The business you manage is part of a changing, dynamic environment. This environment affects the outcomes for your firm and can influence its financial performance. A good executive is aware of these factors, both external to the business and internal, and takes them into account in making financial decisions. Basic management functions include planning, organizing, leading, and control. Two of these functions are particularly important for this discussion: planning and control.
Planning is an essential requirement that recognizes the need to do more than address the issues facing the firm in its daily operations, but what is necessary for the firm to grow and generate financial performance that is as good as, or better than, the market. Managers use control to ensure that the business and its plans meet expectations. This is a process where measurements are created, progress is monitored, and corrective actions are taken as needed.
The firm's strategic plan contains the method for identifying these business initiatives and formalizing the goals and objectives. This is also the means for communicating this information throughout the organization.
Completing this unit should take you approximately 11 hours.
Strategy is a creative process for developing a plan to enable an organization to achieve its goals. In the business environment, a comprehensive strategy can be a differentiator and a competitive advantage against other companies in the market. While large organizations may have a permanent strategic planning group to address their needs, even smaller companies can implement a process to address their strategic planning. Remember that strategic planning is a process. You evaluate where your business is and where you want to see it in the future. Then, you carefully consider the resources you will need and design a series of activities to move your plan forward.
Watch this video, which discusses the basic components of strategic planning in a company.
A critical element of any strategic plan is to develop the goals and objectives that the firm has decided are necessary for its short-term and long-term success. Goals represent the long-term results that the company seeks, while the objectives are the individual tasks that must be completed if the goals are to be reached. This video discusses goals and objectives.
The first step in considering developing a strategic plan is understanding its basic elements. It is important to know what strategy is and what it is not. These sections will provide a foundation for an understanding of business strategy. When you have completed these sections, you will be able to define strategy and explain how it is used in a business setting.
Creating a powerful strategic plan requires a concerted effort to understand the qualitative and quantitative factors that exist in the market. There is also a need to conduct a thorough review of the firm's internal and external influences. This section introduces several approaches to this process.
Earlier, we discussed the importance of the control function and monitoring the firm's progress in meeting the goals and objectives contained in that plan. This section reviews the ways that a company assesses performance. Be sure to pay attention to the use of the Balanced Scorecard, which includes not only financial performance goals but operational goals as well.
The ability to create reasonably accurate forecasts is essential to long-term business success. We use the term "reasonable" because forecasts are a look into future states, which can not be known with exact certainty today. Yet, it is necessary to prepare forecasts to make decisions today that are necessary to address the future needs of the business. Developing forecasts that are useful to the business requires considerable effort and resources. A forecast is built using historical trends as a point of reference. However, past trends are not necessarily a prediction of future outcomes. We will have to add current information that will affect the business plan, such as sales activity, market share, state of equipment and facilities, and available talent and technology. Then, we need to consider factors that can influence future performance like new products that the company will introduce, pending legislation and tax laws, or expansion plans into new markets. All of this, and more, is required to produce a workable forecast.
This brief video introduces the benefits of the Sales Forecasting process. Even though actual results will probably differ from the forecast, it is a useful way to help us list and consider internal and external factors that can affect sales.
Forecasts must be as dynamic as the business environment. That means it is not set in stone but will be routinely evaluated for necessary corrections. These sections will explain the importance of budgets and forecasting to the business. This material will enable you to explain the budgeting and forecasting process and discuss its benefits to the company.
We just discussed the importance of operational and sales forecasts. If our forecast predicts an increase in revenue, there may be a need to acquire additional assets to support that growth. These assets can include equipment, property, inventories, etc. One way to determine the amount of capital that will have to be raised externally is by calculating additional funds needed (AFN). The firm might not be able to generate the additional funds needed to support an increase in revenue. Management requires this information to facilitate their decision-making process.
Companies are routinely evaluating investment opportunities that can support their strategic plans for growth and improved financial performance. At any point in time, the demands for capital can exceed the capital that is available. In this section, you will learn about calculating if there is a requirement for additional funds. When you have studied the formula shown, you will be able to calculate the additional funds needed to support a specific project.
Pro forma financial statements are prepared based on the operational and sales forecasts that the firm has completed. With this information, the company can create a financial package (income statement, statement of retained earnings, balance sheet, and statement of cash flows) that predicts its financial position for one, two, or three years into the future.
This financial view of the future state of the business can be used to help the company plan for its capital needs, giving it time to locate sources for funding. For example, a pro forma statement for a small business can be used to approach banks to secure a line of credit to support the expenses incurred to generate future sales. These statements are helpful in supporting the assumptions that will be used to develop the firm's strategic plan.
We reviewed the complexities of creating a strategic plan for the business. By definition, strategy is a forward-looking process that considers where the company wants to be and what it will take to get there. The same applies to preparing future financial forecasts or pro formas. This chapter covers the process for determining future financial performance. It is important to understand the use of common sizing and the percentage of sales methods.
This article will help reinforce what you've learned about pro forma statements and walk you through an example.
In earlier units, we discussed the responsibilities of management to engage in business activities and invest capital in ways that strive to increase the corporation's value for the benefit of stakeholders. A key component of this responsibility lies with the Board of Directors, who provide oversight to the decisions and investments made by the firm's executives.
There have been volumes written on this topic as it is of real interest to a company's shareholders, suppliers, customers, and the government. The President and CEO of a publicly-traded company works for the board. The board has a fiduciary responsibility to protect the interests of shareholders. In the U.S., a fiduciary strives to ensure that appropriate due diligence has been used in making financial decisions that can affect investors. Outside of the U.S., many countries also include the interests of the firm's employees. They also serve as arbiters in cases of conflict of interest involving the executive team and outside customers or suppliers. This is not to say that the Board of Directors is the only entity providing oversight. Other interested parties can include lenders, the Security and Exchange Commission (SEC), and various financial analysts.
Corporate governance is concerned with the operation of a corporation according to the rules. Those rules can include the corporation's charter, operating guidelines, and the legal agencies with authority for business oversight. Reading this section will prepare you to be able to discuss the idea of governance, and to explain the interests of the many stakeholders involved.
Read this section, where you will learn of the ongoing debate regarding a corporation's Board of Directors and their responsibilities to shareholders in particular and stakeholders in general.
The executives of a corporation, as well as the board of directors, have legal, ethical, and moral responsibilities to the firm and the firm's stakeholders. After reading this section, you will be able to explain the principles of fiduciary responsibility and the need to apply due diligence to business decisions.
Once of interest to only the largest corporations, the global environment now affects businesses of all sizes. Small sole proprietorships are finding that they can access foreign markets for resources and customers. As the business progresses from the local market to a national presence to a global environment, there is an increasing demand for the skills and knowledge necessary to maintain effective and efficient operations.
Consider the implications for operations management in the following scenarios:
These can all represent management challenges for the operation. The business will need to consider the implications of language, customs, currency translations, time zones, transportation, and increased amounts of paperwork, to name just a few.
This chapter reviews the opportunities and issues a company will face when conducting business in the global marketplace. With the ever-increasing dynamics of international trade, you should read this chapter carefully. It is an excellent starting point to consider the skills required to expand your business internationally.
This study session is an excellent way to review what you've learned so far and is presented by the professor who created the course. Watch this as you work through the unit and prepare for the final exam.
Take this assessment to see how well you understood this unit.