Principles of Successful Organisations - Essay Example

The term planning may be broadly defined as “the selection and relating the facts and making and using of assumptions regarding the future in the visualization and formalization of the proposed activities believed necessary to achieve desired result” (Terry, 1988). If the above definition is analyzed, it can be understood that planning is an activity which involves the future of an entity. The analysis of the present and to be prepared for the future is the essence of planning. Planning is a continuous and pervasive activity that is essential for the success of an organization. For a small business, there are so many reasons which make a plan very valuable for its survival and growth. The primary reason is that the plans can help us to perceive opportunities. Awareness of the opportunities is not strictly planning process. But, the awareness of the opportunities is essential for making plans. When there is a mechanism for efficient planning in an organization, it includes collection of information from the market intelligence sources. When the organization is effective in planning it will be in the constant look out for information about new opportunities. Both the factors are reciprocative in nature. When there is good planning the organization is receptive to the opportunities in the environment. When it is receptive to the opportunities created by the changes in the external environment, it there is room for more planning and implementation. Thus, planning makes the organization to be on track towards the achievement of its strategic goals, but it can be made effective only when we have information. Collection of financial information and preparation of financial statements is a way of presenting information is a very crucial step to survive and grow in the future. When we take into account only the present cash position we cannot do planning for the future. The next aspect that has to be understood is the fact that accounting statements and calculation of profits is useful to a group of people than we think, with a different meaning for each group. For the managers it is very useful for making effective decisions. For creditors, it is very essential to assess our performance, the suppliers are concerned whether we can pay for the purchases. Even if the manager is not concerned about the profit position of the organization, the information about our profits and profitability is very essential to a number of stakeholders. Bolten,(1981) mentions that “Any organization has to exist in an environment supported by the stakeholders. Providing information is way to maintain transparency which is the first step towards building trust and credibility.” Honest calculation of profits and presentation of the same will help the company in adversity and also in times of progress. All organizations must have objectives in the long run and short run. Achievement of the objectives mainly depends on financial planning and control throughout the organization. Managing an organization is a very complex task which requires a careful coordination of various resources. The resources have to be used in the most optimal way to increase their efficiency. If the profits are not calculated and analyzed, the management will not have any idea about the amount of resources uses, the quantum of utility, the efficiency ratios, etc which is very important for managerial control. When there is no calculation of profits, the company cannot do any planning and if there is no planning then there is no control of the resources. This will lead to inefficiency in the long run. For any business entity the profit calculation is the fundamental effort that will act as a guide for development. Cash is a liquid asset owned by a business which enables it to buy goods and services. Profit is a surplus arising from trading, it is therefore possible for business to be selling goods at a higher price than they cost and to be making profits but of creditors have not been paid, it is said to be having cash flow problems. Cash is a part of working capital. A business must look carefully at its working capital position, rather checking just the cash position, so that its assets are used more efficiently. If the business is into managing its working capital and concentrating only on the cash position, then it will not be able to innovate. It will be hard to find resources to make exploit new opportunities. An organization must ensure that it has enough working capital to carry out its plans and ensure that the cash coming is sufficient to cover the cash going out because cash in a part of working capital. To have a smooth flow the company has to consider credit insurance against customers who cannot pay, plan purchases from suppliers to coincide with payments from customers, pace new orders so that the business is into overstretched. If the management is considering only the current cash reserve position, but not a scientific approach to manage its working capital then it is not going to be running safe in the future. Calculation of profits and profitability statements are the first step towards collection of information which can be used for analyzing working capital utilization. In the era of globalization, the organizations across the world are facing the competition from products made in emerging economies such as India and China. The competition created by product imports from Asia has changed the dynamics of competition. It has caused organizations to focus more closely on their production costs. Knowledge of cost factors and the elements of cost is very crucial for any management to serve its customers effectively. to increase the profits, the company can either increase the prices or can reduce the costs to increase the profits. But increasing the prices of products is not always the best option in the current global economic conditions. Hence, it becomes critical that the management has to have an idea about the cost of production and profits it makes. The market in which the organization is operating at present is contestable, and hence, any new competitor can enter the industry and can claim a share in our profits. Negligible competition and heavy profits will attract new players into the industry. The company can take advantage of its leader position by creating a cost synergy for itself. This synergy will make the company to cut costs and reduce the prices, which itself will become a barrier for new entrants. The management should have sufficient information regarding the costs and profits if it wants to survive the competition. Also calculation of profits and cash flows is important to analyze long term investment options. When the company makes a long term investment decision it has to analyze it very carefully because decisions made are mostly irreversible and the impact of the decision will be felt by the company for a long period of time. Hence, there are a number of techniques available for investment appraisal and all of which require calculation of profits. Amram(1989), who is a noted expert in capital budgeting opines that, “in business management, capital budgeting decisions pertain to assets which are in operation and yield a return over a period of time. There are often situations where the management has to involve current outlay of resources in return for an anticipated flow of future benefits”. The capital budgeting decisions are pertaining to investment decisions which will create assets which will in turn create products/ services which create the profits. The long-term investment decisions includes the mission and visions of the company and of strategic importance. Hence, calculation of profits is more justified. David Needham(1997) regards “If the organization wants to survive and grow to become a market leader, it is very essential that the competitive position has to be strengthened. To strengthen the competitive position, the management has to make strategic decisions which will make the organization more proactive. In every organization people need to make judgments about the financial aspect of their activities”. Also, the management has to make decisions which help them to exercise some element of financial control over the areas of operations. A manager has to collect financial information and create financial profitability statements to monitor the financial condition, evaluate the need for increased/ reduced productive capacity, determines the additional/ reduced financing required and ensures that the goals of the organization are achieved. It is not the mere maintaining of cash reserves, but the manager has to understand the entire gamut of the task involved in creating wealth for all the stakeholders. A manager should understand that management of cash is not a task that is achieved in vacuum, but it is the relationship of financial management with that of other disciplines of management that ensures profitability and wealth in the long run. Sources 1. Amram, M. and N. Kulatilaka (1999) "Real Options: Managing Strategic Investment In An Uncertain World", Harvard Business School Press, Boston 2. Bolten, S.E and Conn R L(1981) Essentials Of Managerial Finance, Houghton Mifflin Company, Boston 3. George, R. Terry (1988) Principles of Management, Richard D Irwin: Homewood 4. Needham, D and Dransfield, R(1997) Understanding Business Studies, Stanley Thomas, Glasgow Read More