Tag Archives | strategic planning

The Butterfly Effect: Planning with External Analysis

planning with external analysisEvery decision you make as a financial leader affects your business. Looking back on 2016 to now, a lot of events happened and changed the course of business. Often, there are events occurring in the world that either directly or indirectly impact your company. As a financial leader, it’s up to you to decide how to change your business, or if you should keep it the same. But you need to start planning with external analysis.

How External Factors Destroy a Business

Worst-case scenario, a company will collapse due to an event that occurs externally. Here are a few examples of why external factors might actually destroy your business:

Your Company Can’t Keep Up

It’s all about infrastructure. How does your company stay in the game? If you think about it, the core of the company requires a strong group of individuals to keep the company together. Without a strong team, the company will crumble. Analyze your internal situation as well as your external situation: be aware of bitterness, fatigue, and boredom within your staff.

Competitors Fix the Problem Before You Do

“When the going gets tough, the tough gets going.” If we really think about this phrase, it’s true.”The going gets tough” means the situations around you are getting increasingly more difficult. “The tough get going” means that the strongest people work through the problem as fast as possible. If your competitors can solve the problem before you can, then your company becomes irrelevant.

Customers Adapt to the Change

Like we discussed in last week’s blog, the number one reason for startups failing is creating a product that customers don’t need. This can also be applied to businesses that already exist. If a customer doesn’t need a product, they won’t buy it. For example, the hard drive market shrank rapidly after the creation of the cloud. The cloud solved the issue of limited storage. Since then, customers adapted to the change and the hard drive market continues to shrink. Now, it’s up to the hard drive companies to make their change in order to gain new or keep current customers.

Not used to change? Planning with External Analysis helps anticipate obstacles before they affect your business. Download now!

Planning Strategically

As you can see, it takes a lot of adaptation. Over the past year or so, we’ve been getting a lot of traffic from the middle east. Everyone at The Strategic CFO wondered, “Why is this happening?” We caught up on the news and realized that oil prices collapsed.

As a result, the people in the middle east have a renewed interest in all things financial because they wanted to take initiative and start their own companies. To adapt to this change, we shifted our focus and paid more attention to them in our blog and communication.

You, too, can adapt to change. It’s a matter of staying alert, and responding to a pattern. In this case, we took note of our target demographic, and shifted to cater to them.

planning with external analysis

Porter’s 5 Forces

Porter’s 5 forces was created by Harvard Business School Professor, Michael Porter. The model exhibits 5 forces of competition within an industry, affected by multiple aspects of the industry and the environment. The 4 aspects that affect competition include the bargaining power of buyers, the bargaining power of suppliers, the threat of new entrants, and the threat of substitute products.

Analysis of Porter’s 5 Forces

If you think about it, all four of those aspects affect the competition equally, and are affected by spontaneous events. Bargaining power of buyers means that the consumers create pressure for a business to change its product and overall model.

Supplier power refers to the amount of influence the supplier has over a business’s decisions. An example of supplier power is oil and gas pricing. Due to the events that happen in the oil reserves, the prices fluctuate.

Threat of new entrants is the threat that new competitors present in any given industry. In a profitable industry, competition will be saturated. One of our interns told us about an ice cream owner the other day, and he said he and his partner were going to open their shop in Los Angeles. Unfortunately, they couldn’t enter the market because of the competition. As a result, he moved to Houston, posing as a threat to the Houston ice cream market. His product is common with a unique twist, but he entered a less-saturated market.

Finally, the threat of substitutes is the threat of a new product replacing an existing industry’s product. Let’s use an airline as an example. If a new airline provided a better price and better experience, consumers would most likely choose that airline.

Dealing with competition is always tough. Download this External Analysis to beat your competition to the punch!

planning with external analysis

Planning With External Analysis

SWOT analysis considers Strengths, Weaknesses, Opportunities, and Threats. Opportunities and threats are the focus for external factors. These environmental changes are most likely variable, unpredictable, and out of your control.

Environmental changes are similar to “the butterfly effect” – the concept that small changes have large effects. What happens across the world may have a large impact on your company. Not all change is negative – it is possible that what happens halfway across the world might increase your revenues in some way. In that case, you’ll still have to prepare… even if it’s not for the worst.

“Plug In” as a financial leader

As a financial leader, you have to be plugged in. News isn’t always for entertainment! In a way, it’s an indication of what your next move is. When planning with external analysis, consider more than what is happening today. Consider what might happen 3-6 months in advance, based on what is happening and has been happening lately.

Conclusion

Some say that the flap of a butterfly’s wings control the tides on the other side of the world. This concept, although somewhat overstated, is a great metaphor for environmental changes. What happens in Saudi Arabia may not affect us now, but maybe it might 5-6 months from now. The best part of adapting: always preparing for the worst.

Prepare for the best… and the worst. Download the External Analysis to gear up your business for change.

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Strategic Planning Process

See Also:
Product Pricing Strategies
Marketing Mix (4 P’s of Marketing)
Business Plan
How to write an Action Plan
Value Chain

Strategic Planning Process Definition

The strategic planning process involves finding long-term goals, and running through the different steps of the process to achieve those goals. Strategy planning involves finding where the company excels as well as where to allocate resources to maximize the long-term potential or strategy of the company.

Strategic Planning Process Steps

The strategic planning process outline or steps is as follows:

Mission

The mission step for the strategic process involves the creation of a mission statement. This is a big step in that it defines where the company plans on going into the future.

Objectives

After a mission statement has been made, strategy analysis requires that long-term and short-term objectives need to be established. There needs to be a way of monitoring the objectives so that the company has a way to check up on the progress of the company. Monitoring also makes sure it is on the right track to fulfill its mission statement.

Situation Analysis

Once the objectives have been established the strategic process requires that the company begin performing information gathering. Not only does the company need to establish where it is, but it also needs to gather information on its competitors as well as the current economic environment.

Strategy

Once information is gathered for the company on itself and the environment, then the company can begin to establish an overall strategy. The strategy will first incorporate the overall mission statement, objectives, as well as the general environment. Once these have been considered the company needs to decide what it does best in order to maximize the potential of the company.

Plan Execution

After all of the strategy planning is done, a company will gain the financing needed. Then they will begin marketing. They will also be establishing all human and equipment capital needed to best fit the company with the overall strategy.

Controlling Process

As the company moves along towards its objectives and overall mission statement it should establish a monitoring system. In this way the company can regularly check its progress and make sure it is on track to meet all of the goals of the company. If the company is not on track, then it can make adjustments that will put it back on track. To learn more financial leadership skills, download the free 7 Habits of Highly Effective CFOs.

strategic planning process

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Percent-of-Sales Method

See Also:
ProForma Financial Statements
Cost Center
Weighted Average Cost of Capital (WACC)
Standard Costing System
Activity Based Costing vs Traditional Costing

Percent-of-Sales Method

The percent-of-sales method is a technique for forecasting financial data. When forecasting financial data for strategic planning, budgeting, or for developing pro forma financial statements, analysts can use the percent-of-sales method of forecasting to create reasonable projections for certain key data.

The idea is to see how a financial statement account item relates historically to sales figures. Then use that relationship to project the value of those financial statement account items based on future sales estimates. This method of forecasting requires the items to be estimated based on relations to sales figures, thus it is necessary that movements in the items to be forecast are highly correlated with fluctuations in the sales figures. Forecast that item using a different technique; especially if there is no clear correlation between the item to be forecast and sales figures.

For example, if, after examining and analyzing historical financial statement data, an analyst determines that inventory levels are typically at 30% of sales. Additionally, the sales forecast for the coming year is for $100,000 dollars in sales. Then according to the percent-of-sales method of forecasting, the analyst can estimate inventory of approximately $30,000, or 30% of the estimated sales figure.

If you’re still not sure how to accurately project your sales, click here to access your free Goldilocks Sales Method tool. This tool allows you to avoid underestimating or over-projecting sales.

Three Step Process

There are three steps in the percent-of-sales forecasting process. First, use the sales figures to identify the correlated items. Then separate the uncorrelated out. To do this, analyze historical financial statement data. Only the items which are correlated with sales figures can accurately be predicted or forecast using the percent-of-sales method. Estimate items that have no concrete relation to sales figures using a different technique.

Next, forecast sales for the fiscal period in question. Because all projections in the percent-of-sales method of forecasting depend on relationships between financial statement items and sales figures, it is very important to get an accurate sales forecast.

The third step in the percent-of-sales method of forecasting is to forecast the values of certain appropriate financial statement items. You can accomplish this by using the sales forecast from the previous step in combination with the historical relation between the financial statement item and the sales figure.

Percent-of-Sales Method

1. Analyze historic financial statement data
2. Forecast sales for the fiscal period
3. Forecast financial statement items using sales forecast

If you need help creating an accurate sales pipeline, download the Goldilocks Sales Method.

percent-of-sales method

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Malcolm Baldrige National Quality Award

See Also:
Total Quality Management
Theory of Constraints
Activity Based Management
Capital Structure Management
Retainage Management Collection

Malcolm Baldrige National Quality Award

The Malcolm Baldrige National Quality Award is an award for excellence in quality improvement and quality management. It sets very high standards for quality. Furthermore, firms that win the award have demonstrated excellence in the quality of systems, processes, and consumer satisfaction.

The US Congress established the Malcolm Baldrige National Quality Award in 1987. As a result, only US firms receive Malcolm Baldrige quality awards; however, the award is recognized internationally. The US President gives the Baldrige award to the winning firms. Malcolm Baldrige was Secretary of Commerce from 1981 to 1987. Baldrige was a strong proponent of quality management at U.S. firms, so he helped draft the Malcolm Baldrige National Quality Improvement Act. As a result of his efforts, Congress named the award in his honor.

Several Malcolm Baldrige quality awards may be given annually to manufacturing companies, service companies, small and large businesses, education organizations, health care organizations, and nonprofit organizations. Furthermore, the purpose of the Baldrige award is to raise awareness of quality management among consumers. It also motivates U.S. companies and organizations to raise their quality standards and strive for excellence in quality improvement and management.

Malcolm Baldrige National Quality Award Criteria

Each year many companies apply for the Malcolm Baldrige National Quality Award and the winners are chosen based on seven criteria. The criteria are leadership; strategic planning; customer and market focus; measurement, analysis, and knowledge management; human resource focus; process management; and results.

Baldrige Criteria

Baldrige criteria includes the following:

1. Leadership
2. Strategic planning
3. Customer and market focus
4. Measurement, analysis, and knowledge management
5. Workforce focus
6. Process Management
7. Results

Baldrige National Quality Program and Baldridge Award Winners

For more information on the Malcolm Baldrige National Quality Program and to see a list of firms and organizations that are Baldrige award winners, go to: quality.nist.gov.

If you want to learn more financial leadership skills, then download the free 7 Habits of Highly Effective CFOs.

Malcolm Baldrige National Quality Award

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Capital Budgeting Phases

See Also: Capital Budgeting Methods

Capital Budgeting Phases

The phases of the capital budgeting process include the following:

  • Description of the need or opportunity
  • Identification of alternatives
  • Evaluation of the options and the relevant cash flows of each
  • Selection of best alternative
  • Conducting a post-completion audit of the projects.

Examples

To identify capital projects, refer to functional needs or opportunities. Although many are also identified as a result of risk evaluation or strategic planning. Some typical long-term decisions include whether or not to:

  • Buy new office equipment, cars or trucks
  • Add to or renovate existing facilities, including the purchase of new capital equipment/machinery
  • Expand plant or process operations
  • Invest in facilities for a new product line or to expand services
  • Continue or discontinue an existing product line
  • Replace existing capital equipment/machinery with new equipment/machinery
  • Invest in software to meet technology-based needs or systems designed to help improve process and/or efficiency
  • Invest in R&D or intangible assets
  • Build or expanding a foreign or satellite operation
  • Reorganize assets or services
  • Acquire another company.

Refer to capital investment (expenditure) decisions as capital budgeting decisions. They involve resource allocation, particularly for the production of future goods and services, and the determination of cash out-flows and cash-inflows, which need to be planned and budgeted over a long period of time. Because of the complexity of this accounting issues, get involved yourself right from the beginning. Guide them through the whole process.

Project Evaluation

Develop an objective methodology with the upper management. Then evaluate alternate capital projects on a reasonable basis. Consider both quantitative and qualitative issues and use the whole organization as a resource.

Marketing should provide data on sales trends, new demand and opportunities for new products. Managers at every level should be identifying resources that are available to upper-management that may lead to the use of existing facilities to resolve the need/take advantage of the opportunity. They should also be communicating any needs they/their departments or divisions have that should be part of the capital decision.

Financial analysts should also identify the target cost of capital, the evaluation of startup costs, and the calculation of cash flows for those projects chosen for evaluation purposes. If your financial analysts are absent, then refer to qualified external financial experts. By calculating the appropriate discount rate and calculating conservative cash flows, you are contributing to a critical part of this process. As a result, have an independent accounting firm look at the project/these issues impartially. Estimation bias can be dangerous.

Evaluate (predict) how well each capital asset alternative will do. Then, determine whether the net benefits are consistent with the required capital allocation. When doing this, consider that most firms face the scarcity of resources.

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Banks Tighten Credit Standards

An article in todays’ Wall Street Journal highlights how banks tighten credit standards across the country’s banking community. The author cites interviews with bankers indicating a change in the amount of risk that lenders are willing to take. Later in the article the author cites sources that say they haven’t seen a credit crunch. So which is it?

Banks Tighten Credit Standards

The short answer is that it depends on your local market. How is the local economy performing and how competitive is your banking community? Regardless of the current lending environment you can count on banks‘ underwriting to become more conservative. Why? Because the federal banking regulators will begin to tighten the rules for the entire banking community not just local markets.

Prepare for This Changing Environment

As a CFO or controller how can you prepare for this changing environment? The best way is to get your financial house in order. Improve your cash management reporting. Prepare a cash flow projection to give to your banker. Prepare a strategic plan to manage and predict your capital needs months in advance. Finally, take your banker to lunch. Let him know what is happening in your business so there will be no surprises.

By improving your cash management tools, forecasting your needs and communicating with your banker you can actually weather the coming credit crunch.

Download your free External Analysis whitepaper that guides you through overcoming obstacles and preparing how your company is going to react to external factors.

Banks Tighten Credit Standards

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