PREFACE

Though many companies can devise reasonable strategies, few are able to follow through on them due to a lack of ability in the areas of planning and control. If operations throughout a company are not run through a detailed planning and control process on a regular basis, it is quite likely that the corporate direction will eventually become less focused, resulting in reduced levels of profitability. Further, a missing planning and control function yields less attention to costs, so that expenses gradually increase out of proportion to sales levels, leading to reduced profits. This crucial area of corporate expertise falls squarely within the realm of the controller, who can make a major contribution to the well-being of the corporation by enhancing his or her level of skill in planning and controlling a variety of company functions. A Controller's Guide to Planning and Controlling Operations fills that need by describing key planning and control activities in every major area of the company, ranging from sales and manufacturing to the management of cash, receivables, and inventory.

The book places particular emphasis on the need for budgeting and the proper construction of budgeting models in every chapter, so one can devise a coherent framework of financial plans that can subsequently be used as the basis for ongoing corporate control systems. The book provides valuable information not just about the mechanics of budget creation, but also how to determine if the budget is reasonable, based on a variety of ratios, historical trends, capacity planning, staffing levels, and relationships with other parts of the budget model. This additional budgeting analysis typically is the difference between a usable budget model and one that has little basis in reality.

Each chapter also notes the types of controls needed that are unique to each functional area, and their impact on corporate results. This practical controls advice allows the controller to determine the appropriate mix of controls needed to ensure that operational results stay within expected boundaries, or at least that significant variations are promptly spotted.

Chapter One reveals the proper role of standards, how they may be set and by whom, and why they are so useful in controlling operations. Chapters Two and Three address the planning and control of the sales and marketing functions, including the analysis of sales, forecasting techniques, setting sales and marketing standards, and determining product pricing levels. Chapters Four and Five cover manufacturing—planning for direct material and direct labor costs and standard setting, as well as coverage of fixed and variable expenses, activity-based costing, and overhead allocation techniques. Chapter Six describes the unique characteristics of the research and development area, noting such points as budget formulation, project selection, and how this key area impacts corporate earnings. Chapter Seven completes the review of all key functional areas by addresses general and administrative expenses—its primary components, how to budget for them, and what control systems can be used thereafter.

The book then shifts to the planning and control of a number of key asset, liability and equity areas. Chapter Eight describes the extreme importance of cash management and the role of the case forecast in that effort, as well as how to control cash levels and invest them on a short-term basis. Chapter Nine describes how to create a budgeting model for accounts receivable, while also addressing the key control areas of granting customer credit and conducting collection activities. Chapter Ten describes a number of budgets that must be created for the proper planning of inventory, while also noting the impact on inventory of just-in-time and material requirements planning systems. Chapter Eleven describes the capital budgeting process, how to evaluate capital projects, the methods available for doing so, and how to monitor their progress. Chapter Twelve shows how to measure and control liabilities, determine the proper level of debt, and how to build a liabilities budget. Finally, Chapter Thirteen describes earnings per share, how to calculate the cost of capital, the considerations involved in issuing dividends, and how to plan for the correct equity level.

In short, this book improves the controller's toolkit of planning and control techniques with practical advise on the creation of usable budget models and in-depth discussions of the controls needed to ensure proper compliance with those budgets.

Steven M. Bragg

Centennial, Colorado

February 2004