Planning & Budgets

IS 207

Acknowledgements --Several of the slides in this presentation

have been "borrowed" from a variety of sources:
• Gary Dessler, Management (2nd ed.)
• Peter Lyman
• Tom Lucke
First: An Introduction to Planning

 Planning
 Is part of the "Strategic Management
Process"
 Should be tied to the mission and goals
of the organization
 Aligns the organization's internal
capabilities and the external
demands of its environment (market,
regulation, etc.)
 The Strategic
Management Process

Step 1 Step 2 Step 3 Step 4

Define the
Business and Set Strategic Formulate Implement
Set a Mission Goals a Strategy the Strategy
Statement

Step 5

Evaluate
and Correct
as Needed
 Strategic
Strategic
Planning
Planning

Corporate
Corporate Functional
Functional
Competitive
o s e pyt eer hT
 Our approach

A. IT and strategic management issues

B. Business models
• (shorthand for "what you have if you
don't have a business plan")
A. Budgets

B. Accounting as a planning and

management tool (if time permits)
 A. IT and strategic
management
“We still lack a well-defined model or theory
for the kind of organization now emerging.
So managers are confused over the
enormous task of restructuring operations
for a new era.” Halal
Therefore, managers must balance between
today’s operations and strategic planning
for the future.
 Venkatraman on information
management

 Management is evolving from a command paradigm

to the communications paradigm; from hierarchy to
flatter organizations, with more local team
autonomy; management by coordination is replacing
command and control
 Information management has rationalized the
organization, but real time network communication is
changing it fundamentally --from hierarchy to
enterprise (networks of self managed enterprises
that operate like an internal market system).

Budgeting is the language & medium of

coordination.
 B. Business models
(in six "easy" steps)
1. The value proposition
2. Technological innovation
3. The competitive environment &
differentiation
4. The revenue model
5. Source of investment
6. The competent team
 1. The value proposition

How (exactly) does IT innovation add

value?
 To whom does it add value? Think
in terms of value chain.
 Who is the customer? Think about
internal and external markets
 Value Chain

- a linked set of value creating

activities
- from raw material to end use
product

Procurement R&D Manufacturing Marketing Distribution Service Customer

Value chain Customer

Basis
Source: Marius Leibold, Gibert J. B. Probst & Michael Gibbert
For additional information, see the complete lecture at:
http://www.sims.berkeley.edu/~bigyale/koethen/km/english/chains.htm
Branding & differentiation...
The brand: Why will the customer
adopt your solution / return?
 Are online transactions more cost
effective and/or economies of scale
or scope and/or larger revenue?
Differentiation: How will this business
stand out? What will make it one of
the best in this market?
 2. Technological innovation
 Means/ends. Is the technology about
reducing costs or increasing revenue?
Or developing competency? Or
competitive factors? Or quality of
service? Or what?
 How can the costs & benefits be
measured? When? (covered last
week)
 Why is this innovation likely to
succeed?
 3. The environmental scan

 What is the competition doing?

Are online extensions of brick & mortar
business stronger (Amazon vs. Barnes
& Noble)?
Or, are they less able to innovate?
 Might competing value chains emerge?
(Is our business model sustainable?)
 What do we have to do to learn about/
develop competencies in future
innovations?
 4. The revenue model

How does your innovation control costs

and/or create economies of scale
and/or scope and/or produce revenue
compared to traditional models?
What are the costs of building,
implementing, sustaining the new
technology?
 5. Investment source
IT projects are investments. Understand the
business model, culture and decision
making process of your organization to
figure out the politics of IT investment.
(a) internal reallocation
(b) loans (what cost of funds?)
(c) venture capital
 6. The team: attracting and
retaining talent
 How do you find people who can function
in an environment of continuous change?
 How do you recruit & retain them?

 Note: The team is often the key to

finding investors, since every other aspect
of the business plan continuously
changes.
 Who makes the decisions?
(The transition between the team & the role
of budgets)
Does the organization have a strategic
decision making process?
 If so, how does it work?

 If not, how do IT projects get authorized

and implemented?
 What and who determines the success of
an IT project?
Note: Institutional history and culture are
as important as org charts (“informal
organization”).
C. Budgets: Allocation and/or
Reallocation
 Operating budgets are cut to create
one-time or recurring funding for
investment
 Innovation in one place creates
reduction of resources (people,
projects, money, attention) in others.
This may become a diffusion of
innovation problem.
What are the organizational
functions of budgets?
1. Budgets as a planning process
2. Budgets as a priority setting process
3. Budgets as a resource allocation process
4. Budgets as a responsibility allocating
process
5. Budgets as an evaluation process
 Uses of Budgets

 Budgets can be useful

 To provide overview
 To help allocate resources
 To determine leverage points
 In financial control
Budgets have a political side

 Budgets are political documents and are

often part of political processes—internal
& external
 Especially in choice of aggregation
 In focus—changes versus totals
– Accept the status quo vs.
– Zero-based budgets
 Functional vs. Divisional
 Role of Costs (again)

 Budgeting often involves (arbitrary)

allocations of joint costs
 Frequently through the use of
"overhead rates"
 Budgeting ≠ Costing ≠ Pricing
 (Remember the telephone leased line
example)
 UCB per-line telephone and per-node
data charges
Budgets reflect industry type

1. Governmental agencies &

non-profits
2. For-profits
3. Startups
Agency & non-profit budgets
1. The Civil Service Model: most of the
resources are committed to staff, therefore
the budget issues tend to concern priorities
for one-time money (grants, gifts, capital
spending).
2. Budget cycle once a year
 Causes difficulties for strategic (multi-
year) planning
 Digression: Why treat the Navy differently
from the Army? (Art. I, Sec. 8)
2. Implementation decentralized to
"professionals”
 For-profit enterprises

1. Two flavors of money: revenue and

investment.
2. Budgets do not allocate "money," but
allocate revenue projections.
3. Quarterly review of revenue vs.
projections, continuous evaluation and
problem solving.
4. Performance against the budget
determines rewards.
 A startup model
 Funding from VC in a series of
“rounds of funding” -- each with
defined, measurable goals -- through
an evolutionary path.
 Friends & family
 Angel
 First round, second round
 buyout or IPO
 CEO goal: “drive valuation”
“Flavors of money”

 Source and restrictions

 One time and recurring

 Technology budgeting

1. Startup: Defining the product

Differentiating brand
2. For-profit: Controlling/reducing costs
Analysis of what’s going on
New products
3.Agency & n-p: Improving service
Controlling/reducing costs
w/o reducing staff
Planning horizon: motivation

1. Startup: differentiating brand

creating market
2. For-profit: controlling costs and
maximizing profit for
shareholders
3. Agency & n-p: Quality of service, as
defined by professionals, not
customers
 Incentives

1. Startup:Valuation of options
2. For-profit: Bonus
Raises
Promotion
3. Agency & n-p:Professional
ethics, job security
D. The Role of Accounting

 Provide useful information to

 Owners
 Managers
 Potential investors
 Regulators
What would be in the introductory
parts
of a financial management course

• Background/Objectives

• Key Financial Accounting

Concepts

• The Financial Statements

• Interpretation and Analysis

 What Are We Talking
About?
What do accountants do? How do they do
it? Who cares about what they do and how
it’s done?
• Financial Accounting
– Preparation of financial
statements
– Audit
– Control
• Managerial (or Cost) Accounting
– Budgets and variances
– Analysis for management
decisions
– Cost and profitability
assessment
 What Would We Cover?
The objective is not to turn you into
accountants . . .
Just to give you the basic concepts and let
you see how to apply them in your work

Typical Questions:
• How profitable is XYZ?
• What is the value of GGG’s
embedded network, on a per
access line basis?
• Is is reasonable to expect 30%
EBITDA in the LD industry?
• Are small business customers
profitable for a LEC?
 Objectives of Financial
Reporting
. . . to help present and potential
investors and creditors and other users in
assessing the amount, timing, and
uncertainty of future cash flows.
(FASB Statement of Financial Accounting
Concepts No. 1)
 . . . to present a true and fair view of the
company’s results and financial position
(Accounting Act, Finland—post 1993)
Note the crucial distinction between GAAP and "Pro Forma"
statements – procedures and assumptions do matter.