Cost benefit analysis: What is it?

A cost benefit analysis (also known as a benefit cost analysis) is a process by which
organizations can analyze decisions, systems or projects, or determine a value for intangibles.
The model is built by identifying the benefits of an action as well as the associated costs, and
subtracting the costs from benefits. When completed, a cost benefit analysis will yield concrete
results that can be used to develop reasonable conclusions around the feasibility and/or
advisability of a decision or situation.
 
Why Use Cost Benefit Analysis?
Organizations rely on cost benefit analysis to support decision making because it provides an
agnostic, evidence-based view of the issue being evaluated—without the influences of opinion,
politics, or bias. By providing an unclouded view of the consequences of a decision, cost benefit
analysis is an invaluable tool in developing business strategy, evaluating a new hire, or making
resource allocation or purchase decisions.
 
Origins of Cost Benefit Analysis
The earliest evidence of the use of cost benefit analysis in business is associated with a French
engineer, Jules Dupuit, who was also a self-taught economist. In the mid-19th century, Dupuit
used basic concepts of what later became known as cost benefit analysis in determining tolls for
a bridge project on which he was working. Dupuit outlined the principles of his evaluation
process in an article written in 1848, and the process was further refined and popularized in the
late 1800s by British economist Alfred Marshall, author of the landmark text, Principles of
Economics (1890).
Scenarios Utilizing Cost Benefit Analysis
As mentioned previously, cost benefit analysis is the foundation of the decision-making process
across a wide variety of disciplines. In business, government, finance, and even the nonprofit
world, cost benefit analysis offers unique and valuable insight when:

 Developing benchmarks for comparing projects

 Deciding whether to pursue a proposed project
 Evaluating new hires
 Weighing investment opportunities
 Measuring social benefits
 Appraising the desirability of suggested policies
 Assessing change initiatives
 Quantifying effects on stakeholders and participants

How to Do a Cost Benefit Analysis

While there is no “standard” format for performing a cost benefit analysis, there are certain core
elements that will be present across almost all analyses. Use the structure that works best for
your situation or industry, or try one of the resources and tools listed at the end of this article.
We’ll go through the five basic steps to performing a cost benefit analysis in the sections below,
but first, here’s a high-level of overview:
 

1. Establish a framework to outline the parameters of the analysis

 2. Identify costs and benefits so they can be categorized by type, and intent
3. Calculate costs and benefits across the assumed life of a project or initiative
4. Compare cost and benefits using aggregate information
5. Analyze results and make an informed, final recommendation

 
As with any process, it’s important to work through all the steps thoroughly and not give in to
the temptation to cut corners or base assumptions on opinion or “best guesses.” According to a
paper from Dr. Josiah Kaplan, former Research Associate at the University of Oxford, it’s
important to ensure that your analysis is as comprehensive as possible:
 
“The best cost-benefit analyses take a broad view of costs and benefits, including indirect and
longer-term effects, reflecting the interests of all stakeholders who will be affected by the
program.”
How to Establish a Framework
In establishing the framework of your cost benefit analysis, first outline the proposed program or
policy change in detail. Look carefully at how you position what exactly is being evaluated in
relationship to the problem being solved. For example, the analysis associated with the question,
“should we add a new professor to our staff?” will be much more straightforward than a broader
programmatic question, such as, “how should we resolve the gaps in our educational offering?”
 
Example:
Once your program or policy change is clearly outlined, you’ll need to build out a situational
overview to examine the existing state of affairs including background, current performance, any
opportunities it has brought to the table, and its projected performance in the future. Also make
sure to factor in an objective look at any risks involved in maintaining the status quo moving
forward.
 
Now decide on how you will approach cost benefits. Which cost benefits should be included in
your analysis? Include the basics, but also do a bit of thinking outside the box to come up with
any unforeseen costs that could impact the initiative in both the short and long term.
 
In some cases geography could play a role in determining feasibility of a project or initiative. If
geographically dispersed stakeholders or groups will be affected by the decision being analyzed,
make sure to build that into the framework upfront, to avoid surprises down the road.
Conversely, if the scope of the project or initiative may scale beyond the intended geographic
parameters, that should be taken into consideration as well.

Identify and Categorize Costs and Benefits

Now that your framework is in place, it’s time to sort your costs and benefits into buckets by
type. The primary categories that costs and benefits fall into are direct/indirect,
tangible/intangible, and real:
 
  Direct costs are often associated with production of a cost object (product, service, customer,
project, or activity)
 Indirect costs are usually fixed in nature, and may come from overhead of a department or cost
center
 Tangible costs are easy to measure and quantify, and are usually related to an identifiable
source or asset, like payroll, rent, and purchasing tools
 Intangible costs are difficult to identify and measure, like shifts in customer satisfaction, and
productivity levels
 Real costs are expenses associated with producing an offering, such as labor costs and raw
materials

 
Now that you’ve developed the categories into which you’ll sort your costs and benefits, it’s time
to start crunching numbers.
How to Calculate Costs and Benefits
With the framework and categories in place, you can start outlining overall costs and benefits. As
mentioned earlier, it’s important to take both the short and long term into consideration, so
ensure that you make your projections based on the life of the program or initiative, and look at
how both costs and benefits will evolve over time.

TIP: People often make the mistake of monetizing incorrectly when projecting costs and
benefits, and therefore end up with flawed results. When factoring in future costs and benefits,
always be sure to adjust the figures and convert them into present value.
Compare Aggregate Costs and Benefits
Here we’ll determine net present values by subtracting costs from benefits, and project the
timeframe required for benefits to repay costs, also known as return on investment (ROI). 

The process doesn’t end there. In certain situations, it’s important to address any serious
concerns that could impact feasibility from a legal or social justice standpoint. In cases like
these, it can be helpful to incorporate a “with/without” comparison to identify areas of potential
concern.
 
With/Without Comparison
The impact of an initiative can be brought into sharp focus through a basic “with/without”
comparison. In other words, this is where we look at what the impact would be—on
organizations, stakeholders, or users—both with, and without, this initiative.
 
Thayer Watkins, who taught a course on cost benefit analysis during his 30-year career as a
professor in the San Jose State University Department of Economics, offers this example of a
“with/without” comparison:
 
“The impact of a project is the difference between what the situation in the study area would be
with and without the project. So that when a project is being evaluated the analysis must estimate
not only what the situation would be with the project but also what it would be without the
project. For example, in determining the impact of a fixed guideway rapid transit system such as
the Bay Area Rapid Transit (BART) in the San Francisco Bay Area the number of rides that
would have been taken on an expansion of the bus system should be deducted from the rides
provided by BART and likewise the additional costs of such an expanded bus system would be
deducted from the costs of BART. In other words, the alternative to the project must be explicitly
specified and considered in the evaluation of the project.”
 
TIP: Never confuse with/without with a before-and-after comparison.
3 Steps for Analyzing the Results and Make a Recommendation
In the home stretch of the cost benefit analysis, you’ll be looking at the results of your work and
forming the basis to make your decision.
 
1. Perform Sensitivity Analysis
Dr. Kaplan recommends performing a sensitivity analysis (also known as a “what-if”) to predict
outcomes and check accuracy in the face of a collection of variables. “Information on costs,
benefits, and risks is rarely known with certainty, especially when one looks to the future,” Dr.
Kaplan says. “This makes it essential that sensitivity analysis is carried out, testing the
robustness of the CBA result to changes in some of the key numbers.”
that his pie sales are significantly impacted by fluctuations or growth in store traffic:
2. Consider Discount Rates
When evaluating your findings, it’s important to take discount rates into consideration when
determining project feasibility.
 Social discount rates – Used to determine the value to funds spent on government
projects (education, transportation, etc.)
 Hurdle rates – The minimum return on investment required by investors or stakeholders
 Annual effective discount rates – Based on a percentage of the end-of-year balance, the
amount of interest paid or earned.
Here is a template where you can make your Cost Benefit Analysis
3. Use Discount Rates to Determine Course of Action
After determining the appropriate discount rate, look at the change in results as you both increase
and decrease the rate:

 Positive - If both increasing and decreasing the rate yields a positive result, the policy or
initiative is financially viable.
 Negative - If both increasing and decreasing the rate yields a negative result, revisit your
calculations based upon adjusting to a zero-balance point, and evaluate using the new findings.
Based upon these results, you will now be able to make a clear recommendation, grounded in
realistic data projections.

The Risks and Uncertainties of Cost Benefit Analysis

Despite its usefulness, cost benefit analysis has several associated risks and uncertainties that are
important to note. These risks and uncertainties can result from human agendas, inaccuracies
around data utilized, and the use of heuristics to reach conclusions.
 
Know the Risks
Much of the risk involved with cost benefit analysis can be correlated to the human elements
involved. Stakeholders or interested parties may try to influence results by over- or understating
costs. In some cases, supporters of a project may insert a personal or organizational bias into the
analysis.
 
On the data side, there can be a tendency to rely too much on data compiled from previous
projects. This may inadvertently yield results that don’t directly apply to the situation being
considered. Since data leveraged from an earlier analysis may not directly apply to the
circumstances at hand, this may yield results that are not consistent with the requirements of the
situation being considered. Using heuristics to assess the dollar value of intangibles may provide
quick, “ballpark-type” information, but it can also result in errors that produce an inaccurate
picture of costs that can invalidate findings.
 
In addressing risk, it’s sometimes helpful to utilize probability theory to identify and examine
key patterns that can influence the outcome.
 
Uncertainties
There are several “wild-card” issues that can influence the results of any cost benefit analysis,
and while they won’t apply in every situation, it’s important to keep them in mind as you work:
 

 Accuracy affects value – Inaccurate cost and benefit information can diminish findings around
value.
 Don’t rely on intuition – Always research benefits and costs thoroughly to gather concrete data
—regardless of your level of expertise with the subject at hand.
 Cash is unpredictable – Revenue and cash flow are moving targets, experiencing peaks and
valleys, and translating them into meaningful data for analysis can be challenging.
 Income influences decisions – Income level can drive a customer’s ability or willingness to make
purchases.
 Money isn’t everything – Some benefits cannot be directly reflected in dollar amounts.
 Value is subjective – The value of intangibles can always be subject to interpretation.
 Don’t automatically double up – When measuring a project in multiple ways, be mindful that
doubling benefits or costs can results in inconsistent results.

 
Controversial Aspects
When thinking about the most controversial aspects of cost benefit analysis, all paths seem to
lead to intangibles. Concepts and things that are difficult to quantify, such as human life, brand
equity, the environment, and customer loyalty can be difficult to map directly to costs or value. 
 
With respect to intangibles, Dr. Kaplan suggests that using the cost benefit analysis process to
drive more critical thinking around all aspects of value—perceived and concrete—can be
beneficial outcomes. “[Cost benefit analysis] assumes that a monetary value can be placed on all
the costs and benefits of a program, including tangible and intangible returns. ...As such, a major
advantage of cost-benefit analysis lies in forcing people to explicitly and systematically consider
the various factors which should influence strategic choice,” he says.
MEANING AND DEFINITION OF FINANCIAL MANAGEMENT :

Financial management is managerial activity which is concerned with the planning and controlling of the
firm’s financial resources.
Definitions
“Financial management is concerned with the efficient use of an important economic resource, namely
capital funds” - Solomon Ezra & J. John Pringle.
“Financial management is the operational activity of a business that is responsible for obtaining and
effectively utilizing the funds necessary for efficient business operations”- J.L. Massie.
“Financial Management is concerned with managerial decisions that result in the acquisition and
financing of long-term and short-term credits of the firm. As such it deals with the situations that require
selection of specific assets (or combination of assets), the selection of specific liability (or combination of
liabilities) as well as the problem of size and growth of an enterprise. The analysis of these decisions is
based on the expected inflows and outflows of funds and their effects upon managerial objectives”. -
Phillippatus.
Nature of Financial Management
The nature of financial management refers to its relationship with related disciplines like economics and
accounting and other subject matters.
The area of financial management has undergone tremendous changes over time as regards its scope and
functions. The finance function assumes a lot of significance in the modern days in view of the increased
size of business operations and the growing complexities associated thereto.

FUNCTIONS OF FINANCIAL MANAGEMENT :

The modern approach to the financial management is concerned with the solution of major problems like
investment financing and dividend decisions of the financial operations of a business enterprise. Thus,
the functions of financial management can be broadly classified into three major decisions, namely:
(a) Investment decisions,
(b) Financing decisions,
(c) Dividend decisions.
The functions of financial management are briefly discussed as under:
1. Investment Decision
The investment decision is concerned with the selection of assets in which funds will be invested by a
firm. The asset of a business firm includes long term assets (fixed assets) and short term assets (current
assets). Long term assets will yield a return over a period of time in future whereas short term assets are
those assets which are easily convertible into cash within an accounting period i.e. a year. The long term
investment decision is known as capital budgeting and the short term investment decision is identified as
working capital management.
Capital Budgeting may be defined as long – term planning for making and financing proposed capital
outlay. In other words Capital Budgeting means the long-range planning of allocation of funds among the
various investment proposals. Another important element of capital budgeting decision is the analysis of
risk and uncertainity. Since, the return on the investment proposals can be derived for a longer time in
future, the capital budgeting decision should be evaluated in relation to the risk associated with it.
On the other hand, the financial manager is also responsible for the efficient management of current assets
i.e. working capital management. Working capital constitutes an integral part of financial management.
The financial manager has to determine the degree of liquidity that a firm should possess. There is a
conflict between profitability and liquidity of a firm. Working capital management refers to a trade – off
between liquidity (Risk) and profitability. Insufficiency of funds in current assets results liquidity and
possessing of excessive funds in current assets reduces profits. Hence, the finance manager must achieve
a proper trade – off between liquidity and profitability. In order to achieve this objective, the financial
manager must equip himself with sound techniques of managing the current assets like cash, receivables
and inventories etc.
2. Financing Decision
The second important function is financing decision. The financing decision is concerned with capital –
mix, financing – mix or capital structure of a firm. The term capital structure refers to the proportion of
debt capital and equity share capital. Financing decision of a firm relates to the financing – mix. This
must be decided taking into account the cost of capital, risk and return to the shareholders. Employment
of debt capital implies a higher return to the share holders and also the financial risk. There is a conflict
between return and risk in the financing decisions of a firm. So, the financial manager has to bring a trade
– off between risk and return by maintaining a proper balance between debt capital and equity share
capital.
On the other hand, it is also the responsibility of the financial manager to determine an appropriate capital
structure.
3. Dividend Decision
The third major function is the dividend policy decision. Dividend policy decisions are concerned with
the distribution of profits of a firm to the shareholders. How much of the profits should be paid as
dividend? i.e. dividend pay-out ratio. The decision will depend upon the preferences of the shareholder,
investment opportunities available within the firm and the opportunities for future expansion of the firm.
The dividend pay- out ratio is to be determined in the light of the objectives of maximizing the market
value of the share. The dividend decisions must be analysed in relation to the financing decisions of the
firm to determine the portion of retained earnings as a means of direct financing for the future expansions
of the firm.
Meaning of contribution:-
Contribution is the amount of earnings remaining after all direct costs have been subtracted from
revenue. This remainder is the amount available to pay for any fixed costs that a business incurs
during a reporting period. Any excess of contribution over fixed costs equals the profit earned.
Direct costs are any costs that vary directly with revenues, such as the cost of materials and
commissions. For example, if a business has revenues of $1,000 and direct costs of $800, then it
has a residual amount of $200 that can be contributed to the payment of fixed costs. This $200
amount is the contribution arising from operations.
The contribution concept is usually referred to as contribution margin, which is the residual
amount divided by revenues. It is easier to evaluate contribution on a percentage basis, to see if
there are changes in the proportion of contribution to revenues over time.
Contribution should be calculated using the accrual basis of accounting, so that all costs related
to revenues are recognized in the same period as the revenues. Otherwise, the amount of expense
recognized may incorrectly include costs not related to revenues, or not include costs that should
be related to revenues.
The contribution concept is useful for determining the lowest possible price point at which
products and services should be charged, and still cover all fixed costs. Thus, a detailed
knowledge of contribution is useful in the following situations:

 Pricing. Special pricing deals should be designed to yield some amount of contribution;
otherwise a company is essentially losing money every time it makes a sale.
 Capital expenditures. Management can estimate how expenditures for fixed assets alter
the amount of direct costs incurred, and how this impacts profits. For example, an
expenditure for a robot can reduce direct labor costs, but increases fixed costs.
  Budgeting. The management team can use estimates of sales, direct costs, and fixed costs
to forecast profit levels in future periods.

A common outcome of contribution analysis is an increased understanding of the number of

units of product that must be sold in order to support an incremental increase in fixed costs. This
knowledge can be used to drive down fixed costs or increase the contribution margin on product
sales, thereby fine-tuning profits.

CONCEPT OF FINANCIAL CONTRIBUTION:-

 The term financial contribution means--

“(i) the direct transfer of funds, such as grants, loans, and equity infusions, or the potential direct
transfer of funds or liabilities, such as loan guarantees,

(ii) foregoing or not collecting revenue that is otherwise due, such as granting tax credits or
deductions from taxable income,

(iii) providing goods or services, other than general infrastructure, or

(iv) purchasing goods.”

Financial management performance:-

Financial Performance in broader sense refers to the degree to which financial objectives being o
r has been accomplished and is an important aspect of finance risk management. It is the process 
of measuring the results of a firm's policies and operations in monetary terms. It is used to measu
re firm's overall financial health over a given period of time and can also be used to compare sim
ilar firms across the same industry or to compare industries or sectors in aggregation.
Firms and interested groups such as managers, shareholders, creditors, and tax authorities look to 
answer important questions like :

1.  What is the financial position of the firm at a given point of time?
2. How is the Financial Performance of the firm over a given period of time?
These questions can be answered with the help of a financial analysis of a firm. Financial analysi
s involves the use of financial statements. A financial statement is a collection of data that is orga
nized according to logical and consistent accounting procedures. Its purpose is to convey an unde
rstanding of some financial aspects of a business firm. It may show a position of a period of time 
as in the case of a Balance Sheet, or may reveal a series of activities over a given period of time, 
as in the case of an Income Statement. Thus, the term ‘financial statements’ generally refers to t
wo basic statements: the Balance Sheet and the Income Statement.

The Balance Sheet shows the financial position (condition) of the firm at a given point of time. It 
provides a snapshot that may be regarded as a static picture. “Balance sheet is a summary of a fir
m’s financial position on a given date that shows Total assets = Total liabilities + Owner’s equity
.”
The Income Statement (referred to in India as the profit and loss statement) reflects the performa
nce of the firm over a period of time. “Income statement is a summary of a firm’s business reven
ues and expenses over a specified period, ending with net income or loss for the period.”
However, financial statements do not reveal all the information related to the financial operations 
of a firm, but they furnish some extremely useful information, which highlights two important fa
ctors profitability and financial soundness.
Financial Performance Analysis
Financial performance analysis includes analysis and interpretation of financial statements in suc
h a way that it undertakes full diagnosis of the profitability and financial soundness of the busine
ss. The financial analyst program provides vital methodologies of financial analysis.
Areas of Financial Performance Analysis:
Financial analysts often assess the firm's production and productivity performance (total business 
performance), profitability performance, liquidity performance, working capital performance, fix
ed assets performance, fund flow performance and social performance. Various financial ratios a
nalysis includes 
1. Working capital Analysis
2. Financial structure Analysis
3. Activity Analysis
4. Profitability Analysis
Significance of Financial Performance Measurement:
The interest of various related groups is affected by the financial performance of a firm. The type 
of analysis varies according to the specific interest of the party Involved:

 Trade creditors: interested in the liquidity of the firm (appraisal of firm’s liquidity) 
 Bond holders: interested in the cash-flow ability of the firm (appraisal of firm’s capital st
ructure, the major sources and uses of funds, profitability over time, and projection of fut
ure profitability)
 Investors: interested in present and expected future earnings as well as stability of these 
earnings (appraisal of firm’s profitability and financial condition)
 Management: interested in internal control, better financial condition and better perform
ance (appraisal of firm’s present financial condition, evaluation of opportunities in relatio
n to this current position, return on investment provided by various assets of the company 
etc.)

Corporate Social Responsibility:
Corporate social responsibility is a Corporate initiative to assess and take responsibility for the c
ompany's effects on the environment and impact on social welfare. The term generally applies to 
company efforts that go beyond what may be required by regulators or environmental protection 
groups. Nowadays CSR plays an important role in assessing a company.
Conclusion
A Financial Performance Report is a summary of Financial Performance of a Company that repo
rts the financial health of a company helping various investors and stakeholders take their invest
ment decision.

Performance & Financial Management

What Do We Mean By Performance & Financial Management?
Performance & financial management covers the management, process, and behavioral aspects
of strategy execution, and managing and monitoring performance. This is important to
professional accountants, both as employees or advisers, since many of them are focused on
helping their organizations deliver on objectives, goals and targets, and strategies using a range
of approaches, tools, and techniques.
Performance & financial management involves the deployment of various tools, techniques, and
systems to help an organization implement its strategies and plans, and support the achievement
of organizational objectives. Successfully executing strategy involves various disciplines, areas
of capability, including planning and forecasting, funding and resource allocation, revenue and
cost management, managing performance against objectives, and improving operational
management and utilization of assets.
Performance & financial management also covers the management of an organization’s finances,
such as cash flow and working capital management, and forecasting and budgeting, as well as
ensuring resources are allocated to the most important projects and investments by using
analytical approaches to project and investment appraisal.
Effective performance & financial management requires:

 engaging people to determine their information needs;

 implementing processes and systems to collect the right data;
 turning the data into information and insights; and
 presenting it in the best way.

Technological advances in data collection and storage present opportunities for enhancing
performance & financial management. There improvements have also introduced new terms,
such as business intelligence, big data, and predictive analytics, to represent the importance of
evidence-based decision making that helps organizations succeed. The emergence of cloud
computing is enabling organizations, especially small- and medium-sized entities (SMEs), to
gain access to and capitalize from performance & financial management applications.

Why Are Performance & Financial Management Important?

Performance & financial management is essential to achieving sustainable success, and is
universal to all organizations, regardless of size, type, and location. Strategies and plans need to
be informed by quantitative and qualitative insights and a sound understanding of the external
competitive environment, including customers, as well as of internal organizational performance.
Executing strategy involves translating strategies into action, allocating resources to the right
areas, and measuring results and holding people accountable. Performance & financial
management covers all of these core aspects of managing and improving organizational
performance. It involves understanding the linkages between intangible—or non-financial—
factors and financial outcomes, as well as ensuring that operational activities are carried out
effectively and efficiently. Managers need to know that the organization is doing the right things
as well as doing them in the best way possible.
Effective strategic and operational decision making hinges on information being relevant, timely,
and reliable since it is used to answer key questions, including:

 Are we adapting to meet changing market demands and anticipating future events and
trends?
  Are we delivering the results and sustainable value expected by our key stakeholders?
 Are we optimizing productive capacity, resources, and capabilities for a range of
anticipated economic conditions? and
 Are resource allocation decisions aligned with strategic direction, goals, and objectives?

Sound financial planning, management, and control provides the basis for an organization
achieving its goals and can be the difference between success and failure. Good financial
management enables an organization to monitor its daily activities, maintain short-term working
capital needs, and effectively manage its resources as well as provides the information it requires
to enable it to plan and operate more efficiently.

Financial Goal Analysis

Financial goals must be made by everyone so that they can have a steady flow of income and
savings they can fall back on especially after retirement or when they need to spend on
something major like weddings or children’s education.
We must take out time and analyze our financial goals by thinking what do we need the money
for. Every person will have different requirements and those goals must be made keeping in
mind what we need and what are the resources we have.

Those have a bigger financial source of income, can spend, save or invest more money, for
example. You can also take the help of a financial analyst to make your financial goals as he will
be able to tell you about the latest strategies and trends in the financial world. Here are few facts
about financial goal analysis:
Fix a goal
You must know clearly what you want. It can be a short-term goal or a long-term goal. It can be
savings for your children’s education, for your healthcare or if you want to take a holiday after
your retirement.
Fix a term
Set a deadline within which you want to achieve that goal so that you know how many months or
years you have to achieve your financial target.
Calculate resources
Not everyone’s salary is the same and hence you will have to calculate how much you are
earning and also make a projection of your earnings so that you can make the necessary
investments and save the required amount.
Current expenses
You cannot put all your earnings in savings or investment as you need to keep a substantial
amount for current spending too. Hence you have to take into account your current expenses
before you make any financial goals.
Obstacles
Identify any obstacles or hurdles that may stop you from reaching your financial goals. You must
also keep some money aside for emergency purposes so that your financial target is not affected.
Financial instruments
There are many ways by which you can get the best financial returns. There are different places
where you can invest like, money back savings schemes, stock markets, bonds and so on.
Plan
Based on all these factors you will have to make a plan to reach your financial goal. The strategy
should include your current financial situation, your expenses, your needs in the future, your
goal, any hurdles and a selection of the best financial instruments which will give you what you
want.
How to Set Financial Goals: 6 Simple Steps

Here are six steps to setting financial goals.

1. Figure out what matters to you. Put everything, from the practical and pressing to the
whimsical and distant, on the table for inspection and weighing.
2. Sort out what’s within reach, what will take a bit of time, and which must be part of a
long-term strategy.
3. Apply a SMART- goal strategy. That is, make certain your ambitions are Specific,
Measurable, Achievable, Relevant, and Timely. SMART.
4. Create a realistic budget. Get a strong handle on what’s coming in and what’s going out,
then work it to address your goals. Use your budget to plug leaks in your financial ship.
5. With any luck, your tough, realistic, water-tight budget will show at least a handful of
leftover dollars. Whatever that amount is, have it automatically directed into a separate
account designed to address the first couple of things on your list of priorities.
6. Monitor your progress.

Examples of Financial Goals

Here are nine examples of financial goals that you can consider setting for yourself:

1. Make a budget and living by it. Some are skeptical of the budgeting process. “Budgets are
focused on debts and expenses and nobody got rich by focusing on their debts,’’ said Ric
Edelman, a certified financial planner who is the author of eight books. “You get wealthy by
focusing on your assets and your income.’’ But most experts agree that budgets are useful, if only
to clearly define the amount of income and fixed expenses in someone’s household.
2. Pay off credit card debt. Wohlwend said this quality should head the list for anyone serious
about establishing financial standards. “The interest charges (on credit card accounts) eat up so
much of the cash flow that could be used for other objectives,’’ Wohlwend said. “Once you pay
them off, you should be conscious about not using the credit card as much. The whole system
enables people to make poor decisions. Once you get caught up in that culture, you don’t even
know what’s happening until you add it all up. It’s like, ‘My gosh, I’m $150,000 in debt!’ If you
have trouble doing it yourself, try credit consolidation with a reputable company.
3. Save an emergency fund. Three months of liquidity is a minimum standard. Six months (or
more) is better. In a fragile job market, emergency funds are essential.
4. Save for retirement. Delayed gratification remains an elusive concept for some Americans.
“Everything around us is a push to buy, a push to consume,’’ Lusardi said. “We need to making
saving — particularly retirement saving — as exciting as consumption. And it is exciting when
you consider it gives us the capacity to reach our long-term dreams. People just need to see it that
way.’’
5. Live below your means. It’s a simple math equation. If you spend more than your income,
there’s debt. If you spend less than your income, there are savings.
6. Develop skills to improve your income. It doesn’t necessarily mean a return to college for an
additional degree. It might mean taking on additional training or responsibility at your current
job. It might mean finding a mentor, who can provide tips and feedback, or working a part-time
 job. It could also mean attending conferences and workshops, networking in your profession,
taking a class at the public library, anything to acquire more contacts and knowledge.
7. Save for your children’s education. It’s not getting any easier. From 1980-2014, the average
annual increase in college tuition grew by nearly 260% compared to the nearly 120% increase in
all consumer items. Why is it important? According to the U.S. Department of Education, college
graduates with a bachelor’s degree typically earn 66 percent more than those with only a high-
school diploma. Over the course of a lifetime, the earnings are $1 million or more. By 2020, an
estimated two-thirds of all job openings will require post-secondary education or training.
8. Save a down payment for a home. For most people, it’s the most significant purchase and
investment. The greater the down payment, the more freedom and flexibility that’s provided for
the life of the loan.
9. Improve your credit score. In order to get that home — or any other transaction that requires a
loan — it’s always helpful to qualify for a lower interest rate. In simple terms, an improved credit
score saves you money by qualifying you for lower interest rates.

“The bottom line is everyone can do more — and everyone should do more — to plan for their
financial future,’’ said Annamaria Lusardi, a George Washington University professor who is
one of the world’s foremost experts on debt management. “Make a plan, then follow that plan.’’
How to Achieve Your Financial Goals
The best way to reach your financial goals is by making a plan that prioritizes your goals.
When you examine your own goals, you’ll discover that some are broad and far-reaching, while
others are narrow in scope. Your goals can be separated into three categories of time:

1. Short-term financial goals take under one year to achieve. Examples may include taking a
vacation, buying a new refrigerator or paying off a specific debt.
2. Mid-term financial goals can’t be achieved right away but shouldn’t take too many years to
accomplish. Examples may include purchasing a car, finishing a degree or certification, or paying
off your debts.
3. Long-term financial goals (over five years) may take several years to accomplish and, as a result,
require longer commitments and often more money. Examples might include buying a home,
saving for a child’s college education, or a comfortable retirement.

The goal-setting process involves deciding what goals you intend to reach; estimating the
amount of money needed and other resources required; and planning how long you expect to
take to reach each of your goals.
Develop A Goal Chart
Developing a financial goals chart is a good way to begin this process. Here are the five steps
you should follow in order to set up your goal chart:

1. Write down one personal financial goal. It should be specific, measurable, action-
oriented, realistic and it should have a timeline.
2. Decide if your goal is short-term, mid-term, or long-term, and create a timeline for that
goal. This may change at any time based on your situation.
3. Determine how much money you need to save to reach your goal and separate that
amount by the month and/or year.
4. Think of all ways you can reach that goal. Include saving, cutting expenses, earning extra
money, or finding additional resources.
5. Decide which is the best combination of ways to reach your goal and write them down.
All of that might sound daunting, but it’s best to set incremental goals. Prioritize, then achieve.
After accomplishing some of the easier goals, you gain confidence in your decision making That
provides motivation to achieve the more difficult targets that require more time and discipline.
Short-term Goals
Short-term financial goals tend to be narrow in scope, with a limited time horizon. Short-term
goals can include purchasing household furniture, minor home improvements, saving for a car or
vacation, or paying for a graduate degree.
Better still, however, short-term goals should include getting the best possible handle on your
budget, adjusting your spending habits, eliminating credit card debt, saving a set percentage of
your income, and/or establishing your emergency/rainy-day fund.
Short-term goals can include getting serious about doing away with unnecessary spending. Do
you need a landline phone? Do you need all those premium cable channels?
Sound daunting already? Then perhaps your key short-term goal is to find a financial counselor
or investment adviser who can help you sort your priorities and set a plan.
Midterm Goals
The tendency to weight financial plans around the near- and long-term goals has been called the
“barbell” approach. Some attention must be paid to mid-range goals — those ambitions that will
take three to 10 years to pull off.
Again, apply SMART planning. Avoid setting your sights so high that frustration intervenes to
short-circuit your ambitions.
Examples of mid-term financial goals include saving enough for a down payment on a house,
paying off a hefty student loan, starting a business (or starting a second career), paying for a
wedding, stoking your youngster’s prepaid college fund, taking a dream vacation, or even a
sabbatical.
A key mid-term goal would be developing multiple income streams. This doesn’t mean working
every weekend at the neighborhood big-box retailer. Instead, it might mean figuring out how to
monetize a hobby, or starting a side business with an underutilized skill.
Your financial counselor or investment adviser can play a valuable role in guiding your midterm
strategy.
Long-term Goals
The ultimate long-term financial goal, of course, is funding a comfortable retirement. It’s never
too early to get that ball rolling with regular, automatic deposits in tax-advantaged investment
accounts. It’s hard to beat dollar-cost-averaged investing over a period of 30 to 40 years.
Other long-term financial goals could include living debt-free, paying off your mortgage; taking
a lengthy, once-in-a-lifetime trip; getting your kids through college debt-free; building an estate
that would give your youngsters options in life; or leaving a legacy to a favorite nonprofit.
Goal Setting Tips and Resources
There are resources to help everyone stay on course. Financial apps for goal tracking can be
helpful. Technology offers a number of goal ticklers, alerts and prompts that can provide a nice
road map.
There are also old-fashioned methods. A picture of yourself affixed to the refrigerator door,
perhaps simulating that enjoyment of retirement on a secluded beach, might make for a nice
visual stimulus.
What is Sensitivity Analysis?
The technique used to determine how independent variable values will impact a particular
dependent variable under a given set of assumptions is defined as sensitive analysis. It’s usage
will depend on one or more input variables within the specific boundaries, such as the effect that
changes in interest rates will have on a bond’s price.
It is also known as the what – if analysis. Sensitivity analysis can be used for any activity or
system. All from planning a family vacation with the variables in mind to the decisions at
corporate levels can be done through sensitivity analysis.

It helps in analyzing how sensitive the output is, by the changes in one input while keeping the
other inputs constant.
Sensitivity analysis works on the simple principle: Change the model and observe the
behavior.
The parameters that one needs to note while doing the above are:
A) Experimental design: It includes combination of parameters that are to be varied. This
includes a check on which and how many parameters need to vary at a given point in time,
assigning values (maximum and minimum levels) before the experiment, study the correlations:
positive or negative and accordingly assign values for the combination.
B) What to vary: The different parameters that can be chosen to vary in the model could be:
a) the number of activities
b) the objective in relation to the risk assumed and the profits expected
c) technical parameters
d) number of constraints and its limits
C) What to observe:
a) the value of the objective as per the strategy
b) value of the decision variables
c) value of the objective function between two strategies adopted
Measurement of sensitivity analysis
Below are mentioned the steps used to conduct sensitivity analysis:

1. Firstly the base case output is defined; say the NPV at a particular base case input value
(V1) for which the sensitivity is to be measured. All the other inputs of the model  are
kept constant.
2. Then the value of the output at a new value of the input (V2) while keeping other inputs
constant is calculated.
3. Find the percentage change in the output and the percentage change in the input.
4. The sensitivity is calculated by dividing the percentage change in output by the
percentage change in input.

This process of testing sensitivity for another input (say cash flows growth rate) while keeping
the rest of inputs constant is repeated till the sensitivity figure for each of the inputs is obtained.
The conclusion would be that the higher the sensitivity figure, the more sensitive the output is to
any change in that input and vice versa.
Methods of Sensitivity Analysis
There are different methods to carry out the sensitivity analysis:

 Modeling and simulation techniques

 Scenario management tools through Microsoft excel
There are mainly two approaches to analyzing sensitivity:

 Local Sensitivity Analysis

 Global Sensitivity Analysis

Local sensitivity analysis is derivative based (numerical or analytical). The term local indicates
that the derivatives are taken at a single point. This method is apt for simple cost functions, but
not feasible for complex models, like models with discontinuities do not always have derivatives.
Mathematically, the sensitivity of the cost function with respect to certain parameters is equal to
the partial derivative of the cost function with respect to those parameters.
Local sensitivity analysis is a one-at-a-time (OAT) technique that analyzes the impact of one
parameter on the cost function at a time, keeping the other parameters fixed.
Global sensitivity analysis is the second approach to sensitivity analysis, often implemented
using Monte Carlo techniques. This approach uses a global set of samples to explore the design
space.
The various techniques widely applied include:

 Differential sensitivity analysis: It is also referred to the direct method. It involves

solving simple partial derivatives to temporal sensitivity analysis. Although this method
is computationally efficient, solving equations is intensive task to handle.
 One at a time sensitivity measures: It is the most fundamental method with partial
differentiation, in which varying parameters values are taken one at a time. It is also
called as local analysis as it is an indicator only for the addressed point estimates and not
the entire distribution.
 Factorial Analysis: It involves the selection of given number of samples for a specific
parameter and then running the model for the combinations. The outcome is then used to
carry out parameter sensitivity.

Through the sensitivity index one can calculate the output % difference when one input
parameter varies from minimum to maximum value.

 Correlation analysis helps in defining the relation between independent and dependent
variables.
 Regression analysis is a comprehensive method used to get responses for complex
models.
 Subjective sensitivity analysis: In this method the individual parameters are analyzed.
This is a subjective method, simple, qualitative and an easy method to rule out input
parameters.

Using Sensitivity Analysis for decision making

One of the key applications of Sensitivity analysis is in the utilization of models by managers
and decision-makers. All the content needed for the decision model can be fully utilized only
through the repeated application of sensitivity analysis. It helps decision analysts to understand
the uncertainties, pros and cons with the limitations and scope of a decision model.
Most if not all decisions are made under uncertainty. It is the optimal solution in decision making
for various parameters that are approximations. One approach to come to conclusion is by
replacing all the uncertain parameters with expected values and then carry out sensitivity
analysis. It would be a breather for a decision maker if he / she has some indication as to how
sensitive will the choices be with changes in one or more inputs.
Uses of Sensitivity Analysis

 The key application of sensitivity analysis is to indicate the sensitivity of simulation to

uncertainties in the input values of the model.
 They help in decision making
 Sensitivity analysis is a method for predicting the outcome of a decision if a situation
turns out to be different compared to the key predictions.
 It helps in assessing the riskiness of a strategy.
 Helps in identifying how dependent the output is on a particular input value. Analyses if
the dependency in turn helps in assessing the risk associated.
 Helps in taking informed and appropriate decisions
 Aids searching for errors in the model

Conclusion
Sensitivity analysis is one of the tools that help decision makers with more than a solution to a
problem. It provides an appropriate insight into the problems associated with the model under
reference. Finally the decision maker gets a decent idea about how sensitive is the optimum
solution chosen by him to any changes in the input values of one or more parameters.

The budget—For planning and control

Time and money are scarce resources to all individuals and organizations; the efficient and
effective use of these resources requires planning. Planning alone, however, is insufficient.
Control is also necessary to ensure that plans actually are carried out. A budget is a tool that
managers use to plan and control the use of scarce resources. A budget is a plan showing the
company’s objectives and how management intends to acquire and use resources to attain those
objectives.

Companies, nonprofit organizations, and governmental units use many different types of
budgets. Responsibility budgets are designed to judge the performance of an individual segment
or manager. Capital budgets evaluate long-term capital projects such as the addition of
equipment or the relocation of a plant. This chapter examines the master budget, which consists
of a planned operating budget and a financial budget. The planned operating budget helps to
plan future earnings and results in a projected income statement. The financial budget helps
management plan the financing of assets and results in a projected balance sheet.

The budgeting process involves planning for future profitability because earning a reasonable
return on resources used is a primary company objective. A company must devise some method
to deal with the uncertainty of the future. A company that does no planning whatsoever chooses
to deal with the future by default and can react to events only as they occur. Most businesses,
however, devise a blueprint for the actions they will take given the foreseeable events that may
occur.
A budget: (1) shows management’s operating plans for the coming periods; (2) formalizes
management’s plans in quantitative terms; (3) forces all levels of management to think ahead,
anticipate results, and take action to remedy possible poor results; and (4) may motivate
individuals to strive to achieve stated goals.

Companies can use budget-to-actual comparisons to evaluate individual performance. For

instance, the standard variable cost of producing a personal computer at IBM is a budget figure.
This figure can be compared with the actual cost of producing personal computers to help
evaluate the performance of the personal computer production managers and employees who
produce personal computers. We will do this type of comparison in a later chapter.

Many other benefits result from the preparation and use of budgets. For example: (1) businesses
can better coordinate their activities; (2) managers become aware of other managers’ plans; (3)
employees become more cost conscious and try to conserve resources; (4) the company reviews
its organization plan and changes it when necessary; and (5) managers foster a vision that
otherwise might not be developed.

The planning process that results in a formal budget provides an opportunity for various levels of
management to think through and commit future plans to writing. In addition, a properly
prepared budget allows management to follow the management-by-exception principle by
devoting attention to results that deviate significantly from planned levels. For all these reasons,
a budget must clearly reflect the expected results.

Failing to budget because of the uncertainty of the future is a poor excuse for not budgeting. In
fact, the less stable the conditions, the more necessary and desirable is budgeting, although the
process becomes more difficult. Obviously, stable operating conditions permit greater reliance
on past experience as a basis for budgeting. Remember, however, that budgets involve more than
a company’s past results. Budgets also consider a company’s future plans and express expected
activities. As a result, budgeted performance is more useful than past performance as a basis for
judging actual results.

A budget should describe management’s assumptions relating to: (1) the state of the economy
over the planning horizon; (2) plans for adding, deleting, or changing product lines; (3) the
nature of the industry’s competition; and (4) the effects of existing or possible government
regulations. If these assumptions change during the budget period, management should analyze
the effects of the changes and include this in an evaluation of performance based on actual
results.

Budgets are quantitative plans for the future. However, they are based mainly on past experience
adjusted for future expectations. Thus, accounting data related to the past play an important part
in budget preparation. The accounting system and the budget are closely related. The details of
the budget must agree with the company’s ledger accounts. In turn, the accounts must be
designed to provide the appropriate information for preparing the budget, financial statements,
and interim financial reports to facilitate operational control.
Management should frequently compare accounting data with budgeted projections during the
budget period and investigate any differences. Budgeting, however, is not a substitute for good
management. Instead, the budget is an important tool of managerial control. Managers make
decisions in budget preparation that serve as a plan of action.

The period covered by a budget varies according to the nature of the specific activity involved.
Cash budgets may cover a week or a month; sales and production budgets may cover a month, a
quarter, or a year; and the general operating budget may cover a quarter or a year.

Budgeting involves the coordination of financial and nonfinancial planning to satisfy

organizational goals and objectives. No foolproof method exists for preparing an effective
budget. However, budget makers should carefully consider the conditions that follow:

 Top management support All management levels must be aware of the budget’s
importance to the company and must know that the budget has top management’s
support. Top management, then, must clearly state long-range goals and broad objectives.
These goals and objectives must be communicated throughout the organization. Long-
range goals include the expected quality of products or services, growth rates in sales and
earnings, and percentage-of-market targets. Overemphasis on the mechanics of the
budgeting process should be avoided.
 Participation in goal setting Management uses budgets to show how it intends to
acquire and use resources to achieve the company’s long-range goals. Employees are
more likely to strive toward organizational goals if they participate in setting them and in
preparing budgets. Often, employees have significant information that could help in
preparing a meaningful budget. Also, employees may be motivated to perform their own
functions within budget constraints if they are committed to achieving organizational
goals.
 Communicating results People should be promptly and clearly informed of their
progress. Effective communication implies (1) timeliness, (2) reasonable accuracy, and
(3) improved understanding. Managers should effectively communicate results so
employees can make any necessary adjustments in their performance.
 Flexibility If significant basic assumptions underlying the budget change during the year,
the planned operating budget should be restated. For control purposes, after the actual
level of operations is known, the actual revenues and expenses can be compared to
expected performance at that level of operations.
 Follow-up Budget follow-up and data feedback are part of the control aspect of
budgetary control. Since the budgets are dealing with projections and estimates for future
operating results and financial positions, managers must continuously check their budgets
and correct them if necessary. Often management uses performance reports as a follow-
up tool to compare actual results with budgeted results.

The term budget has negative connotations for many employees. Often in the past, management
has imposed a budget from the top without considering the opinions and feelings of the
personnel affected. Such a dictatorial process may result in resistance to the budget. A number of
reasons may underlie such resistance, including lack of understanding of the process, concern for
status, and an expectation of increased pressure to perform. Employees may believe that the
performance evaluation method is unfair or that the goals are unrealistic and unattainable. They
may lack confidence in the way accounting figures are generated or may prefer a less formal
communication and evaluation system. Often these fears are completely unfounded, but if
employees believe these problems exist, it is difficult to accomplish the objectives of budgeting.

Problems encountered with such imposed budgets have led accountants and management to
adopt participatory budgeting. Participatory budgeting means that all levels of management
responsible for actual performance actively participate in setting operating goals for the coming
period. Managers and other employees are more likely to understand, accept, and pursue goals
when they are involved in formulating them.

Within a participatory budgeting process, accountants should be compilers or coordinators of the

budget, not preparers. They should be on hand during the preparation process to present and
explain significant financial data. Accountants must identify the relevant cost data that enables
management’s objectives to be quantified in dollars. Accountants are responsible for designing
meaningful budget reports. Also, accountants must continually strive to make the accounting
system more responsive to managerial needs. That responsiveness, in turn, increases confidence
in the accounting system.

Although many companies have used participatory budgeting successfully, it does not always
work. Studies have shown that in many organizations, participation in the budget formulation
failed to make employees more motivated to achieve budgeted goals. Whether or not
participation works depends on management’s leadership style, the attitudes of employees, and
the organization’s size and structure. Participation is not the answer to all the problems of budget
preparation. However, it is one way to achieve better results in organizations that are receptive to
the philosophy of participation

Budgeting and cost control

Definition
Budgeting and cost control comprise the estimation of costs, the setting of an agreed budget, and
management of actual and forecast costs against that budget.
General
A budget identifies the planned expenditure for a project, programme or portfolio. It is used as a
baseline against which the actual expenditure and predicted eventual cost of the work can be
reported.
Initial cost estimates can be comparative or parametric. These are refined as the feasibility and
desirability of the initiative are investigated and a greater understanding of scope, schedule and
resources is developed.
Once approval is given, these refined estimates form the baseline cost. By allocating costs to the
activities in a schedule, a profile of expenditure is produced.
The three major components of a P3 budget are:

 the base cost estimate;

 contingency;
 management reserve.
The base cost estimate is made up of known costs such as:

 resourcing (e.g. staff costs or consultants’ fees);

 accommodation;
 consumables (e.g. power or IT supplies);
 expenses (e.g. travel and subsistence);
 capital items.

Costs have four possible attributes. They may be direct, indirect, fixed or variable:

 direct costs are exclusive to the project, programme or portfolio; they include resources
directly involved in delivering and managing the work;
 indirect costs include overheads and other charges that may be shared out across multiple
activities or different departments;
 fixed costs remain the same regardless of how much output is achieved, such as the
purchase of an item of plant or machinery;
 variable costs, such as salaries, fluctuate depending on how much resource is used.

Costs may be organised into a cost breakdown structure (CBS) where different levels
disaggregate costs into increasingly detailed categories.
Contingency is money set aside for responding to identified risks.
A management reserve covers things that could not have been foreseen, such as changes to the
scope of the work or unidentified risks. The more uncertainty there is, the more management
reserve is required; so highly innovative work will need a larger management reserve than
routine work.
Once the cost estimate, contingency and management reserve are agreed with the sponsor, these
become the budget. The simplest way of illustrating the use of the budget against time is the ‘s-
curve’. This shows cumulative expenditure against time and gets its name from its typical shape.
This profile of expenditure is used in project financing and funding. It allows a cash flow
forecast to be developed, and a drawdown of funds to be agreed.
There should be strict guidelines or rules for managing the contingency and management reserve
funds. The P3 manager will have control of the base cost. The sponsor retains control of the
contingency and management reserve funds, which may be held as part of broader organisational
funds.
Once the work is under way, actual and forecast expenditures are regularly monitored. Costs are
tracked either directly by the P3 management team, or indirectly through operational finance
systems. Where P3 managers are reliant upon information from operational systems, the
information needs to be checked to ensure that costs have been posted correctly.
The normal payment process means that three types of costs must be tracked:

 committed costs – these reflect confirmed orders for future provision of goods and/or
services;
 accruals – work partially or fully completed for which payment will be due;
 actual costs – money that has been paid.
The forecast cost is then the sum of commitments, accruals, actual expenditure and an estimate
of the cost to complete the remaining work.
A report showing an ‘s-curve’ for the original budget alongside an ‘s-curve’ of actual spend to
date, can quickly show how actual expenditure is varying from that originally predicted and form
the basis for forecasting.
Actual expenditure inevitably varies from planned expenditure. While the P3 manager will have
responsibility for day-to-day management of costs there must be thresholds that require the
involvement of the sponsor. These are known as tolerances and, if expenditure is predicted to
exceed the tolerances, the manager must escalate this to the sponsor in the form of an issue.
Periodically, the viability of the project, programme or portfolio must be reviewed formally. In
the latter stages of the work this review must consider ‘sunk costs’. Sunk costs are actual and
committed expenditure that cannot be recovered, plus any additional costs that would be incurred
by cancelling contracts. Completing an overspent project or programme may be considered
worthwhile if the remaining cost to complete the work is less than the eventual value.
Project
After the initial comparative or parametric estimates, the detailed cost of a project will be
estimated bottom-up using the work breakdown structure (WBS).
By classifying costs in accordance with the WBS, CBS and organisational breakdown structure
(OBS), they can be reported in any combination of cost type, resource type and part of the
project. Estimates may be drawn from internal costs (such as salaries) or external costs (such as
provider quotations); they may be drawn from previous experience of similar projects or be more
speculative where the work is innovative. Where cost estimates are difficult to pin down, three-
point estimates of optimistic, pessimistic and most likely costs allow a statistical analysis of the
overall project cost.
The baseline cost can be used as the basis for earned value management (EVM). This assumes
that the cost of performing the work constitutes its value. The value of work performed at any
point can then be compared to the actual cost of performing it and the value of work planned to
have been performed at that point. The type of work in a project is usually in a narrow range.
This enables earned value management to make predictions about future performance based on
performance to date more accurately than techniques such as critical path analysis.
Many internal resources on a project will not be fully dedicated to the project. They may be part
of a matrix organisation where their time is split between business-as-usual and multiple
projects. In this situation, it is important to have a system of cost allocation that accurately
reflects the costs consumed by the project.
Programme
Programmes frequently cut across operational departments and may be funded from different
sources. The programme manager must understand how the budget is funded so that cost reports
can be fed back to the appropriate stakeholders.Within a diverse programme there may be
innovative projects and routine projects. As well as projects, costs will be incurred in business-
as-usual areas. The estimating accuracy across the programme will also vary widely. At any
point in time the programme will include projects that are well defined and accurately costed,
projects that are in the future and yet to be defined, benefits realisation work that is clearly part
of the programme, and business-as-usual work that is arguably part of the programme.
This variation makes it difficult to provide an overall picture of the programme’s financial
position. The financial performance of a programme cannot easily be represented as a simple ‘s-
curve’ and suitable reporting mechanisms will have to be set out and agreed with stakeholders.
A programme support function will need to establish clear cost accounting procedures that are
adhered to by all projects and benefits realisation work. Business change managers will need to
be clear on business-as-usual costs that can be allocated to the programme.
Portfolio
Portfolios are aligned to corporate financial cycles. Budgets for portfolios are less concerned
with the cost of delivering a specific result, and more to do with what can be delivered within a
defined budget.
The prioritisation and balancing phases of the portfolio life cycle depend upon a good
understanding of the costs of the component projects and programmes. One of the most common
causes of cost control problems is over-optimism about what can be delivered within the
available budget.
It is unlikely that cost variance reporting will be appropriate for the portfolio as a whole, but it
may be appropriate for categories of project and programme within the portfolio.
The portfolio management team is responsible for setting standards of cost estimating,
accounting and reporting across all the component aspects of the portfolio so that sound
decisions can be made
Financial control: definition, objectives and implementation
Any financial performance process becomes meaningless if a strategy to control it is not
defined and implemented based on objectives consistent with the current state of the
company and its upcoming projects.
Financial control has now become an essential part of any company's finances. Hence, it is
very important to understand the meaning of financial control, its objectives and benefits, and the
steps that must be taken if it is to be implement correctly.
Definition of financial control
Financial control may be construed as the analysis of a company's actual results, approached
from different perspectives at different times, compared to its short, medium and long-term
objectives and business plans.
These analyses require control and adjustment processes to ensure that business plans are being
followed and that they can be amended in the event of anomalies, irregularities or unforeseen
changes.

Objectives and benefits

1. CHECKING THAT EVERYTHING IS RUNNING ON THE RIGHT LINES 
Sometimes, financial control just checks that everything is running well and that the levels set
and objectives proposed at the financial level regarding sales, earnings, surpluses, etc., are being
met without any significant alterations. The company thus becomes more secure and
confident, its operating standards and decision-making processes being stronger.
2. DETECTING ERRORS OR AREAS FOR IMPROVEMENT
An irregularity in the company finances may jeopardize the achievement of an
organization's general goals, causing it to lose ground to its competitors and in some cases
compromising its very survival. Therefore, it is important to detect irregularities quickly.
Various areas and circuits may also be identified which while not afflicted by serious flaws or
anomalies could be improved for the general good of the company.
3. OTHER USES
Financial control may also serve to:
Implement preventive measures. Occasionally, early diagnosis of specific problems detected
by financial control makes corrective actions unnecessary, as they are replaced by solely
preventive actions.
Communicate with and motivate employees. Precise knowledge of the state of the company,
including its problems, mistakes and those aspects which are being handled correctly, encourages
better communication with employees and motivates them to ensure that they follow the correct
line or improve the necessary aspects.
Take action where required. Detecting the situation is of little use without concrete actions to
get a negative situation back on track thanks to specific and detailed information provided by
finance control.

Implementation strategies
Financial control must be designed on the basis of very well defined strategies if the
directors of the companies are to be able to:

 Detect anomalies in budgets, balance sheets and other financial aspects.

 Establish different operational scenarios putting profitability, sales volume and other
parameters to the test.

Although there are many different types and methodologies, a very common set of steps can be
distinguished in the vast majority of financial control implementation strategies.
STEP 1. ANALYSIS OF THE INITIAL SITUATION
The first step is to conduct an exhaustive, reliable and detailed analysis of the company’s
situation across various areas: cash, profitability, sales, etc.  
STEP 2. PREPARATION OF FORECASTS AND SIMULATIONS
On the basis of the initial situation analyzed above and the establishment of a set of parameters
or indicators, a set of forecasts and simulations of different contexts and scenarios can be
prepared.
These simulations are immeasurably helpful in making appropriate decisions on such crucial
aspects as investments, profitability, changes in production systems, etc.
 
THE ESTABLISHMENT OF PARAMETERS OR INDICATORS IS ESSENTIAL TO
DELIMITING EXACTLY WHAT WE WANT TO CONTROL. THEY INCLUDE BASIC
FUNCTIONS AND KEY AREAS OF THE MARKET, THE MOST COMMON OF
WHICH ARE: RETURN ON EARNINGS, TAX SITUATION, STATE OF
INVESTMENTS, ASSETS, LIABILITIES, EQUITY, PROFIT AND LOSS
 
STEP 3. DETECTION OF DEVIATIONS IN THE BASIC FINANCIAL STATEMENTS
The basic financial statements are the documents which must be created by the company in
preparing the annual accounts. The three most important documents are the general balance
sheet, the profit and loss account and the cash flow statement.
These analyses and tests in different environments are a fundamental part of financial control,
since they permit problems, errors and deviations from the ideal situation or initial objectives to
be detected early.
STEP 4. CORRECTION OF DEVIATIONS
Financial control would have very little practical use if the proper decisions relating to
corrective actions were not taken to get the company accounts on the right track as previously
established in the organization’s general objectives.

Financial Reporting
In any industry, whether manufacturing or service, we have multiple departments, which
function day in day out to achieve organizational goals. The functioning of these departments
may or may not be interdependent, but at the end of the day they are linked together by one
common thread – Accounting & Finance department. The accounting & financial aspects of each
and every department are recorded and are reported to various stakeholders. There are two
different types of reporting – Financial reporting for various stakeholders & Management
Reporting for internal Management of an organization. Both this reporting are important and
are an integral part of Accounting & reporting system of an organization. But considering the
number of stakeholders involved and statutory & other regulatory requirements, Financial
Reporting is a very important and critical task of an organization. It is a vital part of Corporate
Governance. Let’s discuss various aspects of Financial Reporting in the following paragraph

Definition of Financial Modeling

Financial Reporting involves the disclosure of financial information to the various stakeholders
about the financial performance and financial position of the organization over a specified period
of time. These stakeholders include – investors, creditors, public, debt providers, governments &
government agencies. In case of listed companies the frequency of financial reporting is
quarterly & annual.
Financial Reporting is usually considered an end product of Accounting. The typical components
of financial reporting are:

1. The financial statements – Balance Sheet, Profit & loss account, Cash flow statement
& Statement of changes in stock holder’s equity
2. The notes to financial statements
3. Quarterly & Annual reports (in case of listed companies)
4. Prospectus (In case of companies going for IPOs)
5. Management Discussion & Analysis (In case of public companies)

The Government and the Institute of Chartered Accounts of India (ICAI) have issued various
accounting standards & guidance notes which are applied for the purpose of financial reporting.
This ensures uniformity across various diversified industries when they prepare & present their
financial statements. Now let’s discuss about the objectives & purposesof financial reporting.
Objectives of Financial Reporting
According to International Accounting Standard Board (IASB), the objective of financial
reporting is “to provide information about the financial position, performance and changes in
financial position of an enterprise that is useful to a wide range of users in making economic
decisions.”
The following points sum up the objectives & purposes of financial reporting –

1. Providing information to the management of an organization which is used for the

purpose of planning, analysis, benchmarking and decision making.
 2. Providing information to investors, promoters, debt provider and creditors which is used
to enable them to male rational and prudent decisions regarding investment, credit etc.
3. Providing information to shareholders & public at large in case of listed companies about
various aspects of an organization.
4. Providing information about the economic resources of an organization, claims to those
resources (liabilities & owner’s equity) and how these resources and claims have
undergone change over a period of time.
5. Providing information as to how an organization is procuring & using various resources.
6. Providing information to various stakeholders regarding performance management of an
organization as to how diligently & ethically they are discharging their fiduciary duties &
responsibilities.
7. Providing information to the statutory auditors which in turn facilitates audit.
8. Enhancing social welfare by looking into the interest of employees, trade union &
Government.

Now let’s discuss few aspects about importance of financial reporting.

Importance of Financial Reporting
The importance of financial reporting cannot be over emphasized. It is required by each and
every stakeholder for multiple reasons & purposes. The following points highlights why
financial reporting framework is important –

1. In help and organization to comply with various statues and regulatory requirements. The
organizations are required to file financial statements to ROC, Government Agencies. In
case of listed companies, quarterly as well as annual results are required to be filed to
stock exchanges and published.
2. It facilitates statutory audit. The Statutory auditors are required to audit the financial
statements of an organization to express their opinion.
3. Financial Reports forms the backbone for financial planning, analysis, benchmarking and
decision making. These are used for above purposes by various stakeholders.
4. Financial reporting helps organizations to raise capital both domestic as well as overseas.
5. On the basis of financials, the public in large can analyze the performance of the
organization as well as of its management.
6. For the purpose of bidding, labor contract, government supplies etc., organizations are
required to furnish their financial reports & statements.

Conclusion
So we can conclude from the above points that financial reporting is very important from various
stakeholders point of view. At times for large organizations, it becomes very complex but the
benefits are far more than such complexities. We can say that financial reporting contains
reliable and relevant information which are used by multiple stakeholders for various purposes.
A sound & robust financial reporting system across industries promotes good competition and
also facilitates capital inflows. This, in turn, helps in economic development.

Credit Management policy: What is a credit management policy?

This is an operational document defining a number of operating rules for the sales process that
must be followed by the entire company including of course the credit team.

It defines the standard conditions of sale (standard payment terms, early payment discount rate...
etc.) and the processes to apply the rules (how to open an account, how to set a credit limit, how
to recover the bills ...etc.)

These rules are intended to do "good" sales and to converge business strategy, commercial stakes
and financial issues (credit risk, cash, profitability, working capital improvement).

Why implement a credit management policy?

The establishment of a procedure for credit management is necessary and critical in business
since the number of employees exceeds ten and unwritten rules that are no longer appropriate. It
defines the rules of operation at each stage of the sales process and clarifies the responsibilities in
line with the business strategy.

Thus, it limits the internal conflicts that inevitably appear when the personal interests of the
people involved differ. For example, it is common that the commercial, focused by the sale,
cares little for the solvency of its potential buyer. However, an accountant or financial manager
care more of the cash position and the risk to grant a credit to an insolvent client.

The policy of credit management clarifies the objectives of the company and set best practices
that must be followed by the entire organization.

Key factor of success, it must be shared between vendors, business management and finance
department. It is a document which specifies operating "standard" modes for all stakeholders
while providing rules for exceptions.

Indeed, the principle of the trade is to be specific to a business relationship to another, from an
economic context to another. Each company must be able to adapt its offer to it and sometimes
depart from the rules of running operations it has set itself.
 The credit policy does not include irremovable rules. It is not a static document for financial
controller which gathering dust in a corner office. This is an operational document which sets
operating modes in accordance with the interests of the company whose ultimate goal is to be
paid by its customers.

The division of tasks between employees can generate antagonists interests, as may be the case
between finance and sales department. But the supreme interest of the company must prevail.
This is the role of the procedure for credit management. It reconciles interests by setting limits to
each of them and providing for arbitration in specific cases.

Operating rules established by the procedure may in some cases be overridden but within a
framework defined in advance. Thus, it includes a chart of authority which determines for each
decision committing an additional risk to the company the power of validation of each actor. For
example, sending a new order for a customer who is in default of payment for more than 30 days
may be subject to the validation of the CFO.

In addition to clarifying responsibilities, adherence to such a procedure is used to circulate

information in the vertically (hierarchically subordinate) and horizontally (across multiple
services).
It promotes communication and mutual understanding of the different stakeholders. It therefore
avoids the "silos" generated by the withdrawal of each service who does not understand the
attitude of other services.

Finance and commerce are not intended to quarrel but to understand each other because
everyone has a share of the primary interest of the company.

Of course a company must sell and develop its sales, obviously it must ensure its sustainability
by avoiding overdue and bad debts. These issues are not exclusive, quite the contrary. This is
what helps the establishment of a procedure of credit.

Which the rules for which processes?

The purpose of the credit management policy is to define rules on all steps that are likely to
generate business risk by committing financial resources. This is done in order to manage this
risk and to minimize them.

Well managed, a risk can become an opportunity. For example, if you have evaluated a customer
as insolvent, you can request a payment in advance against an interesting discount. This helps to
improve cash flow of the business while avoiding any credit risk.

Main stages of the sales process

Timing diagram of the sales process:
1) commercial prospection
Business development incurs costs and should be well oriented to be effective. It is for example
against-productive to spend time and money to win an order with an insolvent potential client:

 The financial position of the buyer intends more to regression or disappearance through a
bankruptcy rather than becoming a key player in the market,
 Win a business with this company will result in payment delays or even unpaid invoices
and losses,

It is therefore essential to take into account the financial situation of companies before
prospecting them. Better canvass companies in good financial health and with good potential.
2) Quotations
These deals can be engaging for the seller, it is necessary to include commercial conditions
(conditions and mean of payment, guarantees... etc) coherent with the context and the
creditworthiness of the buyer. Credit risk starts at this stage. It is therefore necessary to define
how it is assessed (financial analysis, credit rating etc ...) and how it is managed.

3) Customer account opening

The customer opening account must follow certain basic rules to obtain necessary information in
order the administrative flows are fluid and do not disrupt the business relationship. Defined
rules specify what documents / information to be obtained prior to account opening and who
must obtain them.

4) Payment terms and credit limit set up

This stage occurs during the trade negotiations and may be before or after the opening of
account. It is here that are approved payment terms (payments, deferred payment, method of
payment, invoicing schedule ... etc), and any guarantees (bank guarantees, parent company
guarantees, delegation of payment, documentary credit ... etc.. ).

This is the heart of the prevention of outstanding risk. These conditions should be an integral
part of commercial negotiations and result from risk analysis that was done previously. The
credit management process defines the standard conditions, checks if it is possible to grant them
to the client and manage any deviations from this rules.

5) Delivery and invoicing

This step should not be overlooked as it is often a source of disputes that generate late payment
and have negative impacts on the business relationship. The credit management process specifies
the prerequisites for billing in a timely manner and the key steps to check to do a good billing
and not make errors (price, date of invoice, customer name, etc ...).
6) Friendly collection
Essential phase not to suffer late payments, the cash collection should be structured and
professionalized to be effective. Well done, debt collection lends credibility to the seller,
significantly improves cash flow and contributes positively to build a commercial relationship.

The recovery process must be defined in a combined result of recovery actions (phone calls,
email, mail return receipt, intervention of the sales representative ... etc) and agreed between the
recovery service or accounting and sales managers.

It also specifies how are used late payment penalties to get customers to pay in a timely manner.
7) Litigation
In case of failure of amicable collection that ended with sending a letter of formal notice,
collection action continues but with other means. These are numerous and depend on the
organization of each company and its customer types:

 Lawsuits handled by the seller with the contribution of a lawyer (referred provision,
payment order or assignment payment),
 Collection agencies,
 Bailiffs,
 Credit insurers.

Conclusion
The credit management policy includes all the steps above, describes how they are implemented
and by whom. It must be operational and concrete and therefore be adapted to each company.
There should not be two identical procedures as each business is unique and has its own strategy.

It represents the application in practice of a business strategy and management of customer

credit defined by the direction of the company. It allows to structure the business, improve
performance and relationships between the different services that compose it.

In a complex and difficult economic context, the implementation of such rules gives a direction
to the company and its employees and helps protect as much as possible his company from
overdue and losses, responsible of a business failure on 4 and many broken dreams of
entrepreneurs.

Well established and applied it will help to improve cash flow and working capital needs of the
company and to preserve its future and fostering its development.

UNIT IV
Definition: Marketing Budget
A marketing budget is marketing plan in terms of costs. Marketing budget is an estimated
amount of cost that will be required to promote products or services. Marketing budget is
generally part of a marketing plan and crucial part of the marketing process. It includes all
promotional costs like advertising and public relations, employing staff, office costs and other
expenses included for marketing. This budget is created to estimate the costs that are necessary
for growing a business.

Importance of Marketing Budget

Most of the businesses have tough time in predicting promotional and marketing costs.
Generally high marketing budgets are kept when new products or services are launched in the
market as companies have to spend on advertising. Percentage method is used for predicting
budget, i.e. marketing budget is set according to percentage of sales or profit. It is critical
resource for entire company because failure to properly estimating cost can lead to various
problems.
Some statistics have stated that 85% of the small to mid size companies just operated on budget
without any specific marketing plan. That’s why so many marketers are focused on tactically
preparing marketing budget. Budgeting is a difficult process and many companies rely on their
last year’s spend as a base in estimating the budget. Marketers also use ROI to prepare the
appropriate budget.

Formulating Marketing Budget 

Some research called advertising or marketing communications research is done prior estimating
budget like-
• Industry and Market Research
• Competitor Analysis
• Marketing Audit
• Internal Marketing performance records
Knowledge of industry and market must be taken into account before developing budget. Internal
Records are useful in estimating cost by calculating ROI of previous spends. So some research is
quite helpful in predicting marketing budget.
Hence, this concludes the definition of Marketing Budget along with its overview.
How to Prepare a Marketing Budget for New & Existing Businesses
For some companies, coming up with a marketing budget can be an exercise in itself. The
question for these companies becomes, “How to prepare a marketing budget?" It’s fine when a
company has an established record, with years of experience to build upon, but what about the
new company that’s just getting started? What are the steps to preparing a marketing budget for
both new and existing businesses who’ve perhaps not yet adopted one?
We’ll review the essential steps involved in ensuring the marketing budget is clearly defined and
measures results, and why it’s essential to track the performance of marketing plans to make
adjustments in future budgets.
1. What Will the Marketing Budget be Based on?
Adopting a marketing budget must first start with an understanding of how the marketing budget
itself will be put together. However, one must first start with an understanding of what to base
the marketing budget on. It can be based on several sales calculations:
 Percentage of future or projected sales.
 Percentage of past sales.
 Percentage of current sales.
 Seasonality adjustments for spikes in demand for busier times of year.
An example of a seasonality marketing budget is one in which certain summer businesses
determine their marketing budget in early March or April and enact those marketing plans in
May. After deciding on what to base the budget on, you can then move to the next step on how to
prepare a marketing budget.
2. How Will the Marketing Budget be Measured?

Without properly measuring the results, there is simply no way to measure success or failure, or
to be able to determine what marketing initiative works better than others and produces a better
ROI (Return on Investment). Marketing ROI simply refers to the outputs (in terms of additional
customers & business) that results from a given input (the marketing initiative).
If a company spends $100.00 a month on a given marketing approach and produces 50 customers
as a result, then the company must then measure the additional business brought in by those 50
new customers. How would this compare to a marketing initiative that cost $50.00 a month and
brought in 30 additional new customers? Well, the only way to truly know for sure would be to
determine the value of the business brought in by those 30 new customers at the $50.00 spent
versus the value of value of business brought in by the 50 customers at $100 spent. Therefore, be
sure to measure the results of your marketing approaches by tracking how many customers those
plans bring in and how much business comes as a result.
3. Be Sure to Track Monthly or Quarterly Performance

When preparing a marketing budget, it’s the results from month to month, quarter to quarter or
from year to year that help set the stage for either increasing or decreasing a given marketing
budget expenditure. Tracking the performance of a marketing plan by quarter will allow
companies to determine the net benefit of the marketing plan and track the marketing
expenditure as a percentage of company sales.
4. Deciding What & Where to Spend

For companies that have existing budgets, it’s rather easy to determine the amount to spend
relative to the marketing approach. However, it’s simply not the same for new businesses. So,
where does this information come from? Well, in the case of new businesses, it really amounts to
making some factual assertions. These factual assertions can come from industry sources that
provide relevant information on a given market. This could come from trade magazines, industry
newsletters or internet research.
Initial budgets always involve some aspect of guess work. However, mitigating that guess work
is done by making factual assertions based on solid information. Initial marketing budgets aren’t
perfect, but are improved over time. When deciding where to spend your advertising dollar, ask
yourself the following questions on how best to reach your customers.
 Are your customers the general consumer who’ll search for your business on the internet
or see your advertisement in print?
  Are your customers businesses that are more prevalent at industry trade shows,
conferences and therefore more geared towards business to business marketing & sales
approaches?
 Are your customers a specific niche or age demographic that congregate at a given
location or online social forums and websites?
Answering these questions will provide the basis for understanding how best to concentrate your
marketing dollar. Understanding your target audience is as important as ensuring your marketing
budget is properly prepared. In fact, one simply can’t succeed without the other.
5. Establishing the Budget Itself

In our example, we’ll base our marketing budget as a percentage of sales by quarter. In the
attached budget we’ve summarized the total expenditures by quarter on magazine
advertisements, online advertising, trade shows, conventions, print & radio as well as
miscellaneous marketing & sales training. Each quarter’s marketing expenditures are summed up
at the bottom of each quarter. The company’s sales for that quarter are just below, and below that
is the marketing expenditure expressed as a percentage of sales. The calculation is done by
taking total marketing expenditures and dividing it by the company’s sales for that quarter.
When companies look to answer that quintessential question of how to prepare a marketing
budget, they must understand that part of the success of the marketing plan is to manage the
budget’s expenditures and performance over time. In this sense, practice makes perfect.
How to prepare your firm’s marketing budget and plan
Every good marketing plan and budget is intrinsically linked to the firm’s strategic business
goals. After all, you must understand what your business wants to be and where it wants to go in
order to market it effectively.
A key component of this is knowing what segments of your accounting practice are prime
candidates for growth — what areas of expertise are most valuable and to whom? What
segments will be easiest to grow and offer the best value to your practice and your clients? Once
you understand your firm’s strengths, weaknesses and direction, you’re ready to create your
marketing program.
Here are six tips for researching and preparing your marketing plan and budget:
1. Research your target audiences. Your target audiences are the individuals or companies that
are the best candidates for requiring and using your services. Their needs and ability to generate
revenue for you align well with the services you offer and your pricing. If your practice serves a
corporate clientele, be aware that your target audience is not just the final decision-maker, but
any influencers who might affect the decision, such as partners, business committees and thought
leaders inside and outside the practice.
There are two broad types of research to help you determine your target audience: primary and
secondary. Primary research refers to studies you might commission to investigate what
industries and types of individuals or organizations would be prime candidates for your services.
Primary research has the advantage of directly addressing the critical questions that are most
relevant to your specific circumstances.
Secondary research refers to utilizing research studies that have already been conducted by
another organization. Trade associations or publishers often release studies about specific
industries. Similarly, there are many organizations that sell relevant research on market size or
trends.
A combination of these two types of research is the best solution for obtaining a comprehensive,
well-informed view of potential target audiences.
2. Develop your marketing strategy. First, it should be noted that a marketing strategy is not
the same thing as marketing tactics. The former describes the concepts and planning that go into
creating a marketing plan. The latter involves the specific techniques and channels you’ll use to
implement your strategy and engage your target audiences.
An effective marketing strategy should be informed by four key elements:

 An understanding of your target audiences;

 Your firm’s unique competitive advantages;
 Your status in the marketplace (are you the low-cost firm, the high-priced boutique or a
specialist?); and
 Insight into the key messages your audiences need to hear — what will interest them the
most?

3. Choose your marketing techniques. Some accounting firms make the mistake of starting
with this task, mostly because an opportunity might present itself that’s hard to pass up, such as a
discounted broadcast advertising campaign, or an attractive social media opportunity. This
haphazard approach is a waste of time, money and effort.
Instead, your target audience research should reveal which communications channels they prefer
and are already using. Even so, it’s important to balance your offline and online presence to
ensure maximum reach (how many prospects you “touch”) and frequency (how often you
“touch” them).
4. Set specific goals and determine how you will track them. Paradoxically, you’ll want to
consider first how you will track your goals before you determine what those goals will be.
Why? Because you might already be using some channels or techniques that lend themselves to
tracking appropriate goals. For example, if you want to get 20 new LinkedIn shares each week,
you have to know you’ll be using LinkedIn before you can set that goal. Modern technology
makes some metrics easy to track, so when it makes sense and is appropriate for your strategy,
take advantage of what is readily available to you.
Not sure what goals to track for your firm? Here are three areas of tracking that are appropriate
for most accounting firms:

 Business outcomes: Look at new leads and new clients acquired, revenue growth and
profitability.
 Visibility: The single most representative measure of visibility is external website traffic.
 Expertise: Track how many people download your white papers, view your blog posts
(assuming that your blog posts demonstrate expertise) or attend your speaking events.
After all, people who consume your educational content are demonstrating an interest in
your expertise.

5. Select frequency, effort levels, and resources. What needs to happen to ensure your
marketing messages reach your target audiences? Who within your firm needs to be involved in
the effort and what tools, resources and training might they need? Coordinating all of these
activities can be quite a challenge, too. One tool that we have found helpful is a marketing
calendar. This document lays out what you will be doing and when it will happen.
6. Develop your budget. The final step is to develop your marketing plan budget based on the
work you’ve done above. Don’t make low cost your primary deciding factor. Many firms have
wasted precious resources on “cheap” marketing tools that were woefully ineffective. Be sure to
include one-time expenses like an updated website or new software tool as well as ongoing
expenses such as online and offline media campaign costs.
If you find you need to reduce your budget, try eliminating one whole technique or initiative
rather than trimming across the board. In our experience, it is more effective to do fewer things
but do them better.
As you dive into your marketing plan and budget, remember the old saying: “The devil is in the
details.” If you conduct the necessary research, develop the appropriate tools and content, create
a reasonable budget, and implement your plan properly, you’ll be well on your way to being
recognized as a marketing guru.

Marketing Control: Top 4 Methods of Marketing Control

On the basis of types of criteria – sales, profits, efficiency, and strategic considerations – used for
measuring and comparing results, there are four types or tools of marketing control. In every
type of control, the same procedure is applied, i.e., setting standards, measuring actual
performance, comparing actual performance with standards, and taking corrective active actions,
if required.

Philip Kotler considers four types of marketing control:

1. Annual Plan control

2. Profitability control
3. Efficiency Control
4. Strategic Control
Annual Plan Control:
In this method, annul plans are prepared for various activities. Each plan includes setting
objectives (expected results or standards), allocating resources, defining time limit, and
formulating rules, policies and procedures. Annual plan control relates to sales. Periodically
(mostly annually) the actual results are measured and compared with standards to judge whether
annual plans are being (or have been) achieved.
Depending on the degree of difference between the planned and the actual results, causes are
detected and suitable corrective actions are undertaken. Thus, it contains checking ongoing
performance against annual plan and taking corrective action. Figure 1 shows five measures of
annual plan control.
Measures (Evaluation Tools) of Annual Plan Control:
Following five measures are used in annual plan control:
1. Analysis of Different Sales:
Analysis of different sales contains measuring and evaluating different sales (total sales,
territory- wise sales, distribution channel-wise, product-wise sales, customer-wise sales, etc.)
with annual sales goals. Targets are set for different types of sales and actual sales of different
categories are compared to find out how far company can achieve its sales goals.
2. Analysis of Market Share:
Here, market share is used as base for measuring, comparing, and correcting results. Market
share is a proportion of company’s sales in the total sales of the industry. It helps to know how
well the company is performing relative to its close competitors. Thus, the performance is
assessed against expected market share and competitors’ market share.
It involves considering three types of market shares:

i. Overall market share

ii. Served market share

iii. Relative market share

3. Analysis of Market Expenses-to-Sales:

This type of control checks marketing expenses. It ensures that the firm is not overspending to
achieve its annual sales goals. Different marketing expenses are watched in relations to sales.

Normally, company considers five components to calculate expenses-to-sales ratios and

compares them with standard ratios to find out how far expenses are under control, such
as:

i. Sales force-to-sales ratio

ii. Advertising-to- sales ratio

iii. Sales promotion-to-sales ratio

iv. Marketing research-to-sales ratio

v. Sales administration-to-sales ratio

Marketing managers needs to monitor these expenses in relation to sales. If the expenses fall
beyond permissible limits, it should be taken as a serious concern and needed steps are taken to
keep them under control.

4. Financial Analysis:

Financial control consists of evaluating sales and sales-to-expense ratios in relation to overall
financial framework. It means net profits, net sales, assets, and expenses are studied to find out
rate return on total assets, and rate of return on net worth.

Financial analysis determines firm’s capacity of earnings, profits, or income. Attempts are made
to find out factors influencing firm’s rate of return on net worth. Here, various ratios are
calculated such as profit margin ratio (net profits + net sales), asset turnover ratio (net sales +
total assets), and return on assets ratio (net profits + total assets), financial leverage (total assets
+ net worth) and return on net worth (net profits – net worth). Profit margin can be improved
either by cutting expenses and/or increasing sales.

5. Analysis of Customer and Stakeholder Attitudes:

The measures of annual plan control discussed in former part are financial and quantitative in
nature. Qualitative measures are more critical because they give early warning about what is
going to happen on sales as well as profits.

Manager can initiate precautionary actions to minimize adverse impacts of forces on the future
outcomes. Under this tool, customers’ attitudes are tracked to project the way they will react to
the company’s offers. Alert company prefers to set up a system to monitor attitudes of
customers, dealers, and other participants.

Base on their attitudes, preference and satisfaction, management can take early actions. This tool
is preventive in nature as adverse impact on the future results can be prevented by advanced
steps. Market- based preference scorecard analysis is used to measure (score) attitudes of
customers and other participants. Such analysis reflects actual company’s performance and
provides early warnings.

Measuring Customers’ Attitudes:

Here, a firm tries to measure attitudes of customers by using various methods like, complaints
and suggestions, customer panels, customer survey, etc. It provides details about new customers
created, existing customers lost, dissatisfied customers, relative product quality, relative service
quality, target market awareness, target market preference, and other valuable information.

Measuring Stakeholders’ Attitudes:

It consists of measuring or recording stakeholders’ attitudes. It shows the pattern of stakeholders’

preference, attitudes, and overall response toward company and its offers. Stakeholders include
suppliers, dealers, employees, stockholders, service providers, etc. They have critical interest and
impact on company’s performance.
Without their cooperation and contribution, a company cannot realize its goals. When one or
more of these stakeholders register dissatisfaction, management must take suitable actions.
Methods used to track attitudes of customers can also be used for measuring attitudes of
stakeholders.
Profitability Control:
In this method, the base of exercising control over marketing activities is the profitability.
Certain profitability (and expenses) related standards are set and compared with actual
profitability results to find out how far company is achieving profits. Profitability control calls
for measuring profitability of various products, channels, territories, customer groups, order size,
etc. It provides necessary information to management to determine whether products, channels,
or territories should be expanded, reduced, or eliminated.
Process of Marketing-Profitability Analysis:
Systematic and logical process is used for analysis of profitability.
It involves:
1. Identifying Functional Expenses:
It consists of determining expenses to be incurred for the marketing activities like salaries, rents,
advertising, selling and distribution, packing and delivery, billing and collection, etc.
2. Assigning Function Expenses to Marketing Entities:
Simply, expenses of particular head (for example, salary or advertising) are associated with
different entities like products, channels, territories or customers groups.
3. Preparing Profits and Loss statement:
A profit and loss statement is prepared for each type of products, channels, territories, etc., to
evaluate their relative performance. Based on relative performance in form of profitability,
management can decide on products, channels or territories to be expanded, reduced or
eliminated.
For example, a firm has five products, like A, B, C, D, and E. If profit and loss statement
shows that:
(1) Product C is more profitable, and therefore, it must be expanded;
(2) Product B is poor, and, therefore, it must be reduced;
(3) Product D is making loss, and therefore, it must be eliminated, and
(4) Product A and product E are satisfactory, and therefore they must be maintained. In the same
way, it can be applied to different territories and segments.
Table 1 shows how to prepare profit and loss statement for different products.
4. Taking Action:
On the basis of the profit and loss statement, necessary actions can be directed.
Actions include one or more of followings:
i. Expanding product(s)
ii. Reducing product(s)
iii. Eliminating product(s)
iv. Reducing any of the expenses
v. Increasing sales, etc.

Efficiency Control:
This control, particularly, concerns with measuring spending efficiency. While profitability
control reveals the relative (in relation to different entities like products, territories, channels,
etc.) profits a company is earning, the efficiency control shows the ways to improve efficiency of
various marketing entities like sales force, advertising, distribution, sales promotion, and so
forth.
Sometimes, a post of marketing controller is created to work out a detailed programme to
measure and improve efficiency of expense-centered marketing activities. Here also, in order to
evaluate efficiency level of different marketing activities, the efficiency standards (of ideal
performance) are set and are compared with actual performance.
Efficiency control can improve efficiency of marketing department in two ways – one is,
improving ability of various marketing activities to contribute more in reaching the goals, and
the second is, reducing expenses or wastage.
Types of Efficiency Control:
Figure 2 shows major types of efficiency control. Main types of efficiency control involve
controlling sales force efficiency, advertising efficiency, sales promotion efficiency, distribution
efficiency, and marketing research efficiency.

1. Sales Force Efficiency Control:

To measure efficiency of sale force (salesmen), certain key indicators/criteria are developed. A
manager has to make a lot of calculations and paperwork.
Common criteria used to measure and evaluate the sales force efficiency include:
i. Average number of sales calls per salesman in a day
ii. Average sales calls time spared per contact
iii. Average revenue generated per call
iv. Average costs incurred per call
v. Entertainment cost per calls
vi. Percentage of orders per specific number of calls, i.e., how many orders have been received
from 100 calls made
vii. Number of new customers created during specific period
viii. Number of customers lost in a given period
ix. Contribution of salesmen in total sales, revenue, and profits
x. Sales force costs as percentage of total sales.
Questionnaire, discussion, inspection, observation, salesman’s report, etc., methods are used for
the purpose. However, most companies use salesman’s report. A unique computer-based
programme or software can also be developed for speedy and accurate measurement of sales
forces efficiency on a regular basis. Simply, actual performance of sales force is compared with
these criteria to find out deviation, and, accordingly, necessary actions are taken.
This measurement of sales force efficiency can provide satisfactory answers of following
questions:
i. What is role/contribution of sales force in selling efforts?
ii. Who are the most efficient, less efficient and inefficient sales people?
iii. Which are reasons responsible for poor efficiency of sales force?
iv. What can/should be done to improve efficiency?
2. Advertising Efficiency Control:
Advertising is the most expensive among all the promotional tools. Major part of promotion
budget is consumed by advertising alone. So, it is extremely necessary to find out efficiency
level of advertising efforts. A company sets advertising goals (standards) and compared actual
contribution of advertising to decide how far advertising has been capable to fulfill firm’s
expectations. Advertising efficiency control mainly involves measuring cost efficiency or
contribution efficiency.
Practically, it is difficult to measure the exact contribution of advertising efforts/costs.
Systematic tools can be developed to measure impact of advertising qualitatively – in forms of
increasing awareness, changing attitudes, and creating brand loyalty – and quantitatively – in
forms of impact on sales and profits. Survey of dealers and customers can be made to collect
needed data.
Common criteria used for measuring advertising efficiently include:
i. Advertising cost per thousand target customers reached by a specific media vehicle, for
example, television medium.
ii. Percentage of audience who read, noted, or saw message from print media.
iii. Customer opinion on advertising contents and effectiveness.
iv. Measurement of pre-post (before-after) advertising impact on attitudes of people toward the
product.
v. Number of inquiries generated by advertising.
vi. Cost per inquiry.
vii. Media suitability.
viii. Impact of advertising on personal selling, sales promotion, public relations, publicity, and
distribution.
ix. Need and performance of advertising agency, etc.
Manager can compared efficiency of advertising programme with internal as well as external
standards to judge comparative efficiency. He must find out causes leading to inefficiency.
One or more of following actions are initiated:
i. To changes advertising objectives and policies.
ii. To change advertising message.
iii. To change advertising media.
iv. To change media scheduling and frequencies.
v. To change and/or train the staff.
vi. To change advertising agency.
vii. To change advertising budget, etc.
3. Sales Promotion Efficiency Control:
This control is exercised by sale manager. Sometimes, sales promotion manager is also
appointed to deal with the issue. Sales promotion efficiency measures the impact of sales
promotion efforts on sales, profits, competitiveness, and consumer satisfaction. Such efforts
include offering a wide range of short-term incentives to stimulate buyer interest and consumer
trial. Sales promotion is, no doubt, costly, but it seems essential. Here, manager tries to measure
costs and impact of each of sales promotion tools. Normally, sales promotion tools are applied at
three levels – customer level, dealer level, and sale force level.
Common criteria used for measuring sales promotion efficiency include:
i. Percentage of total sales promotion expenses to sales.
ii. Costs of display, sample, coupons, and other tools per unit selling price.
iii. Number of inquires generated due to display, demonstration, other such incentives.
iv. Joint and individual impact of various tools on dealer interest, consumer purchase, and
competitiveness.
Analysis of costs and contribution of sales promotion tools helps in selecting the most cost-
effective sales promotion tools to use. A firm can reduce unnecessary costs and/or can improve
contribution of each of the tools of sales promotion. It helps design suitable sales promotion
strategies in term of costs, level of sales promotion, timing, and types of techniques at each of the
levels.
4. Distribution Efficiency Control:
In an average, distribution costs account for 20 to 30 per cent of selling price. By a suitable
distribution network, company can improve its profitability on one end and consumer
satisfaction on the other end. Therefore, it is necessary to review or assess the entire distribution
system periodically. Distribution efficiency control measures how far company’s distribution
system is efficient to achieve marketing goals.
Common criteria used for the purpose include:
i. Percentage of total distribution costs per unit price.
ii. Percentage of physical distribution (warehousing, inventory, ordering, transportation,
communication, insurance, etc.) costs per unit price.
iii. Percentage of channel members’ (wholesalers, retailers, agents, etc.) costs per unit price.
iv. Costs and contribution of direct v/s indirect channels.
v. Potentials of using online marketing, network marketing, and by retailing chains.
vi. Assessing costs of marketing channels in relation to services they offer to the company as
well consumers.
Distribution efficiency gives valuable information to select the most cost-effective distribution
option and sub-options. Company can minimize distribution costs and/or improve profits and
competitiveness. In the same way, it can increase consumer satisfaction, too.
5. Marketing Research Efficiency Control:
Marketing research is process of gathering, analyzing, and interpreting data relating to any
marketing problem. Due to dynamic nature of marketing environment, a company needs data on
various relevant variables time to time. Marketing research is an expensive option. It is
imperative for a firm to know how far marketing research efforts and costs are instrumental in
achieving marketing goals. It provides necessary details to improve research policies and
practices.
Common criteria used to measure marketing research efficiency include:
i. Annual budget of marketing research department.
ii. Costs of research projects conducted in a year.
iii. Effectiveness of tools and methods used for collecting and analyzing data.
iv. Usefulness of findings of marketing research in decision-making.
v. Relative advantages of company’s research department v/s professional research firms, etc.
Strategic Control:
Strategic control implies a critical review of overall marketing effectiveness in relation to broad
and long-term objectives and firm’s response to marketing environment. It deals with assessing
firm’s ability to define and achieve marketing goals, and response pattern to environment.
Normally, strategic control verifies company’s long-term performance with reference to the close
competitors. Here, entire marketing system is reviewed to judge firm’s overall strengths and
weaknesses. It answers the question: How far is the firm capable to exploit emerging marketing
opportunities and face challenges and threats?
Methods or Tools:
As shown in Figure 3, four tools are used for strategic control – the marketing effectiveness
review, the marketing audit, the marketing excellence review, and the ethical and social
responsibility review. Let’s discuss each of them.

1. The Marketing Effectiveness Review:

It involves a review of overall marketing performance. It helps finding effectiveness of several
business plans in term of sales growth, market share, and profitability. Attempts are made to
detect causes for good-performing marketing department and poor-performing department.
Common criteria:
Some criteria are used to review marketing effectiveness.
They include:
i. Company’s Customer Philosophy:
It shows company’s approach toward customers.
ii. Integrated Marketing Efforts:
It shows the way company integrates efforts of all divisions and departments for achieving
marketing goals.
iii. Marketing Information:
It studies company’s policies and practices to collect, use, and disseminate critical information
on a regular basis.
iv. Company’s Strategic Orientation:
It shows company’s broad and long-term plans for survival and growth. It also indicates firm’s
long-term plans for profits, sales, and expansion.
v. Operational Efficiency:
It shows how efficiently a company managing its current operations.
vi. Public Relations Practices:
It shows company’s policies and practices to establish, maintain, and improve relations with
various publics, which have direct interest in the company’s operations, and whose cooperation
seems critical in achieving marketing goals.
Here, we have considered only six criteria. As per need, more criteria can be developed and used
for the purpose.
A special instrument can be developed by using these criteria to measure marketing
effectiveness. The instrument (a type of questionnaire or form with questions and certain number
of options or intensity in each of the questions) is filled by managers of marketing and various
other departments.
On the basis of this instrument, controller can calculate score of each managers of each of the
departments. Level of scores received by manager or department clearly indicates the
effectiveness of particular manager and/or department. Accordingly, each department is awarded
class like excellent, very good, good, fair, or poor. Necessary actions can be taken on the basis of
performance.
2. The Marketing Audit:
Another alternative tool for critical review of overall marketing performance is the marketing
audit. Audit means to examine systematically. It is systematic examination/investigation of all
critical aspects of marketing department.
Philip Kotler defines: “A marketing audit is a comprehensive, systematic, independent, and
periodical examination of a company’s marketing environment, objectives, strategies, and
activities with a view to determine problem areas and opportunities, and recommending a plan of
action to improve the company’s marketing performance.”
Key characteristics of marketing audit have been discussed below:
i. Comprehensive:
The marketing audit covers all the major marketing activities of a business unit.
ii. Systematic:
It is a systematic examination of all marketing operations. It is a well-planned and orderly task.
All aspects are audited minutely. It indicates corrective actions to improve firm’s marketing
performance.
iii. Independent:
Marketing audit is conducted objectively (bias-free) or neutrally. It includes self-audit, internal,
or external audit. However, the external audit is considered as the best one.
iv. Periodical:
The marketing audit should be conducted regularly to detect problems and avoid crisis.
v. Purposive:
Its purpose is to find out marketing problem areas and opportunities. It recommends actions to
improve company’s marketing performance.
Key Issues or Decisions of Marketing Audit:
A detailed plan is prepared to conduct marketing audit.
The main decisions/issues of marketing audit include:
i. Deciding on marketing audit objectives (why).
ii. Deciding on marketing audit responsibility (who).
iii. Deciding on data to be collected (what).
iv. Deciding on respondents (whom).
v. Deciding on time (when and how long).
vi. Deciding on areas of marketing audit (Where).
vii. Deciding on intensity of examination (How much).
viii. Deciding on methods and tools (how)
ix. Deciding on audit report format
x. Deciding on actions to be taken on the basis of report.
Components of Marketing Audit:
The marketing audit examines six major components of company’s marketing operations,
such as:
a. Marketing Environment Audit:
It examines impacts of micro and macro factors of marketing environment. Macro marketing
environment consists of demographic, economic, environmental (ecological), technological,
political and cultural factors. Micro marketing environment includes market segments,
customers, competitors, dealers, suppliers, facilitators, and general public’s.
b. Marketing Strategy Audit:
It examines company’s business mission, marketing goals and objectives, resources capacity, and
marketing strategies.
c. Marketing Organisation Audit:
It examines suitability of marketing organisation (structures) to implement marketing operations
effectively. It includes level, relations, authority- responsibility, communication, facilities,
organisation manual, etc.
d. Marketing System Audit:
It examines major systems like marketing information and research system, marketing planning
system, marketing control system, new product development system, etc.
e. Marketing Productivity Audit:
It examines company’s profitability for different products, territories, and channels. It also
examines cost-effectiveness for various operations.
f. Marketing Function Audit:
It examines marketing mix elements such as product, price, promotion (advertising, sales
promotion, personal selling-sales force, publicity, and public relations), and distribution. For
each of the components, appropriate auditing questions are designed to examine how effectively
the company is performing. All relevant respondents like customers, suppliers, managers,
dealers, etc., are interviewed using these questions.
Finally, the auditor prepares marketing audit report. The audit report contains individual and
joint evaluation of main audit components (marketing areas). It detects strengths and weakness,
and recommends actions for improving marketing performance.
3. The Marketing Excellence Review:
This is more or less similar to market effectiveness review. But, here, some excellently
performing business units are taken as the base for evaluating firm’s performance. Here,
performance is reviewed relatively.
The marketing excellence review is used to judge how excellently the company is performing
with reference to high performing business units. A special instrument with adequate number of
criteria and appropriate scaling can be developed to judge poor, good or excellent performance.
Criteria used for the purpose include:
a. Market/customer orientation
b. Market segmentation
c. Product quality
d. Quality of services
e. Approach toward competition
f. Integration and alliance
g. Approach toward dealers
h. Dealing with other stakeholders
i. Social responsibility and national services, etc.
Depending on result of the marketing excellent review, necessary actions are taken. Company’s
actions mainly include undertaking all possible steps to reach the level of excellently performing
business units.
4. The Ethical and Social Responsibility Review:
This review/verification decides whether firm’s marketing policies and practices are ethically
and socially true. Ethics are moral principles, norms, or standards of right or wrong. Every
business unit has social responsibilities toward a number of stakeholders.
In same way, marketing practices should be ethical with reference to moral norms, standards,
and values. Company’s products, policies, and practices should not have adverse impact on
customers, other stakeholders, and larger interest of society. Thus, here company tries to assess
its ethical and social responsibility. As per need, necessary actions are taken.
Criteria used to review social and ethical responsibility include:
a. Clear definitions of illegal, immoral, and antisocial activities.
b. Company’s active efforts to practice, promote, and disseminate moral principles and to hold
its employees fully responsible to observe them in practice.
c. Company’s direct contribution for social welfare of people.
d. Fulfilment of social responsibility toward various parties.
e. The adherence to all laws and regulations in force.
f. Use of business ethics in areas of product, price, promotion and distribution.
On the basis of ethical and social review, company can evaluate its performance in this regard
and, if necessary, appropriate actions are taken.