Business Finance

CHAPTER 3
Planning and Working
Capital Management
Planning
 Learning Objectives
• To appreciate the importance of planning
• To know and apply the tools used in planning
and forecasting
 Planning and Control
What is done in PLANNING and
CONTROL?

 Management planning is about setting the goals of the

organization and identifying ways to achieve them.
 This may be broken down into long-term plans and short-
term plans.
 In the process of planning, resources have to be
identified including manpower resources, production
capacity, and financial resources.
 Once the plan is set, it has to be quantified (in the form of
budgets and projected financial statements) or else it will
be useless because there will be no basis for monitoring
performance and hence, no way of gauging success.
 Planning and Control
What is done in PLANNING and
CONTROL?

 Budgets and projected financial statements are then

compared with the actual performance, which is where
the “controlling” function comes into play.
 If the actual performance falls short of the budgets or of
the projections, it doesn’t mean that the management is
not doing its function. Reasons have to be identified for
the shortfall so that corrective measures can be made.
Also, the analysis will show whether the reasons for not
meeting the projections are due to management
incompetence or factors outside of its control.
 Planning and Control
What is done in PLANNING and
CONTROL?

 To be effective, controlling must include a reward system

for those who deliver and a penalty for those who do not
deliver whose reasons for failing to meet objectives are
within their control.
 What Are the Steps in Planning?
Step number 1 is to…

1. Set goals or objectives.

The goals of a company can be divided into:
 short-term goals ‒ can be for a year;
 medium-term goals ‒ can be between one and
three years; and
 long-term goals ‒ can be five to 10 years or even
longer.
 What Are the Steps in Planning?
Step number 2 is to…

2. Identify resources.
Resources include:
 production capacity;
 human; and
 financial.
 What Are the Steps in Planning?
Step number 3 is to…

3. Identify goal-related tasks.

In this step, management must figure out how to achieve
an objective.
 What Are the Steps in Planning?
Step number 4 is to…

4. Establish responsibility centers for accountability

and timeline.
If tasks are already identified to achieve goals, the next
important step to do is to:
 Identify which department should be held
accountable for this task; and
 Set a timeline for the activities, especially for those
activities which are not normally done on a daily
basis.
 What Are the Steps in Planning?
Step number 5 is to…

5. Establish an evaluation system for monitoring and

controlling.
The management must establish a mechanism which will
allow plans to be monitored, which can be done through
quantified plans such as budgets and projected financial
statements.
 What Are the Steps in Planning?
Step number 6 is to…

6. Determine contingency plans.

In planning, contingencies must be considered as well.
Budgets and projected financial statements are anchored
on assumptions. If these assumptions do not become
realities, management must have alternative plans to
minimize the adverse effects on the company.
 Self-Test Questions
1. Why is planning important in the success of an
organization?
2. How is controlling related to planning?
3. What are the different steps in planning? Discuss
each briefly.
4. What is the importance of quantifying a plan?