Introduction
At the beginning of each year, it is traditional and necessary to have up to date strategic plans and annual budgets. In this article I make reference to the 2023 strategic plans and annual budgets.
Strategic Plans
It is ideal to have documented strategic plans in order to give direction to the business. Strategic plans cover key aspects such as:
- Vision, mission, values.
- SWOT Analysis.
- Analysis of external factors affecting the business (PESTLE).
- Corporate objectives.
- Key sub or departmental objectives to support corporate objectives.
- Strategies to achieve the set objectives.
- Action plans and assignment of responsibilities.
Vision and mission
Vision represents the dream or where the business would want to be, for example being the leading food retailer or advisory firm in the country. The mission represents why the business exists or what the business stands for, for example insurance, banking, legal services, insolvency practice, medical supplies and many more. Values define a business’ culture.
SWOT Analysis
In the strategic plan a business should also carry out an analysis of its strengths, weaknesses, opportunities and threats (“SWOT”).
External factors affecting the business (“PESTEL”)
A business needs to analyse and document the external factors affecting it. These may include political, economic, social, technological, environmental and legal (“PESTEL”) factors.
Corporate objectives
These represent what the business as a whole or at corporate level wants to achieve within a set timeframe. For example, a company may target revenue of US$ 20 million, net profit of US$ 5 million or capitalisation of US$ 50 million. Essentially everything that is done within the business should be for purposes of achieving the set corporate objectives. There should be what is called “line of sight” between whatever is done and the corporate objectives.
Key or sub-objectives
These are targeted and serve to support attainment of the corporate objectives and vary from business to business or from time to time. Examples may include:
- Achieve a target market share of 20%.
- Raise funding of US$ 10 million.
- Increase production capacity by 50%.
Strategies to support objectives
These are meant to help deliver on the set objectives. They support the attainment of the desired outcomes. For example, to achieve a 20% market share a business may increase its marketing effort, develop new products, increase distribution network, vary its pricing policy, etc. On raising funding of US$ 10 million a company may target equity finance, borrowings or a combination of the two. Increasing production capacity may involve buying new machinery or employing more people depending on what the current bottleneck is.
Action plans
These are the actions or tasks that have to be performed for the strategies to work. It is common for those action plans to be assigned to particular functions or individuals in an organization. For example, to attain a 20% market share it may be necessary to have a marketing plan which clearly spells out the marketing activities, their timing, cost and people responsible.
For raising funding of US$ 10 million the following action plans may be relevant:
- Seeking potential equity investors.
- Approaching banks for possible loans.
As regards increasing production capacity the following action plans may be relevant:
- Researching into machine options.
- Securing of funding.
- Acquisition of the machine.
- Installation and commissioning.
Annual budgets
Annual budgets should be a part of strategic plans but focussing on a particular financial year. It covers key issues such as:
- Review of prior year performance
- Assessment of future outlook.
- Annual plans for that year.
- Planning assumptions such as inflation, exchange rates, interest rates, capacities, etc.
- Volume assumptions
- Projected prices
- Revenue
- Production costs
- Administration and other costs
- Funding options
- Cost of funds
- Taxation.
Key budget statements
Those used in business normally include the following:
- Production budgets
- Income statement
- Cashflow projections
- Statement of financial position
A Production budget shows production capacity, utilisation, expected volumes and may show cost of production.
An Income statement shows the budgeted revenues, costs and profit or loss. Most people are familiar with this. The statement also includes income tax.
The cashflow projection shows the projected cash inflows, outflows and overall cash position. Cashflows can be from trading, capital expenditure, investments, capital raising, etc.
The projected statement of financial shows the projected or future financial position as at specified future date. In the case of a company, it includes the assets, liabilities and equity.
Conclusion
In order to have proper long-term direction a business should have a documented strategic plan. Every financial year a business should produce annual budgets. These are usually approved by the directors of a company.
Disclaimer
This simplified article is for general information purposes only and does not constitute the writer’s professional advice.
Godknows (GK) Hofisi, LLB(UNISA), B.Acc(UZ), Hons B.Compt (UNISA), CA(Z), MBA(EBS, Heriot- Watt, UK) is a practising commercial lawyer, chartered accountant, insolvency practitioner, registered tax accountant, consultant in deal structuring. He is also a director with Investacare International (Private) Limited. He writes in his personal capacity. He can be contacted on +263 772 246 900 or gohofisi@gmail.com
