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PLANNING AND CONTROL

Introduction
Planning
Control
Forecasting
Types of Plans
Profit Improvement Plans
Designing Feedback Systems
Financial Reports As a Communication Tool
Design of Performance Reports
Summary

Introduction
One of the principal roles of management is to define the future direction of the
organisation and based on this, to draw up the means by which the goals of the
organisation will be achieved. This will include specific targets and pragmatic
options that the organisation will face. Once this has been carried out management
must also ensure that feedback systems are put in place so that the progress of the
organisation towards the goals can be monitored and corrective action, where
appropriate, taken. This process just described comprises the fundamental elements
of planning and control.

Planning
All organisations are formed with some purpose in mind, whether it is the control of
government, the making of profits, the achievement of some sporting prize, or
merely the enjoyment of interaction with others. In most cases, organisations plan
for the future in order to stand a better chance of success in achieving their purpose.
There exist very few organisations whose raison dtre is entirely existential, or
which exist solely for the present time and thus involve little or no consideration of
the future. The terminology used in the areas of planning and control varies a great
deal from country to country and writer to writer. In this text we have used the
more generally accepted terminology but the reader should be aware of terminology
differences which can be confusing.

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Financial Management and Decision Making

The more commonly quoted benefits of planning include:
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consistency in management,
planned adaptation to change,
improved performance through the more efficient allocation and use of
resources, and
better control, feedback and communication channels.

Planning is essentially about the determination of goals, an examination of

alternative methods of achieving them (strategies) and finally, a structured way of
evaluating these alternative strategies. The planning process requires the
enunciation of policies to guide the determination of goals and the way in which the
firm will ultimately choose between alternative strategies for achieving the goals.
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Goals may be defined as the desired end or direction that the organisation
seeks.
Goals may take the form of a statement such as to maximise shareholders
wealth, or to win the Americas Cup. In each of these there is a clear
statement of where the organisation wishes to be, but they clearly lack
specific details on how to get there and when.

Strategies for achieving the goals are the practical operational means that the
firm will adopt to reach the said goals.
Continuing the above two examples - in the case of shareholder wealth
maximisation, the strategy may be to withhold payment of any dividends and
to reinvest all funds within the organisation in order to achieve a stronger
compound growth. In the second illustration, the strategy may be to use the
first challenge attempt as a research/experimental step in order to refine the
challenge on the subsequent attempt. In each of these broad approaches a
number of strategies are feasible. The planning process provides the
organisation with a means of evaluating alternative strategies.

Evaluation of strategies is an important management task.

It is not good enough to evaluate alternatives based on whim or personal
prejudice. Alternative methods of evaluation can include payback period,
discounted cash flow analysis, structured meetings of senior management,
and in some organisations, a democratic vote.

Policies are guidelines for the actioning and consideration of the whole
planning process and are used to guide and establish criteria by which
evaluation and planning can take place.
Policy statements can come close to being statements of ethics and
acceptable behaviour. In some organisations they may almost appear to be
sub-goals but in actual fact they serve to guide the activities of the firm.
Policy statements typically cover areas such as worker training and
education, worker participation, recruitment policies, environmental

Chapter 2: Planning and Control

21

management, business ethics.

Thus, planning can be summarised as the process of setting goals and determining
and evaluating strategies to achieve them. Furthermore, it is future-oriented which
implies risk, dealing with exogenous variables and the need to make decisions that
will lead the organisation to the desired goals.
Although planning is often described in terms of short-term and long-term
characteristics this differentiation solely in terms of timing can be misleading since
it overlooks other more fundamental differences between the two. It is better to
think in terms of:
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operational planning which is concerned with shorter time frames, pragmatic

and task oriented decisions, and
strategic planning which tends to have a longer time frame, be more
comprehensive in scope (includes more variables), deals with wider issues
and more abstract elements.

The drawing up of a formal plan will include a number of elements:

1. Initially the organisation must determine its goals or objectives. In other words,
it must decide where it wishes to be or what it wishes to achieve. Although
goals will frequently be of a general nature they must also be specific enough to
enable judgement of how well the organisation is approaching those goals.
2. Secondly, any statement of the future can only be valid when it takes into
account a strategic assessment of the following:
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the current position of the organisation,

the current position of the organisations environment, and
the likely changes in the parameters that will affect the organisation (both
internally and externally) through the planning period.

This analysis will include the strengths and weaknesses of the organisation; key
elements within the environment including political, economic and social
statements; as well as any unique items which have the potential to impinge on
the future plans/aspirations of the organisation.
3. The process must now determine alternative strategies or means by which the
goals of the organisation can be achieved taking into account the situation
analysis already completed. These strategies should incorporate relatively
general statements of a level close to organisational goals and be developed to a
point including detailed pragmatic plans, identification of options, critical events
and contingencies. The criteria for evaluating these alternative strategies must
also be formulated and will include such factors as net present value, payback,
policy guidelines mentioned earlier.
4. The next step is the selection of the particular strategy to be followed and its
implementation.

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Financial Management and Decision Making

It is generally argued that the planning process should be objective and that the
resultant business plan must be written down. This not only imposes some formality
on the process but also enables informed discussion and consideration of the plan.
In many small businesses the planning task will often be the responsibility of one
person and although the steps outlined above may not be rigorously followed, the
essential ingredients of considering options and evaluating alternatives will be
undertaken. However, many small to medium sized organisations lack clear precise
statements of their direction with the result that the planning function regresses to
one of day to day survival. Only with a clear statement of goals can decisions be
made that will have a reasonable chance of success and will avoid being
undermined by digressive activities. The determination of a firms goals as part of a
proper planning process is fundamental to the establishment of medium and longer
term permanence for a business. However, the nature of the planning process also
implies that there must be a control function. The terms planningand controlare
almost indistinguishable in practice since there cannot be effective control without
planning nor vice versa.

Control
Control is primarily a feedback concept whereby regular and comprehensive
analyses of the firms performance and changes in environmental factors are
incorporated within the firms decision making process. Due to the nature of the
feedback process, the strategies themselves and possibly even the goals of the
organisation will change through time as a result of changing organisational
environments, both internal and external.
One of the primary methods of reporting on the performance and achievements of
the organisation is through budgeting and the comparison of actual performance
with budgeted performance. Although financial and quantitative evaluation play an
important part in the feedback and control system, qualitative assessment can be
essential in some organisations. However, the use of monetary and non-monetary
quantitative information provides objective data on which to base a comparison of
standards with actual performance.
Thus, control is concerned with the actual implementation of the planning decision,
and the evaluation and feedback of the performance of that decision. Control may
be looked on as the more pragmatic arm of the process and is often well-established
in organisations. More often, the problem is a lack of adequate statements of goals
or mission rather than systems for control. Operationally defined goals and
strategies matched by appropriate budgeting and control systems are essential for
the long term success of businesses. Even for government and not-for-profit
organisations, which tend to have a low level of budgeting and control, the call for
greater responsibility and accountability will necessitate an improved application of
these ingredients of the planning process.
The critical elements of control are:
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feedback, and
flexibility.

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Appropriate and timely feedback systems must be established to monitor the

performance of the business. The use of budgets and performance reports both in
monetary and non monetary terms, as well as qualitative evaluation, are the
principal tools for feedback systems. Feedback must be timely and must be
pertinent - it is virtually worthless if it is out of date - and it must clearly address
important objectives and avoid immaterial items. Feedback which concentrates on
unfavourable variances and negative results has become known as management by
exception. Management by exception by emphasising poor performance and
concentrating on corrective action has led to a negative connotation for cost
accounting.
The second major consideration in control systems is flexibility. When the initial
planning stage is undertaken a certain set of environmental and organisational
factors are in existence. From the moment the initial report is drawn up these
factors will begin to change. Depending upon the nature of the organisation and the
time frame involved, the organisational and environmental factors could change
significantly before the particular planning period or planning event is concluded.
Therefore, it is essential that the business is flexible and amenable to change and as
a result can respond to a range of varying elements. Some of these elements will be
partly within the organisations ability to control or influence but others will be
entirely exogenous over which the firm will have no influence. For example, the
Middle Eastern conflict and its effect on oil prices in the recent past and the current
political situation in the USSR and other Eastern bloc countries, illustrate the degree
to which the future is uncertain, and the longer the planning period the more
uncertain. Consequently, strategies formulated within the planning process must
include contingencies for major changes in factors material to the firms operation.
Items that many firms may consider critical at the present time are alternative
energy supplies, alternative markets even if they may be less profitable than the
preferred markets, alternative sources of critical componentry.

Exhibit 2.1 encapsulates the main features of the planning and control process.

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Financial Management and Decision Making

Exhibit 2.1

A Diagrammatic Representation of Planning and Control

Establishment of
Long Term Goals

Choosing the appropriate

Strategy
and Implementation
Ensuring that appropriate
Communication and Mangement
Feedback Systems are in place

CONTROL

PLANNING

Developing alternative
Strategies with appropriate
Contingency Options, to attain
the Long Term Goals

Monitoring and
Evaluating Performance
Taking appropriate
Modifying Decisions and Action

Forecasting
When discussing planning and by implication the future, there must be some
attempt at forecasting alternative outcomes in the future. Forecasting by its nature
is based on assumptions and by changing or modifying key assumptions, radically
different forecasts of the future may be developed. The task of forecasting is
complex and difficult if it is to be done well.
The identification of likely future events will concern issues such as technological
fix versus technological change, the real price of energy, political change, military
intervention, all of which are wide-ranging changes. Part of the response by
business to the fact that forecasts must incorporate such gross possible changes is to
reduce the level of uncertainty by reducing the length of the planning period, often
down to merely two or three years.
In generating outcomes of the future large quantities of economic data covering
such items as gross domestic profit and demographic projections are typically used
via techniques such as econometric modelling, surveys, and time-series
extrapolation. No matter how complicated the model or technique it must be
remembered that it is based entirely around the initial assumptions and it is the
quality of these assumptions that will determine the quality (or predicability) of the

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25

outcome. The assumptions are typically arrived at via qualitative assessment using
techniques such as futures groups, delphi, brainstorming and informed guess.
Thus, the quantitative analysis can be seen as the technical arm of forecasting.
This is dependent on the establishment of the key assumptions and statements of
how these will change, and thus the basis of forecasting is largely qualitative.

Types of Plans
As already mentioned, a primary purpose of planning is to reduce the degree of risk
in business operations and there are a number of different ways of grouping a firms
plans. For example, plans may be classified according to the period of time they
cover or according to the nature of the business function to be covered.
Classification of plans on a time basis is increasingly common. Plans can be
recognised as either long range plans or short range plans. Long range planning is
increasingly found in practice and will almost always include long range financial
plans. Research and development activities also need to be planned on a long term
basis and will therefore be incorporated within the long range planning process. The
length of time covered by long range plans can vary considerably. In large
companies the long range planning process may extend, in general terms, for up to
twenty five years. In smaller organisations, a long range plan may only cover two
to five years.
Short range plans tend to be more pragmatic and operational than long term plans.
The period covered by these will also vary, perhaps from a period as short as a
week to the financial year of the firm but it is important, whatever the length of
time, that short range plans are integrated with the firms long range plans. As a
rule it is easier to evaluate the effectiveness of a short range plan than a long range
plan.
Plans may also be classified according to function or use. For example, business
plans typically cover areas such as production, personnel, finance and marketing.
This functional grouping of plans helps in the development of a particular segment
of activity within the firm, but it is essential that all segments of the plan are
integrated. Co-ordination between major segments of the business is vital for the
ongoing success of the undertaking.

Profit Improvement Plans

It is important to appreciate that the planning process can be an effective way of
improving the performance of an organisation or a section of an organisation.
Organisations that are not able to reach their full profit potential will, in the long
term, not be able to survive. Capital is a scarce resource and it is important that all
sections of the organisation contribute to earning a realistic return on funds
employed. It may be possible to improve profits by increasing sales, achieving a
more profitable mix of sales, reducing overheads and purchases or costs of material,
or by minimising funds invested in capital assets.

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Financial Management and Decision Making

A profit improvement plan is part of the process of strategic business development.
An effective profit improvement plan should include the following features:
1. A number of very specific proposals and a clear statement of the likely effect on
profit of each of these proposals. It is also important that responsibility is
assigned for each particular proposal.
2. A target of the minimum return on investment for each section of an
organisation.
3. A sufficient time span to allow achievement of the improvements or targets
specified.
4. Specific provision within the organisational structure. For example, one
approach is to develop profit improvement committees at different levels in the
organisation for approving proposals and for control and evaluation.
5. A reporting or control procedure which will disclose at different levels within
the organisation the extent to which the profit improvement objectives are being
achieved.

Designing Feedback Systems

Planning and control systems are the means by which accumulated data are
processed into information, interpreted and reported to different levels of
management within the organisation.
Ideally, it is the needs of users of planning and control systems which will influence
the format of the information output. Information systems require resources (time,
money, personnel, etc) to design and operate and it is therefore important at
different levels within the organisation to ensure that the information being
produced is utilised and relevant.
The design of a management control system and the design of an organisation
structure for the business are inseparable and interdependent - the most
sophisticated planning and control systems cannot substitute for sound organisation
structure. It is common for management at different levels to be given areas of
responsibility, both in the budget setting process and in terms of overall
performance for a section of the business. A system of responsibility accounting
will usually accompany this division of decision making within an organisation.
Responsibility accounting recognises the various levels of decision making
throughout an organisation and accumulates the costs, revenues and assets
according to the individual manager responsible in that particular area. The effect
of the responsibility accounting approach is illustrated in the following:
The sales department requests a rush production. The plant
scheduler argues that it will disrupt his production and cost a
substantial, though not clearly determined, amount of money. The
answer coming from sales is: Do you want to take the responsibility

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of losing the X Company as a customer? Of course, the production

scheduler does not want to take such a responsibility and he gives up,
but not before a heavy exchange of arguments and the accumulation
of a substantial backlog of ill feeling. Analysis of the payroll in the
assembly department, determining the costs involved in getting out
rush orders, eliminated the cause for argument. Henceforth, any rush
order was accepted with a smile by the production scheduler, who
made sure that the extra cost would be duly recorded and charged to
the sales department - no questions asked. As a result, the tension
created by rush orders disappeared completely; and, somehow, the
number of rush orders requested by the sales department was
progressively reduced to an insignificant level. (Villers, p. 95,
1954).
Responsibility accounting and planning and control are considered desirable
partners. Individuals who have shared in the process of setting targets and plans for
a particular section of activity for which they are responsible, are more likely to be
motivated to achieve those plans. The reporting process must cover the same areas
of activity as the original plan so that results may be compared with objectives and
feedback given accordingly.

Financial Reports As a Communication Tool

In most organisations management relies significantly on information which has
been prepared within the organisation. It is important, therefore, that all feedback
reports are designed as communication vehicles, whether they are budgetary,
financial or performance achievement reports. Communication implies that the
person receiving the report understands the nature and significance of the material
contained in it. When communication is effective management decisions can be
based on facts rather than subjective guesses. There is always a risk that, for a
variety of reasons, feedback reports will not achieve their intended purpose.
Therefore, considerable attention must be given not only to what the message is (for
example, favourable budget performance), but also to how it is put across or
communicated.

Design of Performance Reports

In a comprehensive system of planning and financial control considerable emphasis
will be given to communication of actual performance as compared with the plan. It
is clear that these reports in themselves do not control, rather they provide the
information on which management can take modifying action in future periods. It is
important that particular reporting characteristics are given emphasis in any
organisation. Such characteristics include:
1. Reporting structures should be drawn up having regard to the organisational
structure; levels of reporting will often correspond to levels of the organisation.

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Financial Management and Decision Making

2. Reporting should emphasise variations or exceptions highlighting matters that
need management attention.
3. Reports should generally relate to relatively short periods of time. In this way
timely feedback on actual performance is being relayed quickly to those in a
position to take action in future periods.
4. Reports should be prepared and presented as quickly as possible after the period
to which they relate even if, on occasions, it is necessary to substitute speed for
absolute accuracy.

Summary
The planning and control mechanisms in the organisation must be seen as an
integrated part of the operations of the entire organisation involving to a greater or
lesser extent all elements, at all levels, within the organisation. Planning should be
seen as an ongoing activity growing, developing and adapting as factors relevant to
the firm change. The development of the planning process will not of itself lead to
success in the organisation but it is an important element that has been found to be
lacking in many organisations. The rectification of this deficit has in many cases
led to much better performance and long term survival.

Glossary of
Key Terms

Control
That part of the planning process concerned primarily with feedback and
modification.
Cost Accounting
A part of the management accounting system primarily concerned with analysis of
costs and the calculation of cost of goods sold.
Feedback
An essential element of control involving performance appraisal and modification
in light of actual outcomes.
Goal
Desired end or direction that the organisation seeks.
Planning Process
Encapsulates all activities of planning and control from goal setting, through
development of strategies, to feedback and modification systems.
Policy
Guidelines for the evaluation and implementation of the planning process.
Strategy
An operational means that might be adopted to achieve a goal.

Chapter 2: Planning and Control

Selected
Readings

29

Schermerhorn, J.R., Management for Productivity, 2nd edition, Wiley, 1986.

Villers, R., Control and Freedom in a Decentralized Company, Harvard Business
Review, XXXII, No. 2, 1954.

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Financial Management and Decision Making

Questions
2.1
What is responsibility accounting?

2.2
Discuss the factors about budgets which you consider are disliked by managers. How can these be
overcome?

2.3
Discuss the interrelationships which exist between a profit plan, a cash flow projection and a capital
expenditure budget.

2.4
If we revise our profit plan frequently, its effectiveness as a control vehicle disappears. On the other
hand, if we fail to make revisions it does not provide management with an effective guide to the
future. Discuss.

2.5
Budgeting is fine in theory, but it is dependent on sales estimates; and how can we predict sales with
any degree of certainty? Discuss.

2.6
Select a sporting club or service club with which you are familiar.
Required:
a. Evaluate its stated goals, policies, strategies and control systems.
b. Draw up your interpretation of what these should be.

2.7
Select two companies in the same industry listed on the stock exchange. Evaluate and then compare
and contrast whatever statements they make about their planning and control processes.

2.8
Prepare a personal planning statement including goals, evaluation criteria, policies, etc. (The details
of these will remain confidential.)