Ch 16 - Constructing management information Flashcards
Forecasts
def: prediction of future events & their qualification for planning purposes. (passive)
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gives insight & value to any manager
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many forms (business, industry, economic, demographic) & host of techniques (statistical, time-series analysis, Delphi technique & expert’s opinion)
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ST & very rarely will they be 100% accurate / predict with certainty
Statistical techniques
Regression used to identify past data & extrapolate those into the future.
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these techniques assume past trends will continue.
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TS analysis involves the identification of seasonal & other factors in past data.
Give potential problems with using statistical techniques for forecasting.
-past trends may not continue in the future & so past relationships between variables will not necessarily hold in the future
- relationships between variables may only hold over a range of values
- such forecasts don’t allow for unusual events (eg. a war, market shock or a major new competitor)
- data can be mis-interpreted
Forecasts can be prepared using intuitive techniques such as gathering a consensus view
Delphi technique -> gathering thoughts of a number of experts in a particular area.
Why may it be useful to ask experts?
-experts will be studying the industry & can interpret all/most of the available info
-partly that these experts may be able to influence the direction of any changes
- seeking a consensus view should reduce bias in the forecast & benefit from a wider range of expertise
Budget
def: a plan expressed in money. (active)
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it is prepared & approved prior to the budget period & may show income, expenditure & capital to be employed.
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essentially a planning tool that gives all managers a set of targets that are mutually supportive & consistent.
Top-down budget approach
Corporate targets form the basis of budgets for smaller units (such as divisions) & finally to individual departments
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adv: starts with a set of targets that the B.O.D believes is in the company’s interests
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diadv: line managers may resent having targets imposed on them & may believe that they cannot achieve the targets that have been set.
Bottom-up budget approach
Junior managers set their own targets, which can then be collated & integrated into an overall budget.
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adv: involves junior managers in forming company policy / less likely to demotivate managers.
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disadv: board may feel that junior managers have little incentive to set demanding targets
Budget stretch
if managers are set slack targets that are easily achievable then they may be reluctant to exceed expectations because they will probably lead to more demanding targets in the future. A stretching budget may motivate the staff to excel, although they may become demotivated if the target is clearly unrealistic, especially if feedback doesn’t allow for the possibility that the targets were unachievable.
Budgeting processs
1) IDENTIFY LIMITING FACTOR (which limits the scale of operations - normally is sales or # of specialists)
2) once identified, HOW WILL LIMITING FACTOR BE MANAGED (target should be stretching but not demotivating)
3) SET OPERATIONAL BUDGETS in a logical sequence (NB that it should be mutually consistent)
4) COMBINE OPERATIONAL BUDGET (with a view to seeing what the budgeted figures for the year look like) - if management is disappointed then it’ll be necessary to study the budgets more closely to see whether further revenues can be generated or costs can be cut.
5) IMPLEMENT BUDGET (involves comparing actual results with budget & preparing reports that feed back to individual managers on their performance)
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—— budgetary reports can also assist senior managers to prioritise their time by highlighting departments which are underperforming in terms of actual vs budget
How can a budget provide feedback?
Performance will be measured against budgets. Differences between actual & budget = variances. (the variances can be classified as ‘adverse’ or ‘favourable’)
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Managers at each level will receive feedback on their performance & attempts will be made to rectify problems as they arise
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Advantage of budgets is that senior management can use budget reports to identify areas that are most in need of their attention. Small variances suggest that everything is proceeding according to plan, while large variances may call for more attention.
Budget flex and its danger
def: variable costs might be varied in line with actual output while maintaining fixed costs at the original budget levels.
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danger: automatically flexing all of the budgeted production costs will reduce the incentive to minimise costs overall. (e.g it may not be necessary to spend more on wages if the additional output could be achieved through more efficient working patterns)
Limitations of budgets
-difficulty to producing them as they involve assumptions & subjective forecasts
-they may also be developed & updated too infrequently, and so not sufficiently responsive to changes in a co’s operating environment.
-limit performance & encourage incremental thinking on the park of senior management
-can raise motivational issues (sometimes senior managers set demanding targets to offset the natural reluctance of more junior managers to set difficult targets for themselves)
-annual budgets simply start with previous year & make minor adjustments to reflect actual performance (rarely start with a blank sheet)
Types of budgeting
1) Incremental
2) Zero-based (ZBB)
3) Beyond
Incremental budgeting
base the next year’s budget on the current year’s plus and extra amount for estimated growth or inflation next year.
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(normally for a business in a stable environment -> simple, cheap & quick to administer)
