Planning and budgeting
Peter Lyman
IS208
April 9, 2003
Budget & planning topics
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Use of budgets as project planning and
management tool.
How for-profit and non-profit project
budgeting differs, and why.
Decision making with budgets & financial
statements.
Case studies: Amazon.com & The
University Library.
Developing business plan and budgets for
your project.
Today’s objectives
A. RECAP: IT and strategic
management issues
B. Accounting as a planning and
management tool.
C. Analyzing business models
A. RECAP: IT and strategic
management
“We still lack a well-defined model or
theory for the kind of organization
now emerging. So managers are
confused over the enormous task of
restructuring operations for a new
era.” Halal
Therefore, managers must balance
between today’s operations and
strategic planning for the future.
RECAP: Venkatraman on
information management
 Management
is evolving from a command
paradigm to the communications paradigm; from
hierarchy to flatter organizations, with more
local team autonomy; management by
coordination is replacing command and control
 Information management has rationalized the
organization, but real time network
communication is changing it fundamentally -from hierarchy to enterprise (networks of self
managed enterprises that operate like an
internal market system).
Budgeting is the language & medium
of coordination.
B] The New Book Publishing
Company financial statements
This is what the Board of Directors would
read quarterly, to discuss with the CEO
and executive management what’s
happening.
Budget statements are a tool for 1)
planning, 2) motivation, 3) evaluation, 4)
coordination, 5) analysis, depending on
the situation.
The Balance Sheet
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Assets = Liabilities
Total assets = current assets (cash,
receivable accounts, inventory) + noncurrent assets (royalty advances +
equipment)
Total liabilities and equity = current
liabilities (accounts payable, accrued
royalties) + notes + stock + retained
earnings
[ see Livingstone p. 231 ]
The pro forma (projected)
income statement
Gross profit = revenue (sales) - cost of
sales (royalties, paper, print, bind,
editorial production)
Operating profit = gross profit - operating
expenses (marketing, sales, fulfillment,
editorial acquisition, overhead)
Bottom line (net profit) = operating profit
- taxes
[See Livingstone p. 232]
What story does the
balance sheet tell?
Accounts receivable falling behind
forecast
 Inventory higher than forecast
 Royalties paid are lower
 Equipment costs higher, debt higher
 liabilities lower (but is this good?)
Total: the company’s growth is
slowing
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Why?
If you were reading the budget, how
would you figure out what the
source of the problems were?
What questions would you ask?
The income statement. Bottom line
profitable, but profits declining over time.
Why?
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Sales = Book line A ahead of forecast
but declining, lines B, C and D behind
forecast.
Cost of sales = Editorial production
lower, therefore costs of royalty and
paper print bind lower, but therefore
fewer products to sell.
Operating costs (marketing, editorial
acquisition, overhead) higher than
forecast, but not producing sales.
The illusion of health:
Decline of costs helps the bottom line, but
reflects falling sales.
You are the CEO. What
questions would you ask?
Is the problem the sales force?
 Is the problem editorial acquisition - the wrong products?
 Is the problem marketing?
 Is the problem environmental
factors: competition? supply chain
problems (distribution, etc)?
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C. Business models.
1. The value proposition.
2. Technological innovation.
3. The competitive
environment &
differentiation
4. The revenue model.
5. Source of investment
6. The competent team.
1. The value proposition.
How (exactly) does IT innovation add
value?
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To whom does it add value? Think in terms
of value chain.
Who is the customer? Think about internal
and external markets
Next: What is Amazon.com’s value
proposition? The University Library?
Branding & differentiation...
The brand: Why will the customer
adopt your solution / return?
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Are online transactions more cost
effective and/or economies of scale or
scope and/or larger revenue?
Differentiation: How will this
business stand out? What will
make it one of the best in this
market?
2. Technological
innovation.
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Means/ends. Is the technology about
reducing costs or increasing revenue?
Or developing competency? Or
competitive factors? Or quality of
service? Or what?
How can the costs & benefits be
measured? When?
Why is this innovation likely to succeed?
3. The environmental
scan.
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What is the competition doing?
Are online extensions of brick & mortar
business stronger (Amazon vs. Barnes &
Noble)? Or, are they less able to innovate?
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Might competing value chains emerge?
(Is our business model sustainable?)
What do we have to do to learn
about/develop competencies in future
innovations?
4. The revenue model.
How does your innovation control
costs and/or create economies of
scale and/or scope and/or produce
revenue compared to traditional
models?
What are the costs of building,
implementing, sustaining the new
technology?
5. Investment source
IT projects are investments.
Understand the business model,
culture and decision making process
of your organization to figure out
the politics of IT investment.
(a) internal reallocation
(b) loans (what cost of funds?)
(c) venture capital
Reallocation
Operating budgets are cut to
create one-time or recurring
funding for investment
 Innovation in one place creates
reduction of resources (people,
projects, money, attention) in
others. This may become a
diffusion of innovation problem.
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6. The team: attracting
and retaining talent
How do you find people who can
function in an environment of
continuous change?
 How do you recruit & retain them?
 Note: The team is often the key to
finding investors, since every other
aspect of the business plan
continuously changes.
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Who makes the decisions?
Does the organization have a strategic
decision making process?
 If so, how does it work?
 If not, how do IT projects get authorized
and implemented?
 What and who determines the success of
an IT project?
Note: Institutional history and culture are
as important as org charts (“informal
organization”).
Next. For profit budgets.
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Dan Greenstein talk Thursday –
will/should CDL replace campus library?
Monday. Read and analyze the Amazon
financial statement in the readings.
Prepare to discuss “Does Amazon have a
financially sound business model? What
are the strengths and the weaknesses?”
Refine your project organizational
analysis to include analysis of the
business model and work on your
‘economic feasibility statement.’