Actions for Discussion Issue: Balanced Planning to Achieve ST and LT Objectives

Question

Actions for Discussion Issue: Balanced Planning to Achieve ST and LT Objectives

This issue has three parts.

The notion of value-based management has become widely embraced by corporate managers. As the authors of a recent article entitled, “The Value-Based Management Commitment,” (see http://businessfinancemag.com/bpm/value-based-management-commitment) point out, the real problem associated with value-based management is the development of appropriate metrics to achieve behavioral changes. One challenge is that value-based management concepts never make it out of the finance department. After reading this article, answer the following questions:

1. What is the goal of value-based management? Is its focus on reported earning or shareholder/stakeholder wealth?

2. Describe the difficulties in developing performance measures and the role that the finance department should play in developing appropriate measures.

3. What is one of the major problems associated with the budget process as it is used by most companies in short-term planning?

Explanation / Answer

Ans 1) The ultimate goal of value based management is to enhance the wealth of stake holders/ shareholders by earning more on capital (invested by them) than weighted-average cost that capital.

Ans 2) The difficulties are mainly looking into either current value or future value. Focusing entirely on current value is shortsighted, but focusing entirely on future value neglects the real concerns of the present. The idea is is to bring the balance between these two.

Main role of finance in value based management is to provide provide people with the information they need to understand and improve their performance. Finance must provide rright information to the right people at the right time so that a quality decision can be taken. Information will allow the user to make the right decision for continuous, multiyear improvements, and they need it in time to make midterm corrections.

Ans 3) The major problem is that that Budget is aimed at current period, It completely neglects the future. Future values are sacrificed in order to push up the current values, and this is the biggest mistake happens in Budget. Another issue is Budget is set as plan and people know that they will be measured against this plan, hence they aim low in the budget to increase their success rate.

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