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Management Cycle

The Management Cycle Determines the Value Types

Every manager, whether group leader or CEO, follows the management cycle. He has to plan his area of responsibility. The results they need to achieve must be agreed as objectives with their boss and their own employees in terms of content and deadlines. This requires that target content and target levels be coordinated with the capacities to be provided (people, equipment, money) and with the available knowledge (know how). If investments, process improvements or training are necessary to achieve the objectives, the necessary funds must be budgeted and released. Insofar as project orders are to be provided for this purpose, these must also be planned.

Agreeing on objectives and planning therefore take place in parallel. Their mutual coordination is the prerequisite for the budget resolution (1 + 2).

Plan implementation can be “disturbed” by various internal and external influences. For this reason, the actual results must be measured periodically (3) and compared with the objectives and the plans. This is done in a plan to actual comparison (4). The purpose of this comparison is to find and implement corrective actions (5) which will enable improved achievement of objectives in the next reporting periods.

The integrated planning and control system (IPAC) must be able to map this generally valid management cycle. For this purpose, four value types must be stored in the system:

Plan, actual, variance, forecast (expectation).

Each manager should be able to recognize how well he has succeeded in achieving the plan in his area and what variances have occurred. Starting from the variances he considers which corrective measures could lead to achieving the original plan (and thus also the goal) in subsequent periods. The monitoring process therefore involves not only identifying variances, but also deciding on and implementing corrective measures.

The forecast helps in the management process to assess whether the corrections decided upon will be sufficient to achieve the agreed objectives by the end of the year or project, or whether further measures, possibly in other areas, need to be introduced. It is important to start from the expected effects of the corrective measures when preparing forecasts and not simply extrapolate planned or actual values from previous periods.

Variances in value between planned and actual figures may also be due to the fact that more or less work was produced in a period than planned. In such cases, the responsible manager rightly demands that actual costs be compared with the planned costs of the work actually performed, not with the original planned values. This requires using flexible budgeting in the management accounting system.

Given the requirements resulting from the generally applicable management cycle, management accounting systems adequate for decision-making must be designed in such a way that they:

- can present plan and actual figures in quantities, activities and values,
- enable target to actual comparison by valuing actual activities at planned cost rates (“should-be costs”) and comparing them with actual costs,
- enable each manager to enter into the system expected activities and values in his area (usually cost center) for the rest of the planning year or project in order to quantify his expectations (forecast).

From the management cycle It can also be derived that in the plans as well as in the actual analysis, only those items need to be listed that the responsible manager can directly influence and therefore be responsible for. The management accounting system should therefore not allocate fixed costs to cost centers or products if the receiver cannot personally determine the quantity and the content of the service on which the allocation is based (i.e., there should be no fixed cost allocation).

Main Questions of each Planning Stage

Mission, strategy and operation should answer different questions for different application scopes and timespans.

The Main Questions of each Planning Stage

Before implementation of its operational plan, each company needs to distinguish between four planning levels (or management levels), as in each of these levels a different question needs to be addressed.

Corporate policy (or mission statement) defines what the organization plans to become in the future and how it will distinguish itself from others. A company must consider the requirements of the various environments in which it operates and, if necessary, react to changes in these requirements. These adjustments should be reflected in the core values of the owners and senior management to determine whether the whole business can become what it wants to be.

As noted in our book (Management Control with Integrated Planning), the basic corporate policy statements are documented in three corporate concepts: the performance-based concept, the financial concept, and the social concept. The performance-based concept should be in line with the technological and market environments. Elements of the financial concept are profitability to be achieved, financing structure, use of results, maintenance of liquidity. The social concept sets out the guidelines on topics such as management methods, employee development, and conduct towards government, associations and competitors.

Strategic planning defines which markets are to be served, with which products and services, which technologies appear to be decisive for implementation, and in which price segments one wants to offer. Additionally it is necessary to identify which existing internal potentials for success must be enhanced and which new ones must be built up in order to reach the wanted market positions.

In operational planning the results to be achieved are recorded in terms of content and deadlines. The question is therefore how and by when the targeted market positions are to be achieved. In operational medium-term planning (usually 2 – 5 years), the focus is on building up and expanding the success potentials required for strategy implementation. The planning contents are often structured according to functional areas, because the potentials have to be built up there (personnel, market development, suppliers, plants, IT, financing). To document these plans, it is advisable to define functional concepts. In this way, it can be tracked whether the development of potentials is progressing properly and on schedule.

In (operational) annual planning, the results (objectives) to be achieved in the planned year are derived from the strategies and the functional concepts and transferred to the sub-budgets. This makes it clear to everyone involved what contributions they should make to ensure that the organization as a whole achieves its goals. Finally, the content-related plans and objectives must also be represented in terms of value, so that it is clear whether the plans are financially feasible. This is done in the cost, activity, revenue and profit and loss account (via management accounting).

Because customers order products in different quantities and at different times than planned, because unexpected plant downtimes occur, and because employees can be absent or projects delayed, tactical planning and control during the year is necessary. The majority of the data required for planning is managed in the ERP (Enterprise Resource Planning) systems. The comparison of actual data with planning supports employees and managers in meeting their annual targets.

Early Warning

Sustainable organizations need to identify opportunities, avoid or mitigate risks, and find and assess new market potentials. Milk has been around since time immemorial. Who still buys raw milk directly from the farmer (and likes to drink it)? Supply and consumption needs have changed, as have the forms in which products and services are presented.

Early warning

Early warning is intended to help an organization to recognize emerging or at least presumed developments in the business environment early enough to be able to react. It is about finding opportunities for future business fields and identifying threats that could limit or even prevent the success of existing and future business.

Early warning cannot create certainty. However, it should lead the managers of an organization to consciously deal with ongoing or emerging changes in the various environments and take the findings into account in their strategic and operational planning decisions.

Following and evaluating new developments in terms of needs, attitudes, available materials and services, legal requirements and political trends is not only very time-consuming; there is also no guarantee that nothing is forgotten or fails to appear on the radar.

In order to limit the diversity somewhat, two approaches are used in our book to identify the relevant developments in a structured way and to prepare them for the planning process:

- General observation of focal points in reporting on the various sub-environments
- Derivation of specific early warning indicators that could influence the success of existing and future own strategic business areas.

In summary, the following picture emerges:

Early warning should help to define the strategies with their basic parameters and to determine the resulting requirements on the functional concepts.

In addition to the strategic insights, the early warning system should disclose which internal developments are to be realized by when so that the potential for strategy realization is available in good time.