Management planning is a process of identifying, classifying and analyzing, implementing and reviewing the set objectives and goals of the organization in a given period of time. Planning is a continuous process with its achievements obtained after a specified period of time has elapsed. Management planning is concerned with the future causes of actions by examining causes as well as effects of current decisions made to the future plans. Managers plan in order to take advantage of opportunities and strengths available in achieving their management goals as their organizational function. Management planning is a systematic process that involves predetermined steps that give the structure of a logical approach. This helps the managers to ensure that their decisions are based on analysis of the subject as well as its content and also to make others understand the rationale behind planning. Managers use value judgments in identifying the goals and establishing strategies on how to achieve these goals.
Planning involves the use of various factors depending on the set goals and objectives by the managers. Financial factors are part of these factors that should be dealt with in detail to achieve financial stability of the organization in the future. A stable financial base leads to a strong, competitive power to an organization, making it strive and excel in any threats that may arise. Financial factors can be categorized in accordance with the financial statements. In every organization; there are three common financial statements that include income statements, cash flow statements and statement of financial position of the firm. When planning, managers should consider those factors that are vital in these statements. These factors are such as follows:
Income and expenditure level of the organization.
Income is the return the organization gets after providing its services or sale of goods to its customers while expenditure is the expenses incurred in the provision of those services. A high income level is recommended in the organization as well as a low expenditure level. Managers should set plan strategies in such a way that, the surplus or profits of the organization are increased to maintain sustainability of financial position. In a precise way, they should consider achieving high sales level in the future by increasing the market base as well as, reducing expenditures in the organization. Managers should use their value judgments in developing means of increasing their selling capability to compete with the existing firms in the market.
Cash inflow and outflow factors in the organization
Cash inflow factors increase the liquidity position of the firm whereas cash outflow factors increases the financial risks in the organization. These factors cannot be avoided since cash inflow and cash outflow is a continuous process in every organization that is, it is a routine activity in any organization. However, managers should establish strategies that reduce cash outflows and increase cash inflows. A plan to diversify the market is a cash inflow factor since it will result in increased revenue. Reducing expenditure levels, for example, by retrenching unproductive workers, reduce cash outflows from the organization.
Balance sheet factors
This financial statement shows the financial position of the firm by indicating the capital structure, as well as the asset value of the organization. The assets of the organization describe the organization's capabilities, for example, a ratio between current assets and current liabilities shows the organizational capability to meet its obligations as and when they fall due for payment. Capital structure describes the gearing or leverage level of the organization. Managers should consider the value of the firm by considering the owners' equity and borrowed funds.
Organization is surrounded by various factors that can influence its financial plans. These factors are such as society, buyers, governments, competitors and consumers. Business environment influences plans as well as decisions made thus it should be considered effective. When environmental factors changes, the business should be able to meet these changes in the same position. Thus, it is the role of managers to meet these changes by setting plans that are effective and realistic.
Risks are an unexpected condition in financial planning. In every planning process, there is a level of uncertainty which results to risk at the end of the stipulated period of time. The financial risks are such as credit risks, liquidity risks, foreign investment risks, market risks as well as operational risks. Managers are required to put measures on reducing the levels of these risks when making financial planning. Effective strategies are required to reduce the effect of these risks. Such strategies as transferring the risks or taking insurance covers can be adopted in order to avoid the effects of financial risks to the organization.
Firms life cycle is a process by which firms develops a new product and follows its growth pattern up to maturity. The process involves innovation of a new product into the market and grows into a mature product, critical mass and eventually declines. These phases are as follows:
Product development phase
This is a phase where detailed market analysis, conception, product design and testing are done. The product is yet to be developed but is in the process of development. Market analysis is done to establish the nature of customers, as well as their tastes and preferences. Also, the analysis of the market helps to establish the attractive product design that will appeal the target customers.
Market introduction phase
This is the initial release of the product into the market to the target customers. This stage is marked with high advertising campaigns, to bring to awareness of the product to the target customers. Few sales are expected at this stage and are characterized by losses since the costs exceed revenues. The main aim of this stage is to create awareness of the existence of the product in the market.
An accelerated sales growth of the product begins, characterized by huge profits. Target customers are fully aware of the product and are purchasing it. The production level increases making the firm enjoy economies of scale. Due to these super normal profits, other firms are attracted into the market and are starting to produce the same product. Competition begins at the end of this stage. This leads to minimal profitable levels.
Upper bound of the demand cycle of the product is reached where further advertising has little or no effect on the demand. More firms are in the market and price reaches the equilibrium thus making normal profits. The market is said to be stable.
Decline or stability phase
In this phase, the demand either remains steady or declines as the new product becomes obsolete. Differentiation of product starts at this phase where the firms start to produce similar but differentiated products.
Cash inflows are business activities that raise the cash level in the organization and cash outflow are activities of the organization that lowers the cash levels in the organization. From chapter 4, there are various business activities, some being cash inflow activities and others cash outflow activities. These activities are as follows:
Direct labor is a cash outflow since cash is used in payment of labor in the form of salaries and wages. 90% of labor expenses are paid in the current period whereas 10% in the subsequent period. The same case applies to direct materials cost, which is a cash outflow and 90% are paid in the current period and 10% in the subsequent period. Overheads, selling and distribution expenses, are also cash outflows but overheads are paid only 90% of Q units produced in the current period whereas 100% of selling and distribution expenses are paid in the current period. All loans are cash inflows to the organization since cash is introduced to the organization. They also lead to a cash outflow since there are interest payments, which are treated as cash outflows that require to be paid in the current period. Owner equity is a cash inflow to the organization and forms the main source of cash to the organization. Sales made during the period forms cash inflows to the organization although 33% of sales made are collected in the first quarter. Expenditures such as depreciation are non cash items and should not be incorporated in the calculation of net and net equivalent cash flow of the period. All purchases made both for goods and assets are cash outflow and should be deducted in determining cash equivalent of the period.
Cash flow statements are categorized into three sections; operating cash flow, investing cash flow, and financing cash flows. The list of cash outflows includes; labor cost, materials cost, overheads, purchase of machinery and goods, selling, advertising and distribution cost, taxes as well as, interest payable on loans. Cash inflow activities are such as sales, loans and bonds and proceeds fro equity.
Another difference is that the company adopts a 20% tax rate but most companies pay a tax rate of 30%, but this depends with the income tax department of a given country. The presentation of the financial position statement of the firm starts with more liquid assets. In accordance with International Financial Presentation Standards, the presentation should start with the less liquid assets to the most liquid asset. Owner’s equity should start followed by long term liabilities and then short term liabilities. This is the case in the real world presentation format but not adopted by the company. Material and labor cost per units is realistic and is comparable to the real world. The company predicted performance and set rules are similar to that of the real world except those differences highlighted.
Alexander, Mike. Management Planning for Nature Conservation: A Theoretical Basis & Practical Guide. illustrated reprint. New York: Springer, 2008.
Bhaird, Ciarán Mac an. Resourcing Small and Medium Sized Enterprises: A Financial Growth Life Cycle Approach. illustrated. New York: Springer, 2010.