and time consuming which in itself can have detrimental effects. The next area I will briefly explain is incremental budgeting. This form of budgeting uses a previous periods budget as a base, with incremental amounts added for the new budget period. This approach is not recommended though, as it promotes the use of the use it or lose it term, as if a sector doesnt use its entire budget in the fixed period then they will be allocated a smaller budget for the next period. An advantage of this system is that the budget remains relatively stable as the change is gradual, however a disadvantage of this system is that the system assumes the activities and methods of working will continue in the same way, when this is not at all likely. The impact of revenue generated from the sale of goods or services will have a large effect on the financial planning stages. This is because it is the balance of the income against expenditure which determines how well a company is performing, so with less revenue the 7

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

company is in a weaker position to invest in new facilities or other company necessities. Similarly if costs increase and the income stay the same then the company will find itself in a weaker position than if the costs of manufacturing for instance decreased. Capital control is a Government policy which restricts the acquisition of foreign assets and visa-versa. This would implicate the financial planning process as it may mean that the operations will have to be carried out in a facility which may cost more to run. It may also affect the amount at which services or goods can be sold at within a foreign market. It is put in place to soften outsourcing of production of products to foreign countries, on the economy of the host country.

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Task 3
Apply standard costing techniques and analyse deviation from planned outcomes. You are planning to spend money to get your project to work and there will be a requirement on you to establish your budget for your project. Now! A budget is an estimate of what you will need to spend and in a lot of cases the proposed budget will be exceeded. As part of this task you must, after you have established your budget, tell you MD (me) the areas that are likely to be exceeded and why. Solution:The following chart is a breakdown of the components required for the manufacturing process of the project to take place. The pricing is for a one off unit, I will later on compare the pricing of a mass produced project of 1,000 units. Part LCD Screen Push Buttons Power Supply Relays Microcontroller Oscillator Components LCD Components Case Voltage Regulator Components Printed PCB 3.5mm Stereo Jacks 100m Cable Reel (Red) 100m Cable Reel (Black) 1m Solder Reel Quantity 1 5 1 4 1 1 1 1 1 1 6 0.02 0.02 0.1 Approximate Cost 20.00 0.20 15.00 5.00 5.00 3.00 3.00 5.00 6.00 10.00 0.50 5.00 5.00 5.00 TOTAL Total Approx Cost 20.00 1.00 15.00 20.00 5.00 3.00 3.00 5.00 6.00 10.00 3.00 0.10 0.10 0.50 91.70

The following chart is a breakdown of the required one off components I will need, which will not need to be purchased with every unit made. Part Prototyping Board Tooling (Set) Computer Design Software PIC Programmer Soldering Iron Quantity 2 1 1 1 1 1 Approximate Cost 12.00 20.00 700.00 1,000.00 150.00 10.00 TOTAL Total Approx Cost 24.00 20.00 700.00 1,000.00 150.00 10.00 1904.00

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

The costs of the one off components should not change if I were to mass produce the same project. There may however, be an increase in the costs if parts need to be replaced due to wear and tear. I will now base my parts order on the production of 1,000 units. Part LCD Screen Push Buttons Power Supply Relays Microcontroller Oscillator Components LCD Components Case Voltage Regulator Components Printed PCB 3.5mm Stereo Jacks 100m Cable Reel (Red) 100m Cable Reel (Black) 1m Solder Reel Quantity 1 5 1 4 1 1 1 1 1 1 6 0.02 0.02 0.1 Approximate Cost 5.00 0.02 3.00 0.20 0.20 0.50 0.50 0.70 1.00 4.00 0.05 4.50 4.50 4.50 TOTAL Total Approx Cost 5.00 0.10 3.00 0.80 0.20 0.50 0.50 0.70 1.00 4.00 0.30 0.90 0.90 0.45 18.35

By making 1,000 units I am cutting the costs of parts by 80%, so the price per unit is now only 20% the original cost of a one off product! Now I will talk about the sales costs of this product, to better understand the sale price per unit that will be required to ensure that the costs are covered and that there is a profit made from the project. I will divide the costs of the fixed costs into 1,000 and then add this to the component costs of 18.35. 1,904 / 1,000 = 1.904 1.904 + 18.35 = 20.254 per unit So as long as my costs do not increase, I should charge a greater amount than 20.26 to ensure that my expenditure is cancelled out. Any income made above the 20.26 mark will be profit. Unfortunately any revenue I will make from this project will happen in the future. This means that I will have to find some funding from another source to be able to begin the business venture. For me to afford all of the parts required for 1,000 units I will need to spend: 20.254 x 1,000 = 20,254. This does not take into account for any failure with components or mistakes made in the manufacturing process, so it would be best to add an additional 2,000 to the budget to ensure the full 1,000 units can be produced. For an individual this is a lot of money, so it is understandable to begin on a smaller scale which is more easily manageable, but the price for 10

Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

parts may increase because of ordering smaller quantities, so there is a fine line between the number of units which is best and the number which will see the project fail. It may only be affordable to produce 10 units per calendar month as the manufacturer may need a source of revenue. If this is the case then the profit will be very small per unit and would likely be spent on the acquisition of new parts for more units, due to a slow cash flow. The causes of variance in the component costs could be detrimental to profits. As this is an area which is out of the control of the manufacturer (as components are likely to be bought in) it may be suitable to allow an additional cost to cushion any impact a price increase would have. The causes could be due to many things, such as the price increase of raw materials, transportation cost, fuel prices, or any other economic situation. Errors with the budget calculation could also arise when implementing the manufacturing process as there may have been things which are needed but havent been budgeted for. This could be things like the amount of labour hours which may be required to produce assemblies. If it takes 100 hours more to complete 1,000 units than has been calculated then the effect on the final cost could be substantial as skilled fitters would earn approximately 40.00 an hour. This would fall under the unrealistic target setting criteria as an unreasonable target has been set for a certain objective to be met. Budgetary slack can occur in two forms, either when the amount of revenue is underestimated for a given period of time, or when the amount of expenditure is overestimated in a given period of time. The problem creates a budget which has been distorted compared to the form it should be, this in turn prevents budgets from working properly.

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Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Evaluation
I took my time completing this assignment as I had commitments in other areas which I felt needed to be completed first. Beginning with Task 1, I carried out a lot of research from various internet sources and books before beginning my answer. This approach gave me an underlying knowledge of the subject which helped me cover the aspects related to the question with my own words. Without the research I struggled to keep on track of what needed to be said, as I was going off of common sense more than known fact. It wasnt until I completed the research that the question began to make a bit of sense as to the key differences between the types of various plans. For Task 2 I had to examine the various factors which can influence the decision making process. This involved me carrying out further research on the various factors found at the top of the page on the assignment. It was during this Task that I found out the depth required in the planning stages of a project, and the amount of external sources which can have a deciding factor with budgets. I learnt quite a lot from this task, however I found it was very time consuming. I enjoyed Task 3 a little more than the other two tasks. I involved my project and stated that I would perform the calculations based on the production of 1,000 units as this would be a suitable figure for a mass produced product. It was interesting to see the cost of the parts decreasing to 20% of the original quotation. The impact this would have on the overall profit margins would make the project an absolute success or an absolute failure. The only difficulty is that you would have to use the phrase you have to have money, to make money as it would cost tens of thousands of pounds to purchase all of the necessary components required to make all of the units. I found it interesting to think of my project on the large scale, but it seems that it is only by doing this that any money can be made, as one-offs will cost a substantial amount more and therefore adding a profit margin to this as well would seem like day light robbery!

Conclusion
I will openly admit that I am interested in learning business techniques, such as planning, as they help me understand the processes of projects that I work on within the workplace. I do not, however, enjoy writing about the subject as I often find that I am stuck on how to explain a technique, and because of this it takes a long time to complete Tasks, which in turn is demoralising and frustrating. I am keen to make a start on assignment four of this unit as it involves my project which is heavily underway now. I also still need to complete a Task on assignment one so that entire assignment can be signed off.

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Brendan Burr

BTEC Higher National Certificate in Electronics

Business Management Techniques

Bibliography
Through guidance from my lecturer, the following text books, catalogues and websites I was able to complete this assignment: Books Higher National Engineering (Mike Tooley & Lloyd Dingle) ISBN: 978-0-7506-6177-5 Catalogues N/A Websites 1. http://en.wikipedia.org/wiki/Operational_planning 2. http://en.wikipedia.org/wiki/Working_capital 3. http://en.wikipedia.org/wiki/Zero-based_budgeting 4. http://en.wikipedia.org/wiki/Price_system 5. http://en.wikipedia.org/wiki/Revenue 6. http://www.staffs.ac.uk/schools/business/bsadmin/staff/s5/HNDBIT1/H NDBIT1Workbookweek12.html 7. http://economics.about.com/cs/studentresources/f/business_cycle.htm 8. http://en.wikipedia.org/wiki/Business_valuation 9. http://www.answers.com/topic/budgetary-slack

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