Recognizing problems and opportunities

- Management planning involves a process of recognizing problems or opportunities, identifying alternatives, analyzing those alternatives, and then choosing and implementing the best alternatives. There are two basic types of planning. First, long-run planning, which includes strategic planning and capital budgeting. Long-run planning involves making decisions with effects that extend several years into the future, usually three to five years, but sometimes longer than that. This includes broad-based decisions about products, markets, productive facilities and financial resources. Long-run planning is often called strategic planning. Strategic planning, likely the most critical decision-making process that takes place at the executive level in any organization today, usually involves identifying an organization's mission, the goals flowing from that mission and strategies and action steps to accomplish those goals. Successful executives, such as William Weldon of Johnson and Johnson or Warren Buffet of Berkshire Hathaway have always displayed great skill in studying the market, identifying customer needs, analyzing competitors' strengths and weaknesses and defining the right investments in processes their organizations need for success. Good management accounting supports good strategic planning by providing the internal information needed by executives to evaluate and adjust their strategic plans. With strategic planning in place or in process, the company can then plan for the purchase and use of major assets like buildings or equipment to help the company meet its long range goals. For example, if a university's long-run strategic plan includes making its football team more competitive, the university should consider improving or replacing its existing football stadium and practice facility. This type of long-run planning of the acquisition of assets is called capital budgeting. We will cover capital budgeting in detail in a later topic. Short-run planning is divided into two categories, production prioritizing and operational budgeting. Once the organization has made long-term resource commitments, that is to land, buildings, equipment, management personnel and the like, then managers need to determine how to best use those committed resources to maximize the return on their capital investment, a process often referred to as production prioritizing. Now, did you catch the phrase return on capital investment in the last sentence? That sound familiar? The DuPont ROI concept is one way to establish priorities on products, service processes, or divisions that make the largest contributions to the goals of the organization. Once the organization has determined what to provide to the marketplace in order to maximize its goals, then managers are ready to go on to the next phase of short-run planning, operational budgeting. Sometimes known as profit plans, operational budgets are used by managers to establish and communicate daily, weekly, and monthly goals, also known as standards for the organization. Many individuals face severe personal financial problems because they fail to use even the most basic techniques of regular operational budgeting. We will discuss operational budgeting in a later topic in this course.