Tag: Advanced Corporate AccountingOsmania University B.com Notes

Management Notes

Project Budgeting

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The Project Budget is a tool used by project managers to estimate the total cost of a project. A project budget template includes a detailed estimate of all costs that are likely to be incurred before the project is completed.

A project budget is the total projected costs needed to complete a project over a defined period of time. It’s used to estimate what the costs of the project will be for every phase of the project.

Large commercial projects can have project budgets that are several pages long. Such projects often have a large number of costs associated with them, such as labor costs, material procurement costs, and operating costs. The Project Budget itself is a dynamic document. It is continuously updated over the course of the project.

Some tools and techniques for estimating cost:

Vendor bid analysis: Sometimes you will need to work with an external contractor to get your project done. You might even have more than one contractor bid on the job. This tool is about evaluating those bids and choosing the one you will accept.

Determination of resource cost rates: People who will be working on the project all work at a specific rate. Any materials you use to build the project (e.g., wood or wiring) will be charged at a rate too. Determining resource costs means figuring out what the rate for labour and materials will be.

Cost of quality: You will need to figure the cost of all your quality-related activities into the overall budget. Since it’s cheaper to find bugs earlier in the project than later, there are always quality costs associated with everything your project produces. Cost of quality is just a way of tracking the cost of those activities. It is the amount of money it takes to do the project right.

Reserve analysis: You need to set aside some money for cost overruns. If you know that your project has a risk of something expensive happening, it is better to have some cash available to deal with it. Reserve analysis means putting some cash away in case of overruns.

Creating a Project Budget

As noted above, there are many components necessary to build a budget, including direct and indirect costs, fixed and variable costs, labor and materials, travel, equipment and space, licenses and whatever else may impact your project expenses.

To meet all the financial needs of your project, a project budget must be created thoroughly, not missing any aspect that requires funding. To do this, we’ve outlined seven essential steps towards creating and managing your project budget:

  1. Use Historical Data

Your project is likely not the first to try and accomplish a specific objective or goal. Looking back at similar projects and their budgets is a great way to get a headstart on building your budget.

  1. Reference Lessons Learned

To further elaborate on historical data, you can learn from their successes and mistakes. It provides a clear path that leads to more accurate estimates. You can even learn about how they responded to changes and kept their budget under control. Here’s a lessons learned template if you need to start tracking those findings in your organization.

  1. Leverage Your Experts

Another resource to build a project budget is to tap those who have experience and knowledge be they mentors, other project managers or experts in the field. Reaching out to those who have created budgets can help you stay on track and avoid unnecessary pitfalls.

  1. Confirm Accuracy

Once you have your budget, you’re not done. You want to take a look at it and make sure your figures are accurate. During the project is not the time to find a typo. You can also seek those experts and other project team members to check the budget and make sure it’s right.

  1. Baseline and Re-Baseline the Budget

Your project budget is the baseline by which you’ll measure your project’s progress once it has started. It is a tool to gauge the variance of the project. But, as stated above, you’ll want to re-baseline as changes occurs in your project. Once the change control board approves any change you need to re-baseline.

Advantages of budgeting in a business:

Establishing Guidelines: Project budget allows you to establish the main objectives of a project. Without proper budgeting, a project may not be completed on time. It allows the project manager to know how much he can spend on any given aspect of the project.

Cost Estimating: Once a budget is in place, the project manager can determine how much money can be spent on each component of the project. Hence it also determines what percentage of the available funds can be allocated to the remaining elements of the project. It gives the chance to decide whether or not the project can be completed in the available budget.

Prioritizing: Another advantage of having a project budget is that it helps you to prioritize the different tasks of the project. Sometimes it might seem to be completed at once, but it doesn’t happen due to some inefficiency. A budget will allow you to prioritize which parts of the project can be completed first.

Management Notes

Expected Value

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Expected value (also known as EV, expectation, average, or mean value) is a long-run average value of random variables. It also indicates the probability-weighted average of all possible values.

Expected value is a commonly used financial concept. In finance, it indicates the anticipated value of an investment in the future. By determining the probabilities of possible scenarios, one can determine the EV of the scenarios. The concept is frequently used with multivariate models and scenario analysis. It is directly related to the concept of expected return.

Formula for Expected Value

The first variation of the expected value formula is the EV of one event repeated several times (think about tossing a coin). In such a case, the EV can be found using the following formula:

EV = P(x) *n

Where:

EV: The expected value

P(X): The probability of the event

N: The number of the repetitions of the event

The expected value (EV) is an anticipated value for an investment at some point in the future. In statistics and probability analysis, the expected value is calculated by multiplying each of the possible outcomes by the likelihood each outcome will occur and then summing all of those values. By calculating expected values, investors can choose the scenario most likely to give the desired outcome.

EV=∑P(Xi)×Xi

Example:

Examples of using expected value

It turns out that all events have some aspect of risk and value. Insurance companies use this to determine how much to charge you for your premiums. They add up everyone in your reference class, and determine how much it costs them on average in payouts. They then add a little on the top to make a profit, which makes buying insurance net negative (the costs minus the benefits to you) on expectation, just like buying a lottery ticket. However, this doesn’t mean getting insurance is a bad idea! A lot of people don’t like taking on excessive risk (a small chance of becoming bankrupt feels much worse than paying up for insurance you might never need), so buying insurance is rational. Another way to put this is that we have diminishing marginal returns to extra money (or concave utility functions, for the mathematically inclined).

Pascal’s wager is also an example of using expected value to think about the world. Humans all bet with their lives either that God exists or that he does not. Pascal argues that a rational person should live as though God exists and seek to believe in God. If God does actually exist, such a person will have only a finite loss (some pleasures, luxury, etc.), whereas they stand to receive infinite gains (as represented by eternity in Heaven) and avoid infinite losses (eternity in Hell).

Management Notes

Characteristics of a Successful Budget Process

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The Budget Must Have the Support of Management

The budget must undeniably have the support of management at all levels of the organization. The support of both the top-level managers and the lower-level managers is crucial to garner the support of the employees of the enterprise.

The Budget Must be a Motivating Tool

The budget should motivate and inspire all the people in the enterprise to work toward attaining the enterprise’s goals. Furthermore, the budget must encourage everyone to work together for the improvement of the organization. The budget should not be viewed as a rigid plan, or as a device for top management to use in assessing blame.

The Budget Must Address the Enterprise’s Goals

Essentially, a budget must begin with the enterprise’s short and long-term plans and goals. The budget should not just to recreate the enterprise’s previous year’s results with slight changes. It must include valuable input from planning so that the budget becomes a powerful guiding tool.

The Budget Should be Coordinated

The budget must be coordinated to smoothly operate within the different business units of an enterprise. For example, the sales manager will strive to increase the sales of the enterprise. However, the credit manager will be extremely keen in limiting bad debt write-offs.

The Budget Should be a Correct Representation

The budget should accurately represent what is expected to happen. An inaccurate budget will not have the support of managers and employees directly affected by it and will encourage managers of an enterprise to fabricate “budgetary slack” into their budgets.

The Budget Should be Flexible

A key factor in the success of a budget is whether it is flexible or not. Most successful budgets are flexible. A flexible budget permits an enterprise in going ahead with plans that are strategically important to the enterprise. However, a rigid budget becomes an excuse for not executing strategically important plans.

Budgets are most commonly prepared for the company’s fiscal year, but often three-, five-, and ten-year budgets are planned, as well as budgets of shorter duration. A different year basis other than fiscal year is possible, but is not recommended, because fiscal year financial statements can be easily compared to the budget. Budgets are often further broken down into monthly or quarterly sub-periods, or a continuous or rolling budget is used. A continuous budget has a month, quarter, or year basis, and as each period ends the upcoming period’s budget is revised and another period is added to the end of the budget. Software is available for implementing this type of budget.

Budget Process

Methods of budget preparation differ between companies, but all fall somewhere on a continuum between entirely authoritative and entirely participative. In an authoritative budget (top-down budget), top management sets everything from strategic goals down to the individual items of the budget for each department and expects lower managers and employees to adhere to the budget and meet the goals. In a participative budget (bottom-up or self-imposed budget), managers at all levels and certain key employees cooperate to set budgets for their areas, and top management usually retains final approval.

Characteristics of a Successful Budget

  • Should be flexible.
  • Must be realistic.
  • Should be evaluated regularly.
  • Should have a financial format.
  • Must be well planned and clearly communicated.
Management Notes

Operations and Performance goals

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Operations Goals

Operational goals define the routine tasks that are necessary to run an organization. When a company functions efficiently, employees are more productive and can reach their full potential. Profits can be made. Setting operational goals lets you manage a business, allowing it to grow in a scalable manner.

Regardless of the phrases you use, operational goals are items an organization wants to accomplish over the course of one to two years. They are (typically) defined by these characteristics:

  • Limited to a single department or division
  • Associated with a budget
  • Tracked to see “what you get” with the budget you have
  • Measurable and actionable
  • Shorter time frames

Linking Operational Goals to Strategic Goals

A strategy is a high-level plan to accomplish items of key importance for your organization over the course of three to five years. Strategic goals are the building blocks of a strategy. They can be organized in multiple ways: by perspectives (financial, customer, internal process, and people) or by division and department.

Operational goals should be ingrained in every area of your strategic plan. You won’t be able to achieve your strategy otherwise. If you have too many operational goals tied to one strategic goal and not enough (or any) tied to another, consider shifting resources and prioritizing your operational goals differently.

Also, you may have operational goals and plans aligned by department, such as a marketing operations plan, customer success plan, product development plan, etc. Check all your work plans to make sure they cover all your strategic goals.

Setting Goals Vs. Setting Targets

An important distinction to make here is that goals are different than targets. We’ve established that operational goals specify (in a measurable way) the short-term tactics an organization will take to achieve its strategy. Targets are tools that allow you to define expected progress in even smaller steps that align with the details and deadlines of operational goals. More specifically, targets are typically set by quarter throughout the one- to two-year time span of an operational goal.

Operational Goals and Projects

A strategic plan has clearly defined goals, measures, and projects. Your strategic projects contribute to your goals so you can improve your measures. When you’re doing operations planning, operational goals and projects will be intermixed—and that’s perfectly normal. Similar to how goals and targets can overlap, so can goals and projects. Sometimes you’ll measure a longer term operational goal, like improving miles and miles of paved roads; and sometimes you’ll track and measure a shorter project, like widening a bridge. From a strategy standpoint, the bridge widening will look like a project, but from an operations perspective, it’s both a goal and a project. Ultimately, a lot of your activities will directly or indirectly link to your strategic goals.

Operational budgets are usually consumed by projects, so those projects start to have goal-like “symptoms.” Because of this fluidity of terminology, it’s important to regularly evaluate operational goals and projects to ensure they are on track and aligned with the organization’s strategy. This helps you be continually aware of how the progress you’re achieving is helping the company, all the way up to the strategic level.

Your strategy won’t be effective if you don’t have those operational goals in place and on track. Operational tactics and strategic vision have a reciprocal relationship. Plus, if you’re in a cost-cutting environment, it will be easier to defend your budget or work plan if it links closely to the strategy. You’ll be able to clearly show that you’re thinking strategically and using resources in a way that supports the strategy.

  • These goals are focused on the monetary aspects of the business such as reducing costs or improving revenues.
  • These goals tend to focus on improving productivity or quality so as to differentiate the company from its competitors.
  • Cultural/Workforce. These goals are designed to improve the workforce’s capabilities, commitment, and discretionary effort.

Strategic Goals

Strategic goals let executives and upper management determine where they want to go. Basically, you want to get from your current state to a future enhanced position. Strategic goals are the outcome that you desire.

Perhaps you want to produce more products. You might want to reduce overhead. Maybe you want to enter new markets. Setting strategic goals allows you to evaluate where you are and challenge yourself to end up at a better place.

Some examples of strategic goals include:

  • Increase customer conversion rates
  • Launch a new product
  • Increase revenues
  • Improve training programs
  • Diversify your revenue streams

Tactical Goals

Once you set strategic goals, you can build up your tactical goals. These further define your strategic objectives. You can plan tactical goals in advance by breaking down your strategic goals.

For example, let’s say that your strategic goal is to boost sales by 15 percent by the end of the quarter. Tactical goals would be the campaigns that you set up in each department to increase sales. One strategic goal should have multiple short-term tactical goals that create the momentum to achieve the overarching objectives.

Tactical goals can build on one another. You may have to accomplish certain tactical goals before you can take on more to produce a consequence. On the other hand, tactical goals can also be independent of one another. You can have several separate tactical goals that you can work on at once to bring about a result. Think of them as the action steps that provide a direct line to your strategic goals.

Performance goals

Performance goals are short-term objectives that an employee is expected to achieve within a set period of time. These goals are usually attached to specific job positions and are determined after considering the tasks and duties an employee is required to perform in that position. Performance goals are often a subset of and add up to overall company goals. They let employees know what is expected from their position, so it is important to define performance goals as clearly as possible and make them easily measurable.

Performance goals are what employees work to achieve. They are based on the goals and priorities of an organization and are tied to specific job positions. They focus on the job duties and productivity of an employee, and are designed to integrate an employee’s achievement with the overall goals of the company.

Development goals

Development goals, on the other hand, are set for the professional development of an employee. They focus on the areas the employee wants to develop for growth and advancement in their career. They encourage enhancement in performance through learning and development. Development goals are chosen and set by the employee, but they often involve active support from management. The employee usually looks up to the organization to help fulfill their professional development goals, such as through skill-based training and financial sponsorship.

How to set performance goals

Setting performance goals for employees is an important responsibility of a manager. Use the following steps to set measurable goals to improve the performance of your team and drive growth in your organization:

Invite employees to participate

Encourage employees to identify and suggest their own job-specific goals. Employees will be more motivated to achieve the goals that they set rather than those imposed by the management. Discuss with each employee their individual goals for a given performance period. Ensure that the goals align with the company objectives. Once you finalize the goals, develop an action plan for their achievement.

Review company objectives

Consider your company’s goals to connect performance goals for each employee with the mission and strategy of the company. Performance goals become effective when employees know how they contribute to the company’s growth. Start with an overall company goal and divide it into smaller goals for each employee. For example, if the management wants to grow sales by 4%, find out how each individual can contribute toward that achievement.

Use the SMART method

You can use the SMART method of setting goals to ensure that employee performance goals are specific, measurable, achievable, relevant and time-bound. Each goal should clearly tell the employees what they are expected to achieve and within what time frame. Quantify the achievement to make it measurable, and try to keep the target challenging but within the attainable range.

Specific

You should clearly define goals in specific terms as to what is to be achieved. For example, saying “start publishing a monthly newsletter” is better than making a generic statement like “improve communication with team members.”

Measurable

Goals should be measurable, making it easy to track their achievement. For example, “reduce process time by 10%.” In addition to a numeric quantity, you can also measure goals through a change in behavior, quality, cycle or processing time and efficiency.

Achievable

Goals should be achievable with a reasonable amount of effort. You should set realistic goals that can be achieved within the pre-determined timeframe with sincere efforts and available resources.

Relevant

All goals should be pertinent to the main objective, such as achieving company goals.

Time-bound

You should clearly specify a timeframe to achieve goals. For example, if you want to increase productivity by 10%, you should also state whether it should be achieved in one year, two years or by a certain date.

Management Notes

Cash flow Projections

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Cash flow forecasting is the process of estimating the flow of cash in and out of a business over a specific period of time. An accurate cash flow forecast helps companies predict future cash positions, avoid crippling cash shortages, and earn returns on any cash surpluses they may have in the most efficient manner possible.

Cash flow is the amount of money going in and out of your business. Healthy cash flow can help lead your business on a path to success. But poor or negative cash flow can spell doom for the future of your business.

If you want to predict your business’s cash flow, create a cash flow projection. A cash flow projection estimates the money you expect to flow in and out of your business, including all of your income and expenses.

Typically, most businesses’ cash flow projections cover a 12-month period. However, your business can create a weekly, monthly, or semi-annual cash flow projection.

Advantages of projecting cash flow

Projecting cash flows has many advantages. Some pros of creating a cash flow projection include being able to:

  • See and compare business expenses and income for periods.
  • Predict cash shortages and surpluses.
  • Determine if you need to make adjustments. (e.g., cutting expenses)
  • Estimate effects of business change. (e.g., hiring an employee)
  • Prove to lenders your ability to repay on time.

Forecasting:

Determine Your Forecasting Objectives

To ensure you see actionable business insights from a cash flow forecast, you should start with determining the business objective that the forecast should support. We find that organizations most commonly use cash forecasts for one of the following objectives.

  • Short-term liquidity planning: Managing the amount of cash available on a day-to-day basis to ensure your business can meet its short-term obligations.
  • Interest and debt reduction: Ensuring the business has enough cash on hand to make payments on any loans or debt they’ve taken on.
  • Covenant and key date visibility: Projecting your cash levels for key reporting dates such as year, quarter, or month-end.
  • Liquidity risk management: Creating visibility into potential liquidity issues that could arise in the future so you have more time to address them.
  • Growth planning: Ensuring the business has enough working capital on hand to fund activities that will help grow revenues in the future.

Choose Your Forecasting Period

Once you’ve determined the business objective you hope to support with a cash flow forecast, the next thing to consider is how far into the future your forecast will look.

Generally, there’s a trade-off between the availability of information and forecast duration. That means the further into the future the forecast looks, the less detailed or accurate it’s likely to be. So, choosing the right reporting period can have a big impact on the accuracy and reliability of your forecast.

  • Short-period forecasts: Short-term forecasts typically look two to four weeks into the future and contain a daily breakdown of cash payments and receipts. As you might expect, short-term forecasts are often best suited for short-term liquidity planning, where day-to-day granularity is important to ensure a business can meet its financial obligations.
  • Medium-period forecasts: Medium-term forecasts typically look two to six months into the future and are extremely useful for interest and debt reduction, liquidity risk management, and key date visibility. The most common medium-term forecast is the rolling 13-week cash flow forecast.
  • Long-period forecasts: Longer-term forecasts typically look 6–12 months into the future and are often the starting point for annual budgeting processes. They’re also an important tool for assessing the cash required for long-term growth strategies and capital projects.
  • Mixed-period forecasts: Mixed-period forecasts use a mix of the three periods above and are commonly used for liquidity risk management. For example, a mixed period forecast may provide weekly forecasts for the first three months and then on a month-to-month basis for the next six months after that.

Choose a Forecasting Method

There are two primary types of forecasting methods: direct and indirect. The main difference between them is that direct forecasting uses actual flow data, where indirect forecasting relies on projected balance sheets and income statements.

Choosing the right forecasting method depends on the cash flow forecasting window you selected above, as well as the kind of data you have available to build your forecasting model.

Source the Data You Need for Your Cash Flow Forecast

Direct forecasting provides the greatest accuracy and works for the majority of business objectives that companies build forecasts to support. Therefore, we’ll focus on where to find actual cash flow data for your forecast in this section.

The right places to source cash flow data for your forecast ultimately depends on how your business manages its finances. But, generally speaking, most of the actual cash flow data you’ll need to build your forecast can be found in bank accounts, accounts payable, accounts receivable, or the accounting software you use.

  • Your opening cash balance for the forecasting period: This is normally taken from the most up-to-date and accurate reflection of current positions.
  • Your cash inflows for the forecasting period: Anticipated sales receipts from within the forecasting period are usually the primary source of data for your cash inflows. Other types of cash inflows to consider including are intercompany funding, dividend income, proceeds of divestments, and inflows from third parties.
  • Your cash outflows for the forecasting period: We recommend capturing wages and salaries, rent, investments, bank charges, and debt payments. But you can include anything that’s relevant to your business.
Management Notes

Pro forma income, financial statement projections

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A pro forma income statement is a document that shows a business’s adjusted income if certain financial inputs were removed. In other words, it’s a way to show what the income of the business would be if some costs were excluded.

Pro-forma earnings most often refer to earnings that exclude certain costs that a company believes result in a distorted picture of its true profitability. Pro-forma earnings are not in compliance with standard GAAP methods and are usually higher than those that comply with GAAP. The term may also refer to projected earnings included as part of an initial public offering or business plan.

Pro-forma earnings in the first sense are sometimes reported by publicly traded companies that want to present a more positive picture of their financial condition to investors. Pro-forma earnings may be either higher or lower than GAAP earnings, but typically they are higher.

Pro-forma earnings may exclude items that don’t normally occur as part of normal operations, such as restructuring costs, asset impairments, and obsolete inventories. By excluding these items, the company hopes to present a clearer picture of its normal profitability.

However, some companies have been known to abuse this practice by repeatedly excluding items that should normally be included. Investors should, therefore, exercise caution when using pro-forma earnings figures in their fundamental analysis. Unlike GAAP earnings, pro-forma earnings do not comply with standardized rules or regulations.

As a result, earnings that are positive in a pro-forma scenario can become negative once GAAP requirements are applied.

Users:

Business owners, accountants, or outside consultants may create pro forma income statements for the following reasons:

  • To convince prospective employees of the future health of a business.
  • To project the potential income of the business to creditors or investors.
  • To inform management of financial scenarios, like large, one-time purchases.
  • To help inform decision-making around the acquisition of a company.

Uses of Pro Forma Income Statement

It may be prepared in advance of a transaction to project the future status of the company. For example, if a company is planning to acquire another company, it may prepare a pro forma financial statement to estimate what effect the acquisition would have on its finances.

Forecasting revenues are the most difficult part of any business plan. The assumptions have to be realistic and should be able to support the forecast. It is used to produce the Cash Flow Statements and Balance Sheets, all of which are important components of a business plan.

Pro forma profit and loss statements can also be used to calculate the financial ratios.

For some companies, the pro forma profit and loss statements provide a clear and accurate view of its performance given the nature of their business. Example: telephone and cable companies.

If a company has a one-time expense, it may drastically bring down its net income in that particular year. This cost is irrelevant in subsequent years. Hence companies exclude such costs while making the pro forma profit and loss to give investors and analysts a better picture of the company’s financial position.

Financial statement projections

Financial projections are based on compiling the internal and external accounting data you already use in the day-to-day management of your business. By projecting your revenue and expenses, you can get a more accurate view for how successful your business can be. Creating financial projections is not an easy task but is a very important part of developing a sound strategy. The financials tell you what goals to keep and what to cut.

Projections can also be a guide to help your business grow without running out of cash. To generate and support additional revenues, additional cash is always required. Financial projections help you assess what additional assets are needed to support increased revenue and the potential impact on your balance sheet. The projected financial plan indicates how much additional debt or equity you need to remain solvent and healthy.

Projected financial statements incorporate current trends and expectations to arrive at a financial picture that management believes it can attain as of a future date. At a minimum, projected financial statements will show a summary-level income statement and balance sheet. This information is typically derived from a revenue trend line, as well as expense percentages that are based on the current proportions of expenses to revenues. A better set of projected financial statements will incorporate the following features:

  • Expense projections that include step costs for major points at which revenues increase or decline.
  • A statement of cash flows.
  • Consideration of the pace at which the business can reasonably grow, based on its prior history.
  • The ability of the business to attract the funding needed in order to accomplish the financial results stated in the plan.
  • Consideration of the corporate bottleneck operation on the ability to grow.

Uses:

  • For the first year of business, we include monthly or quarterly financial projections. After the first year is recorded, quarterly or yearly projections will suffice for the next four years.
  • Forecast income statements, balance sheets, cash flow statements and capital expenditure budgets for each year you’ve been in business.
  • Expert CFOs will write an analysis of your financial information. This analysis can include ratio and trend analysis along with charts and graphs for a visual overview.
  • Ensure your projections match funding requests so there are no inconsistencies. We can help to explain any assumptions that accompany your projections.
Management Notes

Alignment of Tactics with Long-term Strategic Goals

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The alignment of strategies in a business is important to ensure that everybody is pulling in the same direction. Strategies are the offshoot of business goals and direction and are designed to give an indication to all members of the business of how the business will achieve its goals. Strategies must work together to be most effective. If people are pulling in different directions, resources will be wasted.

Strategic organizational alignment occurs when all the major components of an organization including people, marketing, operations, and systems are interconnected and directly linked to the mission, vision, and values of an organization.

Strategic Alignment ensures that the goals and plans of each operational and support function are aligned to the corporate strategic plans. This requires cascading the strategic agenda throughout the organization, and establishing accountability and reporting through a results forum to ensure execution takes place.

Strategic Alignment Models

Strategic Alignment Models are visual depictions of how priorities are linked and aligned vertically and horizontally through the organization. An alignment model is a tool that helps determine the degree to which the organization is aligning its longer-term plans with its resources and capabilities, and with opportunities, vulnerabilities, and risks that have to be managed. It will also help an organization understand how to measure strategic alignment progress. It is important to ensure that each activity in the business is equipped with the resources and capabilities needed to execute on their part of the enterprise strategy.

Strategic Alignment Process

A strategic alignment process begins with clear long-term goals, objectives and the big things that must be accomplished to ensure a secure future for the enterprise. Then each division, profit center, or business unit identifies which parts of the enterprise strategy they can contribute to directly. The divisions and business units then formulate their own supporting strategy and key priorities. Once the enterprise strategy and division strategy has been formulated, each function or department identifies critical connection points and formulates their own initiatives and plans that fit and align with division strategies. Finally, each leader, team, or work unit creates their own strategies that link with their division. This process is often referred to as strategic fit or establishing line of sight through the organization.

Horizontal Alignment

Horizontal alignment of strategies ensures that all strategies work together and are not in competition. A health care organization with one strategy to “decrease length of hospital stays” and another to “reduce the number of hospital re-admissions” might have strategies that are in competition with each other. When establishing business strategies, companies need to look at the big picture to ensure that strategies in one part of the organization are not inadvertently and inappropriately impacting the ability to achieve strategies in another part of the organization.

Vertical Alignment

A company’s goals and objectives will drive its strategies. Vertical alignment of strategies will ensure that strategies are related directly to goals which are related directly to the organization’s mission, vision and values. Strategies are developed to indicate “how” a company will achieve its goals and objectives. Companies generally have several strategies that they put in place to meet multiple goals and objectives. Importantly, these strategies must be aligned to ensure that resources are used effectively and that success can be achieved.

Operational Alignment

Operational alignment of strategies ensures that the work will actually be done. While strategies indicate how goals and objectives will be accomplished, tactics indicate specifically what needs to be done to accomplish them. Many companies have scarce resources and, because of this, it is important that strategies are carefully designed and aligned to ensure the effective use of those resources. Operational alignment is the point at which the planning team will determine who will do the work, when, how and with what required resources.

Management Notes

Characteristics of Successful strategic planning process

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Monitoring, measurement and feedback

“Even the best strategic plans require adjustments along the way,” says Linda Gabbard, president of Framework Initiatives Company, Inc. That means looking at both intended and unintended effects. Monitor your plan’s progress, measure outputs as well as outcomes, obtain feedback from all your stakeholders and stay nimble. Identifying and documenting key assumptions about the plan is essential. Periodically, challenge your assumptions. If the assumptions are no longer relevant, your plan won’t be either.

Unwavering discipline

Commitment to achieving strategic goals is still not enough you also need execution. Successful execution means having the discipline necessary to achieve your goals and make sustainable behavioral change. In individual terms, for example, someone might be committed to losing 10 pounds, yet lack the discipline to do what’s necessary to achieve that goal and maintain the new weight. It’s no different in organizations.

Understanding your culture

Working with your culture, rather than fighting it, can go a long way toward aligning and moving your organization forward. Whenever possible, swim with the current, not against it. If you try to force change, your plan is destined to be among the strategic initiatives that fail.

Sense of urgency

“Without a sense of urgency, it’s too easy to put off until tomorrow what should be acted upon today,” says Allen Hauge, president of Hauge Farms, Inc. Harvard Business School professor emeritus John Kotter describes it as “a gut level determination to act today.” It doesn’t mean lighting a fire under someone by manipulating urgency through false crisis, instead, it’s about lighting the fire within and inspiring a sustainable will to change.

Objective situational and stakeholder analysis

Without an objective and unbiased understanding of “what’s going on here,” you’re not likely to come up with strategies that will be very effective. Take a hard look at what’s happening externally and internally and pay special attention to the needs of your stakeholders.

Anchoring the changes in company culture

Recognize small wins, reward your people and reinforce the positive results your strategic initiatives have produced. Doing so will go a long way to taking strategy and change from just what you do to being who you are.

Transparency

It’s essential that your people embrace the strategic plan as their own plan. Failing that, you’re asking your employees to be more committed to your goals than their own hardly very realistic. To accomplish this level of buy-in, it’s important to have transparency right from the start. To sustain the effort, employees should understand and be kept apprised of how their daily activities are helping achieve the desired outcomes.

Leadership

Leaders can’t force change, but they can guide it. That means leading from the front, or as Jim Kouzes and Barry Posner would say, “modeling the way.” If employees sense that the leadership’s commitment is tepid, then that’s what leaders can expect in return.

Strategies that underscore your values and play to your organizational strengths

Strategy isn’t just about what anyone would do; it’s about understanding what YOU would do, based on your priorities and values. In the book Built to Last, Jim Collins and Jerry Porras talk about the importance of balancing the unchanging core (values and company purpose), while stimulating progress (change and innovation). Steve Brody, a former senior executive with Coca-Cola, adds, “And be sure to play to your organizational strengths. Not doing so is the equivalent of what Tom Rath describes as, ‘taking the path of most resistance.”

Clarity of purpose and realistic goals

It’s critical for your people to understand the purpose of your strategic initiative and have clear goals that are aspirational, yet realistic, notes Ned Frey, owner of Foursight Seminars Inc. He talks about it in terms of “purpose, focus and passion.” Clarity of purpose fuels the focus and passion required to achieve a sustainable, successful effort.

Ten Key Characteristics of Strategic Planning

  1. Communication Strategy: The development of a communication strategy is essential for the effective development and implementation of a strategic plan. In the communications strategy, you should determine who will be involved in the planning process, how they will be involved and what is being communicated to whom on the staff.
  2. Strategic Planning Task Force: The development of a core team of organizational leaders is mandatory in the effective creation of a strategic plan. Each task force member should represent a key business area or department of the organization to ensure the plan has organization wide input and buy-in. The task force meets regularly with clearly defined deliverables to be presented at each meeting.
  3. Vision Statement: An organization’s vision statement is simply their roadmap for the future. The direction of the organization should be broad to include all areas of impact but narrow enough to clearly define a path.
  4. Mission Statement: An organization’s mission is a definition of whom and what they are. Often mission statements include core goals and values of the organization.
  5. Values: Values are the organization’s fundamental beliefs in how they operate. Values can provide a guideline for management and staff for acceptable organizational behavior. Often values relate to the organization’s organizational culture.
  6. Goals: Goals are broad based strategies needed to achieve your organization’s mission.
  7. Objectives: Objectives are specific, measurable, action oriented, realistic and time bound strategies that achieve the organization’s goals and vision.
  8. Tasks: Tasks are specific actionable events that are assigned to individuals/departments to achieve. They, too, should be specific, measurable and time bound.
  9. Implementation Strategy: Once the plan has been outlined, a tactical strategy is built that prioritizes initiatives and aligns resources. The implementation strategy pulls all the plan pieces together to ensure collectively there are no missing pieces and that the plan is feasible. As a part of the implementation strategy, accountability measures are put in place to ensure implementation takes place.
  10. Monitoring of Strategic Plan: During implementation of a strategic plan, it is critical to monitor the success and challenges of planning assumptions and initiatives. When evaluating the successes of a plan, you must look objectively at the measurement criteria defined in our goals and objectives. It may be necessary to retool the plan and its assumptions if elements of the plan are off track.
Management Notes

Long-term Mission and Goals

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A mission statement is a short statement of why an organization exists, what its overall goal is, identifying the goal of its operations: what kind of product or service it provides, its primary customers or market, and its geographical region of operation. It may include a short statement of such fundamental matters as the organization’s values or philosophies, a business’s main competitive advantages, or a desired future state the “vision”.

A mission is not simply a description of an organization by an external party, but an expression, made by its leaders, of their desires and intent for the organization. The purpose of a mission statement is to communicate the organisation’s purpose and direction to its employees, customers, vendors, and other stakeholders. A mission statement also creates a sense of identity for its employees. Organizations normally do not change their mission statements over time, since they define their continuous, ongoing purpose and focus

According to Chris Bart, professor of strategy and governance at McMaster University, a commercial mission statement consists of three essential components:

  • Key market: The target audience
  • Contribution: The product or service
  • Distinction: What makes the product unique or why the audience should buy it over another

Advantages

Provides direction: Mission statements are a way to direct a business into the right path. They play a part in helping the business make better decisions which can be beneficial to them. Without the mission statement providing direction, businesses may struggle when it comes to making decisions and planning for the future. This is why providing direction could be considered one of the most advantageous points of a mission statement.

Clear purpose: Having a clear purpose can remove any potential ambiguities that may surround the existence of a business. People who are interested in the progression of the business, such as stakeholders, will want to know that the business is making the right choices and progressing more towards achieving their goals, which will help to remove any doubt the stakeholders may have in the business.

A mission statement can act as a motivational tool within an organisation, and it can allow employees to all work towards one common goal that benefits both the organisation and themselves. This can help with factors such as employee satisfaction and productivity. It is important that employees feel a sense of purpose. Giving them this sense of purpose will allow them to focus more on their daily tasks and help them realise the goals of the organisation and their role.

Design

“What do we do?”: The mission statement should clearly outline the main purpose of the organisation, and what they do.

“How do we do it?”: It should also mention how one plans on achieving the mission statement.

“Whom do we do it for?”: The audience of the mission statement should be clearly stated within the mission statement.

“What value are we bringing?”: The benefits and values of the mission statement should be clearly outlined.

Long-Term Goals

A long-term organizational goal defines a success point in the future potentially months, or even years down the road. Long-term goals include objectives for life, career, education, and more. They require you to plan and allot time for the grand accomplishment. They’re best tackled through a series of short-term goals or milestones along the journey toward the final destination. Especially large long-term goals will not reach completion unless you define a way to break them down into manageable stages of progress.

Agile Goals

Agile goals are rooted in the lean and rapid movements of the Tech Start-Up industry. Agile goals describe a set of values and a process of achieving outcomes that evolve through small cycles of collaboration within or between teams. Agile organizational goals allow individuals or teams to break down the long-term goals into a roadmap of shorter and achievable milestones. Agile goals are usually executed by focusing on one clear and concise smaller objective at a time. Agile goals are typically two week “sprints” of actionable activities that have a clear objective to be completed within that short time-frame.

For example, in the software industry, developers create daily and weekly process cadences as a way to conduct quality checks, run tests, demo, and adjust or refine the requirements of the project to suit customer needs and company goals. Agile goals with shorter cycles and achievable results effectively contribute to a larger ongoing objective. They are designed with an inherent sense of urgency that influences a team to produce results quickly and collaboratively while continually making adjustments and improvements along the way.

Performance Goals

Performance goals are rooted in current events and are designed to measure, analyze, and improve over time usually on a quarterly, tri-annual, or bi-annual period of time. These goals can include achievements in education, problem-solving, and professional scenarios that clearly demonstrate some type of forward, measurable progress in which an individual will have some levels of regular conversations toward a performance goal. These discussions are often in relation to a team member’s role and their contribution toward a specific outcome. Performance goals are often centered on what the organization is trying to achieve from a strategic viewpoint. These goals often motivate individuals to continue finding support, and they give you a gauge on the energy needed to effectively pursue important outcomes.

Along the way, you should constantly evaluate through formal or informal appraisals or retrospectives any performance goals for their effectiveness or completion. When evaluating a performance goal, it’s important team leaders and individuals focus less on the key metrics of the goal and more on the overall process and collaboration was toward achieving it. Metrics and outcomes are important, but the most critical learnings, as related to performance, are lost when only focusing on numbers. Such practice ignores the interpersonal relationships and collaboration that experienced during the pursuit of the goal. As a leader, collaborating on performance goals well developing an individual’s skill sets builds trust and allows you to measure and discuss their work in an objective way. It allows for healthy feedback and recognition and performance improvement in the future.

A long-term goal is something you want to accomplish in the future. Long-term goals require time and planning. They are not something you can do this week or even this year. Long-term goals are usually at least several years away.

Long-term goals are important for a career. Careers last your whole working life. Long-term goals help you think about the education you will need. Long-term goals help you think about jobs you want in the future. Careers take time and planning. These plans will include your long-term goals.

The following are the differences between business goals and business objectives:

  • Business goals define the “what” of a business’s purpose whereas business objectives define the “how.”
  • Business goals typically only provide a general direction that a company will follow whereas business objectives clearly outline actionable steps.
  • Business objectives are measurable whereas business goals generally are not.
  • Business objectives are specific whereas business goals are broader and more all-encompassing.
  • Business objectives typically have a set timeline whereas business goals do not.

Steps

  1. Establish the goals you want to accomplish over the next 5-10 years

The first step to creating long-term business goals is to determine the goals you want to accomplish over the next several years. Many people find that setting goals 10 years out is sufficient; however, you can set goals as little as one year out or as far away as 20 years. Identify and write down as many goals as possible that you want your business to achieve in the time period you decide on.

  1. Prioritize your long-term business goals

Many companies have several goals that they want to accomplish in the long-term. However, it’s difficult to focus on every goal at once. For this reason, it’s important to prioritize the goals that you want to focus on first and put your company resources into accomplishing those before moving onto other goals.

  1. Break down each long-term goal into short-term objectives

Similar to how you break down short-term goals, you will also need to break down your long-term goals into actionable short-term objectives. For example, if your long-term goal is to increase your company’s overall brand awareness, you will need to break this down into short-term objectives that will ultimately help you accomplish the long-term goal. Examples of actionable objectives for the above goal would be to post to social media three times a week and collaborate with social media influencers on a monthly basis.

  1. Track your company’s long-term goals regularly

An important component of accomplishing long-term goals is tracking them on a regular basis. Because long-term goals can take an extended period of time to reach, it can be easy to forget about them or lose sight of the end goal. Keeping track of the progress being made towards each goal can ensure you’re on the right path to reaching these goals and enable you to make any adjustments when needed.

Management Notes

Watered Stock

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Watered stock referred to shares of a company that were issued at a much greater value than the value implied by a company’s underlying assets, usually as part of a scheme to defraud investors. The last known case of watered stock issuance occurred decades ago, as stock issuance structure and regulations have evolved to put a stop to the practice.

Watered stock is an asset with an artificially-inflated value. The term most commonly refers to a form of securities fraud in which a company issues stock to someone before receiving at least the par value in payment.

This term is believed to have originated from ranchers who would make their cattle drink large amounts of water before taking them to market. The weight of the consumed water would make the cattle deceptively heavier, enabling the ranchers to fetch higher prices for them.

Watered stock is shares in a corporation that are sold at a price higher than the value of the underlying assets. This situation can arise when the assets are grossly overvalued, usually through a manipulative scheme. The seller of the shares then pockets the proceeds and leaves investors with valueless stock.

The term comes from cattle ranching, where ranchers forced cattle to drink an excessive amount of water in order to sell them immediately thereafter at a weight-based price.

The book value of assets can be overvalued for several reasons, including inflated accounting values like a one-time artificial increase in inventory or property value or excessive issuance of stock through a stock dividend or employee stock-option program. Perhaps not in every single case, but often in the late 19th century, owners of a corporation would make exaggerated claims about a company’s profitability or assets, and knowingly sell shares in their companies at a par value that far exceeded the book value of the underlying assets, leaving investors with a loss and the fraudulent owners with a gain.

Criticism

Over the years the use of watered stock has been heavily criticised by various experts, such as Walter Rauschenbusch and George D. Herron. Some of the major criticism is as follows:

  • New or inexperienced investors tend to struggle in a market marred by watered stocks. They lack the ability to do detailed research and compute conclusive data.
  • During the uncovering of the fraud, the liability of creditors money falls on the Unaware holders of the watered stocks.
  • In most cases, the investors are caught in a value trap, and the only way out is through the unloading of these stocks by incurring considerable losses.

Advantages

  • Usually, the promoters of the company make money out of this information asymmetry as they are at the helm of the entire controversy.
  • Ace investors may take advantage of the market misinterpretation regarding the stocks by selling the stocks at a highly overvalued price and booking huge profits.
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