Initiative and cost
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Strategic planning initiative and its cost
Abstract
The paper includes the meaning of strategic planning initiative. It also includes how it affects
the financial planning of the company. Costs involves in initiative due to risk involve in it has
also been discussed. How it is reported in annual reports and what may be the impact on sales
due to initiative taken by the management has also been discussed.
Text
Strategic planning in most simple words means that top management has to consider the whole
organization as one unit. It means that they have to make decision which is beneficial for whole
organization not to only one department or one unit. When company is doing financial planning
the management of the company has to be strategic. It can be understood with the help of
following example.
For example, if marketing department forecasts that it can sell 50,000 units and company
believes that all resources are available to meet the target then the budget will be made for
50,000 units. But if some of the resources are in scarcity, say production capacity is limited to
40,000 units then company has to make budget for the achievable target. Then management has
to decide that planning to be done for 40000 or 50000 units.
Therefore it is necessary to make sure what is achievable to bring synchronization among all
departments of the organization. If the synchronization is not done may create conflict between
two departments.
Top management has to look whatever the sales forecast has been given by the marketing
department it must be factual the figure might have been cooked and they are not achievable. It
they are achievable then there is a question of sustainability of the sales. Is the forecast for
temporary period or it is for longer period. If it is for temporary period then management may
drop this option or may outsource it and if they are for longer period then the management does
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have two options, either to expand the capacity or outsource it for current period and then expand
the capacity gradually.
Strategic planning initiative may include the finding new market, innovation of existing
production process, introduction of new product/s and improvement in the present technology
available.
Every activity of initiative will involve cost. Cost has been defined as “Cost is forgoing,
measured in monetary terms, incurred or potentially to be incurred to achieve specific objective.”
(Page # 39 , Cost Accounting, Planning and Control, by Matz and Usry 7th edition. According to
this definition the cost may be and expense or cost may be an assets. The initiative may have
impact on assets as well as expenses. It may involve huge cost while doing the research and
development but it may cut down your expenses, due to improvement in the production process
or introduction of new technology or increase in sales in terms of bulk quantity.
As the initiative involves huge cost and there is a risk that it may or may not be successful, it is
not successful then all cost has to be shown as expense thus reducing the profit for that period.
And if it is successful then it is permitted to capitalize. This capitalization will not reduce the
profit but it may decrease the future cost of the product. As all these information has the
material impact on the financial position of the company, therefore it has to be reported in annual
reports as per following clause of IAS 38


Charge all research cost to expense. [IAS 38.54]
Development costs are capitalized only after technical and commercial feasibility of the
asset for sale or use have been established. This means that the enterprise must intend and
be able to complete the intangible asset and either uses it or sells it and be able to
demonstrate how the asset will generate future economic benefits. [IAS 38.57]
Whether it is successful or not company has to arrange the finance to support its initiative.
Therefore it has to include it in the financial planning by including initiative in cash budget.
Future earnings may also be affected by the success of the initiative; it may boost or put down
the market value of the company’s share. It may also hurt or give benefit to the financial
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planning of the company, as they may or may not get the future finance easily, based on the
future financial position of the company, which is related to the success of the initiative taken.
Sales of the company is also affected by the initiative if the company has introduced new product
or improved product after research and development then the company sales will go up. And if
company has not taken the initiative and its competitor has taken the initiative and taken away
the market share by introducing new product then the company’s sales will go down.
Apart from success or failure risk, the other risks which are involved in initiative may be
commodity rate risk, interest rate risk, foreign exchange rate risk, equity risk and operational
risk. If company’s research and development activity involves the use of materials or equipment,
there is always a risk that the purchase price of the commodity may fluctuate. And if they are
imported from abroad, then apart form commodity risk foreign exchange risk is also involved. If
the initiative has been financed with foreign loan then it involves both foreign exchange risk and
interest rate risk, if loan has been taken under floating interest rate scheme. There is always a
chance of operational risk, it means that whatever the goods or equipment purchased may be lost
during delivery or the usage of material for research purpose may be more than expected. If the
initiative taken is not successful then it may affect the market value of the firm, which known as
equity risk.
All the above discussed risk has some cost. Some of the risks may be reduced or eliminated by
following certain techniques, such as forward booking of currency rate, future booking of
material and equipment, interest rate swapping and insurance for the goods purchased or
imported. Cost in the form of charges to cover this risk has to be paid.
It means despite the risks involve in initiative a company may not ignore it. Company has to do
cost benefit analysis before starting an initiative.
Reference
Cost Accounting, Planning and Control, by Matz and Usry 7th edition
International Accounting Standard 38