Republic of the Philippines

State Universities and Colleges

GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

Subject: ED 218 – SCHOOL FINANCE AND BUSINESS ADMINISTRATION

Topic: ED 218 – LONG RANGE BUDGETING
Professor: LENIE A. ADUANA, PhD
Reporter: JOEY V. FRANCISCO
Long Range Budgeting
A long-range budget or planning is defined as a systematic and formalized
process for purposefully directing and controlling future operations toward a desired
objective for periods extending beyond one year. Long-range budgets or plans are
neither described in precise terms, nor are they expected to be completely coordinated
future budgets. They cover specific areas, such as future sales, future production, long-
term capital expenditures, extensive research and development programmes, financial
requirements, profit forecast.
They evaluate the future implications associated with present decisions and help
management in making present decisions and select the most profitable alternative.
Long-range budgeting does not eliminate risk altogether: it only reduces the risk to a
level which does not hamper the production and achievement of company objectives.
There are many factors which are duly considered while preparing long-term
budgets, such as market trends, economic factors, growth of population, consumption
pattern, industrial production, national income, government’s economic and industrial
policy.
Fundamentally, long-term budgeting is
putting your strategic goals into numbers.
It’s a good prediction of what cash inflows
and outflows your organization will be
experiencing in the future. Periodically
compare actual results to what you
forecasted earlier, and adjust your budget
accordingly for the future. So, reviewing
your budget will reveal areas of your
business that are most and least profitable.
This gives you an indication of which
projects to drop and which need more
attention and resources. Long-range
budgeting is about changing the direction
of the organization to meet its long-term
goals and insulate it from the upheavals
that periodically affect the economy.
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

Techniques for Focusing Long-Range Thinking

Most companies are good at short-term planning and often have excellent
strategic plans but fail in the implementation. According to an article in the Harvard
Business Review on long-term success, it's because they don't adequately focus on
how to bring those new ideas and technologies onboard. Here are four techniques that
help focus long-range thinking.
a. Forecasting
Long-range planning activities and goals need to be specific. Actions
should be deliberate and focused, not rough cut or vague. At the same time, they
need to recognize the realties and vagaries of business life. The environment will
change and plans should not be immutable, but amended as and when
necessary.
b. Handle Uncertainty and Unexpected Change
The planning process should consider risk and structural uncertainties.
There are certain events that are simply unknowable, until they happen. To the
extent that's it possible, plans should be flexible and robust enough to handle
risk. Take small bites and don't expose your organization to unnecessary risk.
Use sophisticated analytics to determine the most appropriate business decisions
to achieve your strategic goals. Set targets that are feasible and realistic. Don't
be tempted to follow your gut by making grandiose plans which can never
succeed. Test all decisions using decision support software, such as prescriptive
analytics, that allows you to model how your business works.
It's important to think holistically, ensure you have adequate decision
support software and have integrated your long-range planning with your
budgeting process to avoid conflict and unrealistic goals.

Steps in Long Range Budgeting

Beyond the annual budget cycle and multi-year capital plan, governments need
to identify long-term financial trends. Long-term financial planning involves projecting
revenues, expenses, and key factors that have a financial impact on the organization.
Understanding long-term trends and potential risk factors that may impact overall
financial sustainability allows the finance officer to proactively address these issues. A
long-term financial planning process allows decision-makers to focus on long-term
objectives, encourages strategic thinking, and promotes overall awareness for financial
literacy in an organization.
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

a. Reviewing the Strategic Plan

A financial planning process should start with a strategic plan. You must
know what you want to accomplish at the start of the new year. A series of
questions that may be necessary to understand what needs to be accomplished
may include the following:
 Is expansion necessary?
 Is more equipment needed?
 Is it necessary to hire more staff?
 Is any other new resource necessary?
 How will the plan impact the cash flow of the business?
 Is financing necessary? If yes, how much financing is optimum?

b. Developing Regular Financial Projections

After creating the strategic plan, you must develop monthly financial
projections, recording the anticipated income depending on sales forecasts and
estimated expenditures, such as costs of equipment, overheads, etc. Now apply
the costs you incurred in the factors required in the previous step. Also,
incorporate a projected income statement and balance sheet that may be handy
during the overall preparation of the plan.
c. Arrange Financing
The financial projections are necessary to get an idea about the required
financing. Planning ahead of time would help because it will offer you time to
make a detailed projection that will be appreciated by your financial partners.
Well-prepared plans will also reassure the bankers that your financial planning is
solid. This will help you get more financing in the case of any such need.
You must also take into consideration which form of financing suits you
the best. Usually, debt is a preferred method as the interest in debt financing is
low. However, you may also go for other forms of financing based on the unique
needs of your business.
d. Planning for the Contingencies
Without a proper plan to manage the contingencies, your long-term
financial plan will be incomplete. You must be prepared for the rainy day when
the organization meets a sudden deterioration. The ways to meet contingencies
may include creating an extra fund and/or keeping the line of credit open for extra
funds that may be needed in the case the organization loses its grip and goes in
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

an undesirable direction. All organization want to earn profit and grow, but there
may be hurdles in the path due to uncertain business conditions. Planning for
contingencies may be of great help in times of need.
e. Monitoring the Organization
It is important to monitor the actual achievements in order to check
whether the actual conditions of the organization meet the projections. If there
are errors in management, monitoring will reveal them. Moreover, if some
corrections in terms of financials are needed, monitoring can show them too.
Also, if any future course of action is needed, monitoring the organization will
lend a hand in such a case.
Relationship Between Long Range Budgeting and Planning
While most organizations understand the need to plan for the future, many don't
take concrete steps to identify where they want their business to go and even fewer
have long-range plans. The gap between present realities and long-range strategic
planning means many organizations meander along, never really achieving their full
potential.
Long-range planning is an effective way of aligning the organization's activities
with a strategic plan and helping preempt those situations that could threaten its
business model and success. It is an inwardly fixated look at the organization’s
objectives and goals. For instance, it is the assumption of the present knowledge about
the future conditions. It emphasizes on making certain the plan’s exact results over the
time of its implementation.
A key purpose of the long-range plan is to avoid random, non-specific growth and
focus the organization’s skills toward those areas where it excels, such as making high-
quality consumer goods. It's this process that often guides an organization to sell off
non-core activities that distract from the overall goal of the organization. So, typically,
the long-range plan will focus on identifying the organization's key strengths and what
it's good at with specific plans to grow the organization in that direction.
A long-term financial plan is a projection of the business’s doable things to reach
the financial goal of the organization. The business, therefore, must create the plan so
that it acts as a warning, showing the pitfalls of cash flow dips, pinpointing the best time
to execute tasks, and identifying financial needs for the future.
Comparison Between Long Range and Short-Range Budgeting
The budget period is an important factor in developing a comprehensive
budgeting programmed. This is the period for which forecasts can reasonably be made
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

and budgets can be formulated. A business enterprise generally prepares a short-range

budget, and a long-range budget.
 Short-Range Budget:
Short-range budgets may cover periods of three, six or twelve months depending
upon the nature of the business. In determining the period of the short-range budget,
the following factors should be considered:
1. The budget period should be long enough to cover complete production of
various products.
2. For business of a seasonal nature, the budget period should cover at least one
entire seasonal cycle.
3. The budget period should be long enough to allow for the financing of production
well in advance of actual needs. It should provide adequate time to arrange the
funds for production and other purposes.
4. The budget period should coincide with the financial accounting period to
compare actual results with budget estimates and thus to facilitate better
interpretation of the performance.

There are advantages and disadvantages in both long-term and short-term

budgeting, and the choice must be made judiciously. Short-term budgeting has the
advantage of accuracy in budgeted figures which relate to future activity. Long-term
budgeting may be less reliable as predictions for a longer period are relatively
inaccurate.

On the other hand, short-term budgeting has some limitations. One of the
objectives of budgeting is anticipating problems long before they appear so that
sufficient time is available for satisfactory solutions. This objective is difficult to achieve
in short-term budgeting. Therefore, it is necessary for a business firm to prepare both
long-term and short-term budgets.
Examples of Long-Range Planning
While many businesses are wary of long-range planning, others embrace it.
Ferrari went from being a joke in Formula 1 to becoming its undisputed leader through
implementing a bold and ambitious long-range plan. Companies such as BASF, VW
and Nestle adopted 10-year and longer strategies and outperformed many of their
industrial peers. Others used sophisticated optimization techniques to determine future
plant investment strategies, while a large UK water utility, Yorkshire Water Services,
used prescriptive analytics to develop a long-term risk model.
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

The History of Long-Range Budgeting

During the 1950s and 1960s, the economy was stable and growing.
Organizations experienced substantial growth, and planners started using numerical
theory to extrapolate growth predictions. However, the landscape changed in the ‘70s,
and the economy suffered an upheaval due to the US's inability to maintain the gold
standard. Static long-range strategies of the time could not cope with these upheavals,
and many but not all businesses abandoned long-term planning for some time.
Subsequently, a number of events caused further economic instability, including
the 1973 oil crisis, the 2008 housing bubble and banking crisis, and more recently, the
impact of trade wars. Despite this, savvy organizations adopted long-range planning
strategies intended to cushion the business from unpredictable upheaval through
techniques, such as the SWOT analysis (Strengths, Weaknesses, Opportunities and
Threats), and planned accordingly.
Example of SWOT Analysis
Let us take the example of Starbucks, which is a globally renowned brand for
coffee and other beverages. Let us conduct a SWOT analysis for Starbucks.
Strengths
 It has claimed the position of the global leader in coffee and beverage
retailing on the back of stellar financial performance.
 It has strong brand equity which is valued at more than $44 billion.
 The company enjoys great brand recall value among its consumers who
perceive its products offerings to be of excellent quality at a reasonable
price.
 It is one of the largest coffeehouses globally and on the back of its
commendable size and high sales volume the company is able to price its
products even for the middle-income group which forms a huge portion of
the consumer segment.
Weaknesses
 Its heavy dependence on coffee beans, which is the key input, keeps its
profitability vulnerable to the price volatility of coffee beans.
 In the past, the company has been under the scanner of many
environmentalists and social activists for procuring coffee beans from
impoverished third-world farmers.
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

Despite its pricing catering to the middle tier of society, the price is still
costly for many working consumers.
Opportunities
 It can expand the supplier network which will help it to improve its braining
power against the whims of its unscrupulous supplier network.
 Although the company has expanded into most emerging markets, it
should penetrate the tier-II cities of the emerging countries in order to
further increase its customer base.
 The company should expand its product portfolio to venture into the full
spectrum food and beverage business which includes the like of Burger
King and McDonald’s
Threats
 The company’s profitability is always at the mercy of rising prices of coffee
beans and the whimsical supply network.
 The customer outreach faces strong competition from the local
coffeehouses and specialty stores that offer similar products at a much
cheaper price.
 The company’s growth in the past was primarily driven by the developed
markets which are currently saturated.

Conclusion
So, the above examples give us a perspective of each of the companies and
allow us to understand what can be the key challenges and growth prospects for them
in the near future. It also shows that even the strongest, companies that are global
leaders in their respective domain, are vulnerable to certain threats and they too are on
the lookout for growth opportunities.
 Republic of the Philippines
State Universities and Colleges
GUIMARAS STATE COLLEGE
GRADUATE SCHOOL
McLain, Buenavista, Guimaras

References:
https://www.educba.com/swot-analysis-examples/
https://www.tutorialspoint.com/how-to-create-a-long-term-financial-plan