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Planning and ForecastingTopic Gateway Series
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Planning and ForecastingTopic Gateway Series No. 17
Prepared by Louise Ross and Technical Information Service October 2006
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Planning and ForecastingTopic Gateway Series
About Topic Gateways
Topic Gateways are intended as a refresher or introduction to topics of interest
ew and a fuller
st some further resources
ers only in the CPD
bsite, along with a number of electronic resources.
ormation Service
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information needs. Additionally, our accounting specialists can help CIMA
n financial reporting,
management and performance management, as defined in the CIMA
rminology2005 edition.
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to CIMA members. They include a basic definition, a brief overvi
explanation of practical application. Finally they signpo
for detailed understanding and research.
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Centre on the CIMA we
About the Technical Information Service
CIMA supports its members and students with its Technical Inf
(TIS) for their work and CPD needs.
Our information specialist
identify or create authoritative resources to help members
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members and students with the interpretation of guidance o
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Official Te
CIMA member
and resources.
The Chartered Institute
2
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Planning and Forecasting
formulation, evaluation and selection of
the policies, strategies, tac chieve them. Planning
term/strategic planning and short term/operational planning. The
l Terminology, 2005
r planning purposes.
erminology, 2005
agement (cost
planning) and paper 5, Integrated Management (scenario planning). Students
covered in managerial level paper 1, Management Accounting
aper 4,
arket forecasting).
anagement
eting and Cash
r topic gateways.
Related concepts Budgeting: Like planning, budgeting looks into the future beyond the
immediate timeframe. Planning is an attempt to shape the organisations
future, while budgeting aims to predict what resources the organisation can
use and might expend. Budgets are an essential, more detailed element of
planning. They are not effective when divorced from the planning context
JIT (Just in Time): This relies on detailed forward planning to schedule when
parts will be needed to reduce inventory and speed up response times to
customers.
Definition and conceptPlanning is defined as:
'The establishment of objectives, and the
tics and action required to a
comprises long
latter is usually for a period of up to one year.
CIMA Officia
A forecast is defined as:
'A prediction of future events and their quantification fo
CIMA Official T
Plans often incorporate forecast data.
ContextPlanning is covered in Managerial level paper 2, Decision Man
also study planning in the Strategic level paper 6, Business Strategy.
Forecasting is
Performance Evaluation, paper 2, Decision Management and p
Organisational Management and Information Systems (m
Students also study forecasting in strategic level paper 6, M
Accounting Business Strategy.
This topic gateway only mentions Strategic Planning, Budg
Forecasting briefly as these topics will be covered by othe
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Overview - Planning
Planning is a universal management activity, inherent in every business
lanning is an analytical activity, and is:
breaking down a goal or set of in ormalising those steps
d articulating the
enry Mintzberg, 1994
, that is, in the context of plans at other
levels in the hierarchy. Strategic plans usually take a long term view, five or more
ture. Tactical plans (also known as functional plans) look two to
ead. Operational plans, which include budgets, have an annual
of plan in the business context include:
lanning
scenario planning
lanning
rmulated in advance, to be implemented upon the occurrence of
l Terminology, 2005
identifying possible problems as far as
is practicable. It considers what actions could prevent or ameliorate the impact ofthose problems. Contingency planning involves monitoring if the trigger points
for those problems occur.
Scenario planningThis is similar to contingency planning in that it also scopes out a limited number
of possible futures in the context of high uncertainty. However, scenario planning
is used to generate a population of possible futures to help long term plans
remain flexible, rather than to prepare for the worst.
proposition. A plan exists when an objective is framed and a sequence of events
identified to reach that objective. P
tentions into steps, f
so that they can be implemented almost automatically an
anticipated consequences or results of each step.
H
Plans are usually prepared in a cascade
years into the fu
four years ah
scope.
Specific types
contingency p
the business plan.
Contingency p
A plan, fo
certain specific future events.
CIMA Officia
The contingency planning process includes
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Business plan
A business plan outlines the companys expected course of action for the
medium term. This should be in the context of the industry, market, products,
one-off exercise, but a
ent which is regularly used and revised. Its purpose is to help the business:
meet the expected and and obstacles the future
a guide to navigate successfully through its unique competitive
Harvard ManageMentor, 2006
d on available past
dgement. There are
basic forecasting methods.
analysis and projection
uch as trends, seasonality
hich is not caused by
ding this trend into the future using those
s.
Qualitative techniques
the accuracy or relevance of
forecasts. Mintzberg refer
techniques include the Delphi method where pr ictions and analysis from
Causal methods
In which:
Theory, prior research and expert domain knowledge are used to specify
relationships between a variable to be forecast and explanatory variables.
Forecasting Principles, Methodology Tree
http://www.forecastingprinciples.com/methodologytree.html
policies, capacity and resources. It should not be a
docum
unexpected opportunities
holds
environment.
ForecastingForecasting is an attempt to estimate the future. It is base
data, the extrapolation of trends and the application of ju
three
Time series
The analysis of past data is used to identify patterns, s
or cycles. A trend is an upward or downward pattern w
seasonality. Projection is about exten
observation
Where non-numerical information is used to improve
s to such information as soft information. These
ed
experts are collected, moderated and summarised.
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Application
Planning helps organisations articulate, share and imp
assists in the allocation of resources and in monitoring their us
Forecasts are used by many functions within the organisatio
application
lement their strategies. It
e.
n. One specific
, the cash forecast, is prepared by the Finance department. This
forecast predicts the size and timing of inflows and outflows of cash over a
monthly forecast for
etailed annual forecast for
ears.
her budgets will be
are. Similarly, profit and
isation, given
projected sales and costs.
tion, and for
o increase capacity.
ecasts to set targets and quotas for salespeople.arketing departments, the
r example, Marketing
economic and perhaps social trends.
Marketing will also consider how the organisations share of that market might
based on customer trends and intentions, as well as
market testing and competitive data results.
ialist forecasting
resource in the organisation. This helps ensure that different departments base
their forecasts on common data. It also facilitates the sharing of results and good
practice
Reported benefits of planning and forecastingAlthough there are many types of plan with different purposes and planning
horizons, in general planning may:
help management to think about the business logically and strategically
identify milestones towards the achievement of objectives (clarity and focus)
defined period. Typically, the Finance department prepares a
the first two years. This is usually followed by a less d
the next three y
The Finance department also uses forecasts to anticipate whet
met. If not, Finance can analyse where the problem areas
loss forecasts predict the trading performance of the organ
Operational departments use forecasts to schedule produc
purchasing and logistics. If there is insufficient capacity, forecasts can be used to
determine the timing and amount of capital expenditure t
The Sales department uses forForecasts are mainly generated from the Finance and M
latter frequently including external data in its forecasts. Fo
might estimate how the market for its products will develop. This would involve
looking at market potential, based on
develop. This would be
It is helpful (some argue essential) to have a dedicated spec
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enable management to chart progress against the plan
monitoring)
(performance
ed and when (resource
help management inform employees of the direction and intentions of the
ion, communication and involvement).
ess plan may also:
nders or potential investors.
ith analysts. For example, this might regard profit and
loss forecasts
abling more efficient production scheduling and
istics forecasts)
ation to predict when it
ill have most impact
gplanning as for
o maintain any
usefulness. A large proportion of users report a lack of satisfaction with the
process. Cranfield Management Schools Centre for Business Performanceadvises that there is widespread dissatisfaction from practitioners, who conclude
that the effort spent on planning and budgeting is simply not justified by the
results.
In June 2006, CIMA Insightpublished a survey on business performance
management techniques. Over half of respondents criticised their own planning
for not relating to strategy, echoing the views of management theorist Henry
Mintzberg.
ensure that strategies specify what resources are need
allocation and scheduling)
business (co-ordinat
A busin
provide an overview of essential information to inform the decision making
of le
Forecasts may:
help manage financial market expectations by enabling management to
better communicate w
reduce costs by en
minimisation of stock holding (production and log
reduce the cost of borrowing by enabling the organisneeds finance (cash flow forecasts)
helps focus marketing effort to those areas where it w
(forecastsof market potential).
Reported drawbacks of planning and forecastin
Critics of planning report many of the same drawbacks for
budgeting. It is time-consuming and plans need to be updated t
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Mintzberg felt that planning and strategy were mutually
characterised planning as the mere codification and opestrategies. Mintzberg acknowledged planning had a vital r
process which stifled innovation and c
exclusive activities. He
rationalisation of existingole, but felt it was a
ommitment. He believed planning was
mble the past. It also under
alyse, but providing the
planning process.
n average six planning systems compared to the typical
Group, quoted in an article in BusinessFinancemag.com. Those best practice
l to
tp://www.businessfinancemag.com/magazine/archives/article.html?arti
82andhighlight=planning
The inaccuracy can
lity data, faulty assumptions or weaknesses in
methodology. Analysing the cause of the problem can help improve future
forecasts.
Planning process
Planning is a cycle (with a feedback loop) rather than a process. It shouldnt be a
periodic intellectual exercise but something against which performance is
regularly monitored and analysed.
based on a faulty assumption that the future will rese
appreciated the role of soft data, hard to gather and an
essential insight and wisdom. [Henry Mintzberg, 1994]
Some dissatisfaction may stem from deficiencies in the
Organisations have o
three of best practice organisations. This is according to consultants The Hackett
companies generate 48% fewer reports. So there seems to be potentia
streamline the planning process.
ht
cleID=146
Forecasts come in for criticism if they are routinely inaccurate.
be caused by poor qua
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Source: Mindtools (2006)
The analysis of opportunities can be made using several well-known approaches
ateway) such as Porters
analysis and strategic
w.bized.co.uk/educators/16-
ss is to start with a sales
values. All other
nd so on are based on activity
ales forecast. For not-for-profit organisations or cost
centres, the proxy for sales will be an indicator of demand for services. For
example, visitor numbers, number of visa application numbers or volume of calls
to the IT helpdesk.
The advantage of this approach is that it highlights the sales volume element
which needs to be forecast. Strictly speaking, the other forecasts are only
estimation the application of logic and arithmetic. By linking all the forecasts, it
is possible to flex the assumptions in the sales forecast. This enables forecasters
to see how the forecast filters through and affects all the subsequent
estimations. [Richard Stutley, 2003]
(discussed in more detail in the Strategic Planning topic g
Five Forces, SWOT analysis or PEST and its derivatives.
A useful mindmapof the issues in relation to strategic
planning can be found at the Bized website.
http://ww
19/business/strategy/presentation/strategic1_map.htm
The suggested best practice for the forecasting proce
forecast. This should be expressed in quantities rather than
forecasts such as production, income, net profit a
levels assumed in the s
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Cooper, T. and Gould, S.Can we all go beyond budgeting?CIMA Insight,
sight
ur finance function.
global.com/insight
ber 2007].
CIMA Insight, January
m: www.cimaglobal.com/insight
November 2007].
way to do business. CIMA Insight,
e from: www.cimaglobal.com/insight
er articlesIMA
a
ugh businesses within
ablished organizations. Harvard Business Review, May 2005, Volume 83, Issue
ed? Business Finance,
forecasting package.
SupplyChain Management Review, September 2002, Volume 6, Issue 5,
sourcesDugdale, D., Jones, C. and Green, S. (2005). Contemporary management
accounting practices in UK manufacturing. CIMA Research Executive Summary.
London: CIMA Publishing. Available from:
www.cimaglobal.com/researchexecsummaries
[Accessed 6 November 2007].
A survey of practices in 41 UK companies showed that most made regular
forecasts. However, the authors characterised the methods adopted as typically,
relatively unsophisticated.
January 2004. Available from: www.cimaglobal.com/in[Accessed 6 November 2007].
Higgins, L. Financial fitness: upping the performance of yo
CIMA Insight, June 2006. Available from: www.cima
[Accessed 6 Novem
Nurdin, Georges. Most forecasting is useless and archaic.
2006. Available fro
[Accessed 6
Starovic, Danka. Place your bets on a new
March 2004. Availabl
[Accessed 6 November 2007].
Oth
Abstract from Business Source Corporate through My C
www.cimaglobal.com/mycim
Govindarajan, Vijay and Trimble, Chris. Building breakthro
est5, pp 58-68.
Leahy, Tad. Can the budgeting competency be narrow
February 2006, Volume 12, Issue 2, pp 39-43.
Tyagi, Rahul. How to evaluate a demand planning and
pp 48-55.
CIMA online
http://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insighthttp://www.cimaglobal.com/insight -
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'For example, most companies made forecasts only t
year. O
o the end of the financial
ne company was felt to be exceptional in developing its forecasts to
Contemporary management accounting practices in UK manufacturing
e Corporate (BSC) has the full text of several planning and
forecasting journals, including.
ces.
usiness Forecasting Methods and Systems.
Journal of Forecasting.
dustry profiles. These
for forecasting. On
les from futurologists
affect the way we live, in the journal
ist.
Driving value through strategic planning and budgeting. (PDF 468 KB). This is
and Accenture.
on planning and
budgeting, interviewed senior executives from 15 companies and many
analysts. www.som.cranfield.ac.uk/som/research/centres/cbp/downloads/
Research_Report.pdf
Websites
Bized
Website for educators and students of accounting, business and related
commercial fields. Contains useful material for CPD such as topic overviews,
resource lists and cases. www.bized.co.uk
include the remainder of the current financial year and the whole of the
following year'.
Business Sourc
Decision Scien
Journal of Business.
Journal of B
Business Strategy Review.
Business Change and Re-engineering.
BSC also contains thousands of company, country and in
include forward-looking information which would be valuable
a more general note, BSC also includes downloadable artic
on trends and developments likely to
Futur
a joint research report from Cranfield School of Management
(2001). Accenture reviewed more than 100 publications
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Topic Gateway Series
Cranfield School of Management Centre for Bu nceSpecialises in the development of predictive perform
events.
www.som.cranfield.ac.uk/som/research/centre
Forecasting principlesPortal provided
terminology, methodology, and solutions. Includes a diagnostic
userof commercial software and some freeware. D
for the serious forecaster.
www.forecastingprinciples.com/w
Mind tools
Useful site with many tip
manager, including those
www.mindtools.com
Prepare a
Business Links step by step guide to pr
entities. www.businesslink.gov.u
ership organisation which publishes research and other mater
i ed to bridge the gap between academics and practitioners.
www.sps.org.uk
Value-based Management
ludes useful material on
.valuebasedmanagement.net
siness Performaance measures,
among other areas. The site includes articles, research papers and
s/cbp/research.asp
by the International Institute of Forecasters. Provides
to help
s identify weak areas in their forecasting systems. Also gives reviewsefinitely worth exploring
elcome.html
s, tools and techniques for the business
for decision making and project planning.
Business Plan
eparing a business plan for small
k
Strategic Planning Society
Memb ial
ntend
Site inc scenario planning.
www
Copyright CIMA 2006
First published in 2006 by:
The Chartered Instituteof Management Accountants26 Chapter StreetLondon SW1P 4NPUnited Kingdom
Printed in Great Britain
No responsibility for loss occasioned to any person acting or refraining fromaction as a result of any material in this publication can be accepted by theauthors or the publishers.
All rights reserved. No part of this publication may be reproduced, storedin a retrieval system, or transmitted, in any form or by any means methodor device, electronic (whether now or hereafter known or developed),mechanical, photocopying, recorded or otherwise, without the priorpermission of the publishers.
Permission requests should be submitted to CIMA at: [email protected]