An important part of the planning process is positioning the organization to achieve its goals. Positioning is a broad concept and depends on gathering and evaluating accounting information.
Cost/Volume/Profit Analysis and Scalability - In a subsequent chapter, you will learn about cost/ volume/ profit (CVP) analysis. It is imperative for managers to understand the nature of cost behavior and how changes in volume impact profitability. You will learn about calculating break-even points and how to manage to achieve target income levels. You will begin to think about business models and the ability (or inability) to bring them to profitability via increases in scale. Managers call upon their internal accounting staff to pull together information and make appropriate recommendations.
Global Trade and Transfer - The management accountant frequently performs significant and complex analysis related to global business activities. This requires in-depth research into laws about tariffs, taxes, and shipping. In addition, global enterprises may transfer inventory and services between affiliated units in alternative countries. These transactions must be fairly and correctly measured to establish reasonable transfer prices (or potentially run afoul of tax and other rules of the various countries involved). Once again, the management accountant is called to the task.
Branding/Pricing/Sensitivity/Competition - In positioning a company's products and services, considerable thought must be given to branding and its impact on the business. To build a brand requires considerable investment with an uncertain payback. Frequently, the same product can be "positioned" as an elite brand via a large investment in up-front advertising, or as a basic consumer product that will depend upon low price to drive sales. What is the correct approach? Information is needed to make the decision, and management will likely enlist the internal accounting staff to prepare prospective information based upon alternative scenarios. Likewise, product pricing decisions must be balanced against costs and competitive market conditions. And, sensitivity analysis is needed to determine how sales and costs will respond to changes in market conditions.
As you can see, decisions about positioning a company's products and services are quite complex. The prudent manager will need considerable data to make good decisions. Management accountants will be directly involved in providing such data. They will usually work side-by-side with management in helping them correctly interpret and utilize the information. It behooves a good manager to study the basic principles of managerial accounting in order to better understand how information can be effectively utilized in the decision process. With these sorts of topics in play, it is no wonder that the term "strategic finance" is increasingly used to characterize this profession.
A necessary planning component is budgeting. Budgets outline the financial plans for an organization. There are various types of budgets.
Operating Budgets - A plan must provide definition of the anticipated revenues and expenses of an organization and more. These operating budgets can become fairly detailed, to the level of mapping specific inventory purchases, staffing plans, and so forth. The budgets, oftentimes, delineate allowable levels of expenditures for various departments.
Capital Budgets - Operating budgets will also reveal the need for capital expenditures relating to new facilities and equipment. These longer term expenditure decisions must be evaluated logically to determine whether an investment can be justified and what rate and duration of payback is likely to occur.
Financial Budgets - A company must assess financing needs, including an evaluation of potential cash shortages. These tools enable companies to meet with lenders and demonstrate why and when additional support may be needed.
The budget process is quite important (no matter how painful the process may seem) to the viability of an organization. Several of the subsequent chapters are devoted to helping you better understand the nature and elements of sound budgeting.