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Planning is a means of directing the members of the organization to accomplish the goals of the firm.

General Planning Principles

The lowest level of the organization should be involved in the planning process to facilitate acceptance of the plan and allow for meaningful input from the employees who are most aware of the operations details. For instance, a production line worker has valuable input into how many units can be produced in an hour with the existing equipment without incurring overtime costs. Plans should also take into consideration the known available resources of the firm. Employees will be quickly discouraged if asked to achieve goals that are not achievable as a result of a lack of resources (for instance, a production schedule that exceeds the capacity of the production lines). Plans must be flexible and subject to change as conditions permit, should be limited to the most likely future events, and it should be understood that no plan can identify every possible outcome.

Planning Premises

When planning for the future, companies must assume some things about the expected conditions. The plan's premises are the underlying assumptions about the expected conditions and environment under which the plans will be executed. Assumptions related to the economic environment may include assumptions about the expected future interest or inflation rates. Assumptions about competitor actions may be necessary as well. For example, if an airline has a long-term plan to increase flights in a particular market by lowering fares, the company must identify other airlines that also serve this market and make assumptions about their competitive response.

Types of Plans: Budgets

Plans can be made for various time frames. Short-range plans can be as short as one month and include production budgets, materials budgets, and cash flow projections. Long-range plans typically span from 1–20 years and include capital budgets and research and development budgets.

Budgets are one type of plan that the management accountant assists in preparing. The controller of the organization is in charge of the budgeting process, while department heads are responsible for preparing the budget for each department. Budgets are quantitative plans of expected results and can

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be used as control devices. They integrate and quantify the objectives of the entire organization, present plans in a logical manner, and serve to coordinate the activities of all organizational units. Budgets are a useful tool in communicating the organization's goals in a numerical manner.

Budgets may be developed for several purposes including cash flow, revenue, and expense projections and capital plans and production needs. Production budgets must consider the number of production lines needed, workers per shift, and plant capacity. Materials budgets must consider availability and sourcing of materials. Cash flow budgets must consider the timing of cash flows.

Objectives and Goals

The words objective and goal are often used interchangeably. If there is a distinction, it is usually that objective describes what the organization is trying to achieve overall, whereas goal describes expected outcomes at the individual or departmental level. One common goal of organizations is to achieve profits in an ethically responsible manner.

Objectives and goals should be clearly stated in specific terms and should be able to be easily communicated. For managerial accountants, goals and objectives include meeting specific profit objectives and return on equity. It is also helpful when the organization's members accept these objectives and goals. One way to gain employee acceptance is by asking lower-level employees to assist in developing the goals and objectives.

Organizations frequently have goals and objectives that conflict. For instance, a firm's objective many be to achieve maximum profits, which involves growing the business rapidly. This may conflict with the goal of long-term profits. Another conflict may arise when the organization wants to achieve rapid growth but also maintain a motivated workforce. Pushing the sales organization to achieve a high level of sales may be demotivating if the market cannot accommodate such rapid growth. The company's senior management must resolve these conflicts, while taking into consideration the input of their management team with support of the board of directors.

Policies, Procedures, and Rules

The next second step in the planning process, after the development of goals and objectives, is the development of policies, procedures, and rules. These

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elements need to be in existence at all levels of the organization and can stem from the intermediate plans.

Policies are general statements that help guide employees' thinking and decision making and may include preferred methods for dealing with particular situations. Policies can be explicitly defined in writing or simply implied in the actions of management.

An organization may have a written policy that states that all production department employees will be on time for work and may even specify the consequences of arriving late. The same policy could be implied if the supervisor is always on time for work and walks through the department to ensure that all employees are on time and inquires about absent employees. Indirectly, this policy has an effect on accounting, as tardy employees result in a loss of productivity, which will ultimately lead to lower profits for the firm.

All policies need to be clear and comprehensive and involve known principles of behavior. Difficulties can arise if the policies are not understood, not properly communicated, or are outdated. It is important that departmental policies are consistent with company policies and are consistently enforced throughout the organization.

Procedures typically provide a system of steps that should be followed in a particular order to accomplish a task. Procedures can facilitate efficiency by ensuring standardization throughout the organization, including the training of new employees. For instance, a restaurant may have a procedure that tells a new waitperson the steps to take during first contact with each customer: greeting customers, taking drink orders, and notifying customers of any special menu items. Accounting department procedures may require that the accounting manager sign off on any journal entry entered by the department. Procedures need to be precise but also flexible enough to accommodate most situations, and they are typically published in procedure manuals.

Rules are specific guidelines that restrict the behavior of employees. For instance, a rule may be that a department store will not offer cash refunds for returned items. One accounting department rule is that the accounting department manager is the only person who can have direct contact with an outside auditor. Rules do not allow for discretion or flexibility and are sometimes thought to be too rigid.

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Causes of Failure in Planning

One of the biggest causes of failure in planning is the lack of commitment to the process. In some organizations, the start of the planning season elicits a collective groan from management that sets the tone for the entire process. Although planning is often seen as unavoidable, it is important for management to convey the importance of the process, particularly the accounting department. The accounting department must communicate the importance of building a good plan and explain the final plan after it is reviewed.

Other causes of failure are not committing the necessary time to the process, lack of meaningful objectives, and inconsistent assumptions, which can result in budgets that are not integrated across the organization. If top management does not set aside time to review the plans as they are developed, the middle and lower level managers may perceive that the planning process is not valued. In addition, the first step in developing a master budget is typically a sales forecast, which determines the production needs of the firm and culminates in a production budget. If the sales forecast is adjusted, the production budget must then be revised as well.

Another cause of failure is too much reliance on past information; history does not always repeat itself. Although historical budgetary information is often useful as a starting point, the new budget must consider any differences that will occur in the future. A lack of control can also derail a plan. It is important that the final plan be communicated to the managers at all levels and that they are held accountable for its outcomes.