Planning, Programming and Budgeting: Understanding

Planning, Programming and Budgeting: Understanding Financial Management and Enterprise Resource Planning and How it Is Applicable in the Real World

The objective of this work is to research planning, programming and budgeting and to understand how financial management and enterprise resource planning is applicable in the real world.

Regardless of the age of size of a business, financial planning is a critically important activity. Fort businesses that are new, financial projections are centric to the planning process of the business and in companies of a larger size, annual budgeting is partially formed by financial planning and financial planning plays a key role in planning that is long-term in nature as well as in business appraisals and corporate development. A model that is centric to the financial planning task is the 'Sales minus Costs equals Profits (S-C=P) formula which is used in calculating profits that are projected based on assumptions relating to future sales and costs of the business.

I. COMPREHENSIVE MODEL in FINANCIAL PLANNING model that is comprehensive in nature may "...contain many thousands of formulae with functions ranging from simple addition to complex condition statements..." (PlanWare, nd) the utility of the financial model is compilation of forecasts and budgets as well as assessment of "...possible funding requirements and to explore the likely financial consequences of alternative funding, marketing or operational strategies. They can also be used for business planning, raising finance, investment or funding appraisals, financial analysis, corporate planning..." (PlanWare, nd) and so forth. When the financial model is used in an effective manner, the financial model can assist in prevention of major errors in planning and can assist in identification of or evaluation of opportunities as well as in attraction of external funding, and provision of strategic guidance. Financial models are further beneficial in evaluation of options relating to finance and development as well as in monitoring progress.

II. FINANCIAL PLANNING MODELS: HOW DO THEY WORK?

Today's financial planning models are generally computer-based models, which utilizes "assumptions for sales volumes, prices, operating costs, funding...to produce projected balance sheets, profit & loss accounts and cash flow statements." (PlanWare, nd) Following the initial assumptions being made, they are entered onto a spreadsheet. It is possible to evaluate alternative scenarios with the computerized spreadsheet. The model may be used "...to explore the extent to which future sales can be increased while holdings borrowings within predetermined limits; to assess the effects of varying selling prices and/or volumes and prices have been increased by a fixed percentage." (PlanWare, nd) the following Figure is one example of the alternative scenario analysis which can be utilized in which sales volumes and prices are increased by a fixed percentage.

Results of Sensitivity Analysis

Scenario:

Base Case covering 12 months

Sales Volumes increased by 20%

Selling Prices increased by 10%

Sales ($000)

Sales (% change)

Pre-tax Profits ($000)

Pre-tax Profits (% Change)

Net Cashflow ($000)

Net Cashflow (% Change

Peak Monthly Loans ($000)

Peak Monthly Loan (% Change)

Full-Year Return on Capital (%)

Source: PlanWare (nd)

In the above model, it can be seen that when a choice exists between increase in sales volumes of 20% or a 10% selling prices increase, it is shown in the model that the more attractive option is the later choice.

III. Business PLANNING PROJECTIONS

Financial modeling is a valuable tool in preparing a business plan. The business plan provides the foundation for financial projects. Prior to the use of a financial model in planning the future of a business the manager should: (1) Decide at the very outset on the central purpose of the planning exercise; the target audience; and the time horizon; (2) Identify and think through all the critical assumptions. Prepare outline projections to confirm their overall direction, examine the critical elements in detail and consider strategic issues relating to sales, profitability, funding etc.; and (3) Check that all key assumptions and data are to hand, and have been adequately researched." (PlanWare, nd)

IV. FINANCIAL PLANNING TRAPS

Traps to avoid in financial planning include those as follows: (1) Using financial forecasting as a substitute for business planning; (2) Ignoring historic trends or performances at company, sectoral and national levels; (3) Overstating market shares and growth, sales forecasts, and profit levels; (4) Giving insufficient consideration to working capital requirements; (5) Underestimating costs and delays likely to be encountered; (6) Disregarding industry performance norms and competitors' responses; (7) Breaching generally-accepted financial guide lines and ratios; (8) Making unduly optimistic assumptions about the availability of loans, trade credit, grants, equity etc.; and (9) Seeking spurious accuracy while failing to recognize matters of strategic importance. (PlanWare, nd) it is critically important that the views taken of the business in terms of its potential profits, prospects, and funding requirements be realistic and merit is said to exist in "compiling 'worst' case projections to complement 'most likely' or 'best' forecasts." (PlanWare, nd) it is important to note the statement that "it is much less painful to deal with a flaw in a business at the planning stage, than later on when commitments have been made and the business has started trading." (PlanWare, nd)

V. WRITING the Business PLAN written business plan has four critical functions including those as follows: (1) the business plan assists the management or the entrepreneur to clarify, focus and research their business's or project's development and prospects; (2) the business plan provides a considered and logical framework within which a business can develop and pursue business strategies over the next three to five years; (3) the business plan serves as a basis for discussion with third parties such as shareholders, agencies, banks, investors etc.; and (4) the business plan offers a benchmark against which actual performance can be measured and reviewed. (PlanWare, nd) the business plan is unique to each individual business as no two businesses are identical and neither will their business plan be identical to any other business plan. The plan's contents should be specifically tailored to the specific business circumstances although business plans generally follow a structure that has been tried and found to be sound. The business plan must hold a realistic view of the long-term objectives and expectations for the business and "provides the framework within which it must operate and, ultimately, succeed or fail. For management or entrepreneurs seeking external support, the plan is the most important sales document that they are ever likely to produce as it could be the key to raising finance, etc." (PlanWare, nd) the importance of a business plan that is satisfactory is sometimes "a painful but essential exercise." (PlanWare, nd) the manager is driven to grasp more clearly their projected achievements and the 'how' and 'when' those achievements are possible. The planning process involves thought, discussion, research and analysis. These processes are in many ways, of greater value that the final written plan.

The first step of writing a business plan is the 'business strategy' or strategic plan, which served as a foundation for the following business plan. Prior to writing the strategic plan, it helps greatly to "clearly identify the current status, objectives and strategies of an existing business or the latest thinking in respect of a new venture. Correctly defined, these can be used s the basis for critical examination to probe existing or perceived strengths, weaknesses, threats and opportunities." (PlanWare, nd) the strategy development phase of the business plan involves the issues are follows:

Vision;

Mission;

Objectives;

Values;

Strategies;

Goals; and Programs. (PlanWare, nd)

The 'Vision' states what the business will be in a few years time in terms of its physical appearance, the size of the business, the business activities and so forth. The business 'Mission' gives an indication of the business purposes while the business 'objectives' state the needed or wanted achievements in the mid- and long-terms. Business 'Values' are the principles which govern the business operation, conducts, and relationships. The business 'Strategies' are "the rules and guidelines by which the mission, objectives, etc. may be achieved." (PlanWare, nd) the business 'Goals' are "specific interim or ultimate time-based measurements to be achieved by implementing strategies in pursuit of the company's objectives..." (PlanWare, nd). Finally, the business "Programs" "set out the implementation plans for the key strategies." (PlanWare, nd) the mission, objective, values, strategies, and goals are all interconnected with one another. It is necessary to express the primary purpose and audience of the plan from the beginning and it is important to identify and cultivate the potential key recipients of the plan during preparation of the plan because "this will ensure that when the plan if finally presented, these contacts will have some prior knowledge of its contents and the promoters and, where appropriate, the views of contacts may have been taken into account during the preparation process." (PlanWare, nd)

VI. ENTERPRISE RESOURCE PLANNING

Enterprise Resource Planning software or (ERP) is useful in integration of all departments and functions across a company through use of a single computer system that serves all the needs of the various departments. While each of the many departments, such as human resources, finance, and warehousing "typically has its own computer system optimized for the particular ways that the department does its work...ERP combines them all together into a single, integrated software program that runs of a single database so that the various departments can more easily share information and communicate with each other." (Pang, 2001) the work of Les Pang (2001) entitled: "Manager's Guide to Enterprise Resource Planning (ERP) Systems" published in the Information Systems Control Journal informs this study that over the past ten years an organizations have significantly experienced "changes in their core business applications. These applications have moved from a centralized mainframe platform towards distributed client-server architecture, changed from monolithic customized software systems to commercial off-the-shelf (COTS) system modules with graphical development tools and expanded from a local area network environment to one with the broad reach of the World Wide Web. Business applications have changed to support the globalization of their organization with the addition of multisite and multicurrency functionalities." (Pang, 2001)

The desire of a great number of managers is to have along with the aforementioned changes "integration among functional applications that support data flow among the business units and have a common look and feel among the modules." (Pang, 2001) Environmental limitations have been long acknowledged to exist among managers in the 'stove-piped systems and databases." (Pang, 2001) the need for data that flowed through departments and able to flow in slow batches and "repackaged and even manually reentered because of the differences in format, platform and data meaning among the functional departments." (Pang, 2001) in order to address the needed changes and accompanying challenges "a new type of software system was developed - enterprise resource planning (ERP) system. These systems are applications of integrated software solutions that support enterprise-wide business requirements. They consist of modules that focus on specific aspects of the enterprise business such as finance, human resources, logistics and procurement." (Pang, 2001) Specifically, the ERP is a software system that fully integrates "all departments and functions across an organization onto a single computer system that aims to serve practically everyone's particular needs." (Pang, 2001) Data exchange is easier and communication among departments is done with much more ease as well. The ERP system runs on client-server networks.

VII. EXAMPLES of ERP MODULES

Examples of ERP modules provided in the work of Pang (2001) include those as follows:

Human resource management

Financial management

Supply chain management

Procurement

Logistics and materials management

Planning and budgeting

Sales and distribution

Student administration (Pang, 2001)

VIII. ERP VENDORS

ERP vendors are stated by Pang (2001) to be those as follows:

SAP (Systems, Applications and Products in Data Processing) is the global market leader in ERPs; it has approximately 30 to 60% of the world market. The strengths of its R/3 product include support for multi-country, multicurrency environments and wide scalability. The company spends a large percentage of its revenues in research and development.

Oracle is the second-largest software company in the world. Its ERP product, Oracle Applications, includes the popular Oracle Financials module. It has the reputation for developing a product that can be interfaced with others to create a best-of-breed ERP package. It should be pointed out that Oracle Applications should be distinguished from the Oracle relational database management system, which often is part of other ERP products such as PeopleSoft and SAP.

PeopleSoft has its origins in human resource management software that evolved to a full feature product with the addition of other modules. However, its strength remains its human resource management systems. PeopleSoft has a major presence in the U.S. federal government.

Baan has developed a number of componentized products. Recently, it has struggled financially because of questionable financial reporting practices and changes in leadership. However, it is still a relatively dominant player in the ERP market.

JD Edwards has a product called OneWorld with origins in the as/400 environment. Its target customers are primarily smaller organizations with less than 2,000 users. (Pang, 2001)

The following figure illustrates the ERP Market Share as related in Pang (2001).

ERP Market Share

Source Pang (2001)

IX. BENEFITS of ERP

Benefits of ERP are stated to include integration of the activities of the organization while employing "best practices that have been proven in the real world." (Pang, 2001) ERP's additionally enable standardization of the organization. ERPs further bring about improvement to management of information through "a single database as opposed to multiple, often duplicative systems. Because of this centralized data source, ERP's provide online and real-time information and facilitate intra -- and inter-organization communication and collaboration." (Pang, 2001),Drivers of ERP are stated to include: (1) customer satisfaction; (2) more efficient processes; (3) meeting business process reengineering requirements; (4) competitive challenges; and (5) labor shortages. (Pang, 2001)

X. ORGANIZATIONS IMPLEMENTING ERP

ERPs are being used in the private sector by 70% of the largest 1,000 companies. ERP is stated by Pang (2001) to have been implemented within the United States federal government, the U.S. Department of Defense, and soon will the implemented in the following:

Defense Logistics Agency -- Business systems modernization

National Security Agency/Defense Intelligence Agency/National Imagery and Mapping Agency -- Integrated human resources and payroll solution across all three agencies

Defense Finance and Accounting System (DFAS) -- Defense procurement pay system -- Contract and vendor pay entitlements; DFAS corporate database (DCD) -- Standard general ledger for the Air Force

Navy -- Interim modernization for the Navy -- Accounting, payroll, human resources, acquisitions, procurement, operations

Army -- Wholesale logistics modernization program (Pang, 2001)

ERPs are stated to either recently been implemented in the following non-defense agencies:

Interior, Health and Human Services, General Services Administration, Labor, Veteran Affairs -- Human resources

Treasury's U.S. Mint -- Consolidated information system (COINS) and human resources

NASA Jet Propulsion Lab -- Financial and human resources including payroll

Energy -- Administration and resource management

Transportation, Commerce -- "Financials (Pang, 2001)

XII. STEPS to ERP IMPLEMENTATION

Steps to implementation of the ERP system includes the steps listed as followed: