Saturday, November 2, 2013

Budgets and Implementations of Business Strategy - Resource Availability

For the sake of simplifying this article, strategy and planning will be used to mean the same thing. Budgets and objectives are related and so is the implementation of business strategy. The implementation of a business strategy is considered as the final stage in business strategy (before monitoring and control). It could be defined as the translation of strategy into organisational action through organisational structure and design, resources planning and the management of strategic change.'' Analyzing the definition, it becomes obvious that strategy implementation of a business strategy would therefore, be how well the various components in carrying it out are successfully integrated.

The organisational structure and design aspect of the definition has to do with how the human resources in the organization are utilised, mobilised and organised to be encountered through the usage of the organisation; and design aspect is that most employers can leave the firm if they are not motivated or given the right position to operate in the organisation in other words underutilised.

The next aspect in the implementation of a business strategy - resources planning-sets out what resources need to be created and which disposed of. It deals with the identification of resources needed, how those resources will be deployed and controlled to create the competences needed to implement the strategies successfully. This resources configuration is dependent on protecting unique resources i.e. where a strategy depends on the uniqueness of a particular resources such as legal means, fitting resources together (i.e. mix resources to create competence) business process re-engineering (i.e. to create a dynamic improvement in performance) and exploiting experience by learning and improving continuously to improve competence. One of the many problems is the conflict arising amongst departments on the allocation of funds especially where money is involved in the implementation of the business strategy.

Management of strategic change is the next component in the implementation stage. This change involves incremental change that merely builds on skills, routines and beliefs of the organization so that change is efficient, and transformational change, which requires the organisation to change its paradigm over time.

In constructing a strategic management system, the budgeting process must be linked with the business strategy. In commencing the budgeting process therefore, budget targets and organizational goals are set up for the next budgeting period by the budget directors, whose main task is to produce a master budget that combines business units and functional period budgets. From period budgets, the budget director constructs the master budget. This is then adjusted to calculate the forecasted shareholder value, which in turn acts as a test on the corporate strategy. This is the point where strategic analysis can be verified. If the strategic blueprints do not create shareholder value, they are taken through strategy modification cycle. Once the master budget and therefore, the strategic blue prints are through, the budget is set to be used and strategy to be implemented.

Acquiring a sufficient budget is one of the main requirements for efficient business strategy implementation. The question is where does budget and business strategy implementation interact?

There is evidence of numerous spates of failures of business strategies implementations and plans in spite of reasonable analyses. Someone has said that good planning can greatly reduce the risks in business failure.

A plan is a projection of future activity. It is normally translated into budget if quantified. Thus, for a forthcoming time period in which the budget relates expressed in money terms. It is defined as a financial or quantitative statement, prepared prior to a specified accounting period, containing the plans and policies to be pursued during that period.

Generally, budgets are prepared procedurally and systematically usually followed by most organisations (although the procedures might differ depending on the size, type and leadership style of the organisations) are as follows:

Communication of details: Those responsible for preparing the budget must be made aware and kept informed of the company's strategic plans (plans or objectives) so that the budget is tailored accordingly. This means that long-term plans of the organisation must be taken into account in drawing the budget.

Principal budget factor that limits an organisation's performance. It is usually sales demand. If an organisation cannot make and sell, more of its products because consumers do not accept that price it restricts the company's demand. Management may, not know the limiting factor, say, machine capacity, distribution and selling resources, until a budget, draft has been prepared. This is the starting point in budget preparation. Once this factor is determined, the rest of the budget is set to be drawn.

Sales budget preparation: Usually this is the base or primary budget prepared based on sales forecasts and from which most of the other budgets emanate because it has been established that the principal budget factor for most organisation.This leads to initial preparation of budgets for the following: finished good stock, production, resources for production, overhead cost, raw materials (stock), raw materials (purchase)

It is when all the budgets are in complete consonance and with one another that they are summarised into the master budget made up of budgeted profit and loss account, budgeted Balance sheet and cash budget.

Cash budget is one of the most important planning tools that any organisation can use. Its usefulness is felt when it shows that there are insufficient cash resource to finance planned operations. Cash budget can show four positions or scenarios giving management an indication of potential problems that might arise so that management can avoid such problems.

The implication of the position is one of the areas where the budget interacts with the implementation of the business strategy. For example when the cash budget shows a position of short-term surplus, management are prompted to either make short-term investments, pay creditors early to obtain discount or increase sales by increasing debtors and stocks, on short term deficit, the appropriate action to be taken by management include increase creditors, reduce debtors and arrange overdrafts to fund the deficit. The other cash position-long term surplus is tackled by making long-term investments, expand organically or by acquisitions or diversify among others; and long-term deficit could be handled by raising long-term finance or disinvestment opportunities.

Budgets and objectives (strategies) are clearly allocated to those areas and activities in the organization, which are seen as priorities. If important objects are to be achieved, and priority strategies implemented, resources must be provided.

However, research in inter-organisational settings identifies resource acquisition (i.e. budget), cooperative interaction acquisition and organisational power acquisition as the difficult part of implementation processes. Thus, inter-organisational fights for larger budgets also influence budget planning and affect strategy implementation. For example, where resources are limited and finite, strategic opportunities may be constrained. Since budget planning is usually annual, budgets are frequently bound to be different from the current situational needs, especially towards the latter part of the budget period. Because of this, flexed budgets are designed to allow for changes in the level of activity, which might result from adaptive changes in functional and competitive strategies.

It must also be noted here that while the role for today's financial managers is quickly moving upstream in the strategic plane, the challenge becomes even grater in light of the accelerating pace of change. This reality is rendering obsolete the traditional approaches to corporate governance, such as 3-5 years static annual planning and static budgets. To provide useful financial insight, sooner rather than later managers need to think about business strategy as a process of continuous course correcting more like a series of real options than a single projected cash flow statement.

The implementation of a business strategy could be likened to a human body without a soul (budget). If there is no soul in a body, it is deemed dead; in the same vein budget is that soul (especially when implementing a new business strategy) for the implementation of a business strategy; thus, the two are linked and interdependent.

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