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Determining costs to complete plans

Determining costs to complete plans

Now that you understand the components of a strategic plan, let’s consider the cost elements that are required to finalise the plan before you submit it for approval.

Before you complete this plan, the organisation should have a framework (value drivers and KPIs) to drive the PBF process.

Value drivers focus on controllable aspects of business and financial operations; KPIs measure how successfully value is created, maintained, and enhanced through the PBF process.

Diagram shows how KPIs measure how value is created, maintained, and enhanced through the PBF process

Remember to consider fixed costs and variable costs in your strategic plan. To identify the specific costs, you need to carry out a cost-evaluation exercise.

Fixed costs stay the same, regardless of the level of activity or volume. Examples include factory overheads such as rent on factory buildings, insurance, depreciation, and property taxes.

Variable costs change with volume or level of activity. Examples of variable costs include direct materials, direct labour, and so on.

The next step is to make financial projections. Financial projections (forecasts) begin with forecasting sales and their associated expenses.

Financial projections enable organisations to:

  • translate company goals into specific targets
  • provide vital feedback (operates as a control tool)
  • anticipate problems/issues in advance.

An organisation needs to develop several types of projections and budgets based on its objectives and situation.

Rolling 12-month (annual) budget: An annual projection should be updated monthly. This is the main planning and monitoring vehicle.

3–5 year strategic plan: These long-range projections incorporate the organisation’s strategic goals.

Cash projections and forecasts: Cash projections and forecasts focus on cash flows. They can be prepared for a short term (e.g. one week) or for a 12-month period.

The key to the success of the strategic plan is that the PBF process enables the organisation to set up for success through:

  • reduced costs and effort
  • manageable and efficient timelines
  • improved responsiveness and agility
  • enhanced accuracy.

The PBF process requires you to determine costs. The budgeting process plays an important role in cost assessments. Most organisations use a budget sheet to identify and assess the cost consequences.

A budget sheet therefore includes:

  • historical cost records
  • cost formulas
  • changes in operating conditions
  • foreseeable future conditions.

With those key elements in place, how do we assess PBF requirements according to the business’s context?

Assessing PBF requirements according to business context

There’s not a single answer for all PBF models. The PBF framework is different from one organisation to the next.

Fit-for-purpose financial planning and the budgeting framework should take the following variables into account:

  • Industry or sector (e.g. banking/finance, defence, logistics, manufacturing)
  • Business type (e.g. sole proprietorship, company, government, or public)
  • Business size (e.g. small, medium, large enterprise)
  • Business maturity (e.g. start-up or launch, growth, mature, declining stage)

Building a strategic plan requires external and internal environment scanning.

External issues and factors are based outside the organisation. They are identified through external environment scanning and include political, social, economic, and technology factors. You can identify external factors through research or consultation with stakeholders.

Lens Considerations
Political What are the major current political realities or anticipated political developments that could affect the achievement of the strategy?
Economic What are the current or future anticipated economic conditions that could affect the achievement of the strategy?
Social What are the current or anticipated social realities of the relevant societies and cultures that could affect the achievement of the strategy?
Technology What are the technological realities or anticipated developments that could affect the achievement of the strategy?
Environment / Climate What are the current environmental or climate conditions that could affect the achievement of the strategy?
Legal What are the current legalities or anticipated legal issues that could affect the achievement of the strategy?
Security / Safety What are the current security and safety realities or anticipated developments that could affect the achievement of the strategy?
Religion What are the current religious considerations that could affect the achievement of the strategy?
Regulatory What are the current regulatory or anticipated regulatory changes that could affect the achievement of the strategy?
Demographic What are the current demographics that could affect the achievement of the strategy?

An internal view identifies organisational issues that could affect strategy.

Such factors include:

  • capacity to deliver intended services
  • core competencies of the business
  • staffing (roles, skills, and knowledge)
  • assets
  • financial resources.

We can identify internal factors by gathering internal inputs. The SWOT analysis is a popular tool for this purpose.

  Strengths Weaknesses
Internally What do we want to protect that we have or are good at doing? What do we want to improve that we have or are not good at doing?
  Opportunities Threats
Externally What do we want to take advantage of to help our organisation? What do we want to defend against to help our organisation?

Organisations should also identify strategic risks associated with the internal and external environment, such as:

  • possible known risks from external environments (such as political and legal risks)
  • possible/known risks of the internal environment (such as human capital, projects, processes, and service quality)
  • risks that affect strategy composition (Which risks should be considered in selecting strategic objectives?)
  • risks affecting strategic initiatives (Which risks could prevent the successful execution of a strategy?)

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Financial Analysis for Business Performance: Planning, Budgeting, and Forecasting

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