CHAPTER 5.
THE PLANNING FUNCTION OF Framework for Business Planning
CONTROLLERSHIP
Business Planning Defined
➢ Business Planning is a complicated but
fascinating procedure, intertwined with all the
functions or departments of the entity.
➢ The financial aspects of planning are important
to business survival and growth; the financial
officers of the corporation should be aware of
the interrelationship of plans, methods of
planning, problem areas, and the concomitant
financial implications of each.
➢ The process of thinking ahead and making a
judgment on a course of action while giving
consideration to the many feasible alternatives
available is the planning process.
A plan, accordingly, must recognize three factors:
1. It must involve the future.
2. It must involve action.
3. It should give recognition to the organizational
structure of responsibility, authority, and
accountability by which action takes place in a given
business.
➢ A plan assumes a predetermination to take
action, which distinguishes it from forecasting.
Forecasting may involve predicting the future to
some degree, but it does not necessarily involve
future action by the planner or his or her
company. It often involves future action by
someone else. Hence, forecasting may be used
to predict future conditions or action by other
forces, such as governments, competitors, and
environment. The planner determines a course
of action to reach an objective.
➢ Business planning may be done only in the mind
of the chief executive or may involve a well-
organized effort by many individuals.
Perhaps the best way to understand what
constitutes good business planning is to recognize
three separate and related elements:
1. The system of plans that should comprise the
whole—for all activities of the business and for
all planning periods—and their relationship to
each other
2. The orderly process by which each plan is
formulated
3. The basic elements that should be inherent in
any sound plan of action
But before the planning system and process is
discussed, it may be desirable to review the time
factor.
Time as Related to Planning
➢ In a sense, planning may be described as an
opportunity to consider and experiment with
the valuable assets (including both employees
and materials) of a company before committing
them to risk. The future period for which
different industries must commit these
resources varies greatly as, for example, from
the season-oriented apparel business to the
decade-oriented orchard or ranch operation.
➢ It is obvious in the planting of citrus groves or
the building of a butadiene plant that a period
beyond the immediate future must be
considered. This properly should involve long-
range planning. This difference in period for
which planning must be undertaken can be
better viewed in the light of generations of
product and market.
➢ A company has existing products that are being
sold in present-day markets and may be
described as current-generation products and
markets. But at an unknown time in the future,
these existing products and markets will be
superseded and replaced by new products
and/or new markets, and so on ad infinitum.
The same business judgment that recognizes the
inevitability of the change or evolution of things also
understands the need for a complete planning
process. This continual change in business
environment as related to the potential of the
company is best illustrated in Exhibit 9.1.
Planning Period: How Long Is “Long Range”?
➢ Strategic planning sometimes is referred to as
long-range planning. Each business has
characteristics that need to be identified in
determining the time period of planning. A
company should plan ahead only so far as it is
useful.
➢ Surveys on this subject indicate that among
companies that do long-range planning, the
most common period is five years.
Some of the factors that serve as a guide in selecting
the proper planning time span are:
• Lead time for product development.
• Length of life of the product.
• Market development time.
• Development time for raw materials and
components.
• Time for construction of physical facilities.
• Payout period for capital investment.
Strategic Plan: An Overview
A strategic plan generally involves the following
components:
A clear and understandable statement of the
company’s basic purpose.
A carefully thought-out strategy or means to
accomplish this basic purpose.
A statement of specific goals to be achieved under
the strategy and means of measuring progress
toward each.
A statement of the assumptions or conditions used
or needed to achieve the goals.
Corporate Development Plan
➢ Auxiliary to the strategic plan is the corporate
development plan. It may be said to relate
principally to the new product and market
activities, to the actions or methods by which
the new generations of products and/or markets
will join existing ones.
This product- and market-oriented development
activity will concern itself largely with:
• The establishment of those conditions or
business climates that foster and encourage
the creation or discovery of new products and
markets
• The gathering together of pertinent data to
identify those fields with the highest potential
return on the corporate resources.
• The determination of resource requirements
and the scheduling needed to implement the
program as it passes into normal operations.
The corporate development plan has three
segments:
• The Divestment Plan
• The Diversification Plan
• The Research and Development Plan
Operations Plan
➢ is concerned principally with current business
actions. Essentially, it covers the near-term
activities and extends to every function of the
firm. It deals with and influences the functions
directly and indirectly involved in distributing
 the present generation of products to existing The planning cycle, including the relationship of the
markets. strategic plan to the annual operating plan of the
corporate office.
➢ Basically, it relates to the development of the
plan of operations for the next year or two. It is
essentially detailed in nature and specifies plans
by individual function, the whole of which
becomes the “annual plan” or some such
designation.

Basic Elements in Any Plan

➢ The strategic plan is broad and general in nature.
Conversely, the annual operations plan is quite
detailed and specific – and becomes the budget
or control tool for the near term.
Planning Frequency
Basic qualities of a plan:
➢ In general, it might be stated that planning is a
1. Statement of purpose
continuous process and that as significant
2. Identification of action to be taken
developments occur, such should be inputted to
3. Specification of the resources to be used.
the master strategic plan.
4. Identification of goals.
5. Establishment of definite time schedules and
➢ In regard to the frequency of formal updating or
adherence thereto.
revision, many companies find it practical to
6. Identification of conditions to be met or
update the strategic plan on an annual basis.
assumptions made.
➢ The short-term business plan, of course, should
Planning Process
be prepared each year. However, since the
annual plan is not only a plan but also a control
tool, it would seem prudent to review it if major
events change.

Plan Guidelines
➢ The heart of sound planning is thinking and
communicating, whether for the strategic plan
or the short-range plan.

The contents of the executive summary should

include:
1. Comparison to the prior-year plan
2. The major planning assumptions (external and
Planning Cycle - Five basic steps:
internal)
1. Selected strategic studies are made
3. Growth strategy
2. An environmental analysis
4. Business goals
3. Company objectives and goals (tentative) are
5. Perceived strengths, weaknesses, opportunities,
established.
problems, and threats.
4. the strategic plan (for 10 years) is developed.
6. Optimization of profit plans for the existing
5. detailed annual plan for the first one or two
business
years.
7. Programs and strategy for new business
development
8. Financial summaries of major factors, trends, and
return on assets.
Supplemental Planning: Alternative Scenarios
Planning Timetable or Schedule
➢ To achieve a sound strategic or short term on a
timely basis, it is desirable to prepare a calendar
of events. With respect to the strategic plan, the
calendar may be issued at the time of the chief
executive’s announcement of the annual
strategic planning effort.
Strategic Planning: An In-Depth Review
systematic and more or less formalized effort of a
company to establish basic company purposes,
objectives, policies, and strategies and to develop
detailed plans to implement policies and strategies
to achieve objectives and basic company purposes.
Most strategic planning processes encompass these
seven steps:
1. Analysis of the industry and business
environment and status
2. Determining the corporate mission or purpose
(in some instances, the sequence of these first
two activities, both closely related, may be
reversed)
3. Selecting the company’s long-term objectives
4. Developing appropriate strategies.
5. Preparing the long-range plan, including the
financial plan.
6. Measuring actual performance (of the
milestones to be attained each year) against the
plan
7. Analyzing the reasons for departure from the
plan, and taking any appropriate action.
Environmental Analysis and SWOT Analysis
PORTER’S 5 FORCES MODEL
Understanding each business segment as to market
share and growth rate, according to the Boston
Consulting Group matrix as either:
➢ A star—high market share, high growth rate.
➢ A cash cow—high market share, low growth
rate; significant generator of Cash.
➢ A wild cat—low market share, high growth rate;
probably a cash user until the product and
market are more developed
➢ A dog—low market share, low growth; a
candidate for divestment
Role of the Controller
The following are possible roles the controller can
have in the planning process:

• General. In those areas susceptible to financial

or economic analyses, whether based on
internal and/or external data, where the
controller is knowledgeable, the controller
should prepare the analysis and present
recommendations.

• Company mission. The company mission or

purpose will be determined based on a
thorough knowledge of the entity’s strengths
and weaknesses and a host of subjective
opinions. If the controller is aware of erroneous
financial or economic assumptions used (which
should be disclosed) in reaching the decisions,
then the controller can and should provide
alternative suggestions. Otherwise, this area
should be left to the decisions of the other
officers.

• Long-range objectives. As to those long-range

objectives that involve conclusions based on
financial facts or calculations (such as return on
shareholders’ equity), the controller should
make or assist in making the necessary analysis.
If the conclusions reached are erroneous or not
realistic, there is an obligation to bring this to
the attention of the appropriate executive and
to demonstrate in what way the objective is
unrealistic (or too easy of attainment) and what
might be more appropriate.

• Developing strategies. In this phase, also,

financial analysis probably could be applied to
some of the strategies. Suggestions would be
those relative to profit impact of alternative
choices, cost effectiveness, unrealistic earnings
estimates of proposed acquisitions, unduly
optimistic economic assumptions, too high an
inflation rate, or cost estimates that are too low.