Business plans and budgets

1. Business plans andbudgets • By: Mohammadreza Arabi • December 2012

2. “In the Name of God”

3. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 What’s Business plan? • Business plan setting out in detail the role each part of organization has to play for the next three to five years.

4. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 What’s Business plan? • It should encompass:- The period is needed as recognizing an opportunity- Developing the product or service to exploit that opportunity- Bringing it to market

5. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The Dichotomy • So three-to five-year business plans need to be reviewed fundamentally each year and progress monitored at least quarterly.

6. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Aspects of preparing BP • The supporting forecasts • Budgets • Economic overview

7. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 forecasting • First of all: “A SALE FORECAST” is not the same as “A SALE OBJECTIVE” • Objective: is what you want to achieve and will shape a strategy to do so. • Forecast: is the most likely future outcome, given what has happened in the past and the momentum that provides for the business.

8. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 forecast Components • Underlying trend • Cyclical factors • Random movements

9. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 forecasting Methods • Using Averages-Moving Average-Weighted Moving Average

10. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 forecasting Methods • Advanced forecasting techniques- Exponential smoothing- Holt’s & Brown’s linear exponential smoothing- Box-Jenkins- ...

11. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 causal relationship • By drawing the line that most accurately represent the slope, called “the line of best fit”, we have a useful tool for estimating what sales might be next month, given the temperature that occurred this month.

12. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 causal relationship • There is an algebraic formula known as “linear regression” that will calculate the line of best fit. • There are a couple of calculations then needed to test if the relationship is strong (positive or negative) and significant.

13. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Economic cycles • The natural fluctuation of the economy between the periods of expansion (growth) and contraction (recession).

14. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Economic cycles • Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of economic cycle. • The cycle itself is caused by the collective behavior of billions of people - the unfathomable “animal spirits” of businesses and households.

15. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Economic cycles

16. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 categories of cycle • Kondratieff’s long waves • Kuznet’s cycle • Juglar cycle • Kitchin cycle

17. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 kondratieff’s long waves • He advanced the theory that the advent of capitalism had created long wave economic cycles lasting around 50 years. • The idea of long wave is supported by evidence that major technologies from first printing press to internet take 50 years to yield full value, before themselves being overtaken.

18. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 kondratieff’s long waves

19. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Kuznet’s cycle • Also known as “building cycle” • He identified a cycle of 15-25 years duration covering the period it takes to acquire the land, get the necessary permissions, build property and sell.

20. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 juglar cycle • He observed boom and bust waves of 9 to 11 years going through four phases in each cycle:- prosperity- crisis- liquidation-recession

21. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 kitchin cycle • He observed an natural 40-month cyclical path caused, he believed, by movement in inventories.

22. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 A glance...

23. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 business plans • The plan is in essence the root map from where the business is to where it wants to get and how it will go about getting there. • it includes:- roles and responsibilities of key players- the resources required in terms of money, people, materials and...

24. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Executive summery • It’s primary purpose is to excite and inspire an audience to want to read the rest of the business plan. • It should be:- written last- punchy, short- ideally one page, maximum two pages

25. executive summery • It should start with a succinct table showing past performance in key areas and future objectives.

26. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Executive summery • It should continue with sections covering the following areas:- What are the primary products/services are and why they are better or different from what is around now?- Which market/consumer groups will most need what you plan to offer and why?- ...

27. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • VisionIt’s purpose is to stretch the organization’s reach beyond it’s grasp.

28. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • Missionexplains concisely “what you do” , “who you do it for” and “why you are better or different from others operating in the market”

29. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • ObjectivesThese are the big picture numbers that are to be achieved by successfully executing the chosen strategy like: marketshare, profit,...

30. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • MarketingThis section provide info on: product/service on offer, customers and market size, competitors and...

31. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • OperationsThis area covers any processes such as manufacture, assembly, purchasing, stock holding, delivery and website.

32. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • Financial projectionsDetailed information on sales and cash flow for the period of the plan, showing how much money is needed, for what, by when, and the most appropriate source of those funds.

33. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • PremisesThe space and equipment needed.

34. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • PeopleThe skill and experience you have on board that will help run this business and implement the chosen strategy, what other people you will need and where you will find them

35. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • Administrative MattersAny IP on your product or service, the insurance you need, the changes needed to the accounting, control and record system.

36. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • Milestone timetableShow the key actions you have still to take to be ready to achieve major objectives and the date these will be completed.

37. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 The contents • AppendicesAny bulky information that you refer to be in your business plan like market studies, technical data and...

38. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Budgets & variances • Budgeting is the principle interface between the operational business unit and the finance department. • “Rolling quarterly budget”: Budgets are reviewed quarterly through the year. At the review a further quarter can be added to the budget to maintain a one-year budget horizon.

39. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Budgets guidelines • The budget must be based on realistic but challenging goals. • The budget should be prepared by those responsible for delivering the results. • Agreement to the budget should be explicit.

40. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 Budgets guidelines • The budget needs to be finalized at least a month before the start of the year and not weeks or months into the year. • The budget should undergo fundamental reviews periodically throughout the year. • Accurate info to review performance against budgets should be available each month.

41. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 variance analysis • Performance needs to be carefully monitored and compared against the budget as the year proceeds, and corrective actions must be taken when necessary.

42. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 the fixed budget

43. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 flexing the budget • The way to manage situations mentioned, is to flex the budget to show what would be expected to happen to expenses, given the sales that actually occurred. • Applying the budget ratio to the actual data does this. • The flexed budget allows you to concentrate your efforts on dealing with true variances in performance

44. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 the flexed budget

45. By: Mohammadreza Arabi University of Economic Sciences Dec 2012 seasonality & trends • The figure shown for each period of the budget are not the same. The exact figure depends on two factors:- The projected trend- Seasonal factors