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Chapter 10 - Strategy and the Master Budget
10-1
Chapter 10
Strategy and the Master Budget
Teaching Notes for Cases
10-1: Emerson Electric Company
Background
• Emerson is an $8 billion company.
• Its successful strategy is efficient, quality, and low cost production. R&D does not get a great deal
of attention from top management.
Planning Process
• Top management sets sales growth and return on total capital targets for the divisions.
• Each fiscal year, from November to July, the CEO and several corporate officers meet with the
management of each division at a one or two day division planning conference:
▪ Prior to its division planning conference, the division president submits four standard exhibits
to top management:
1. Value measurement chart
2. Sales gap chart
3. Sales gap line chart
4. 5-back-by-5-forward P&L
• The division president and appropriate division staff then meet with top management to present a
detailed forecast for the coming year based on the result from the division planning conference and
conduct a financial review of the current year’s actual performance versus forecast:
▪ Contingency plans for several lower levels of activity also developed to protect profitability
at lower sales levels.
▪ However, changes to the division’s forecast are not likely unless significant changes occurred
in the environment or in the underlying assumptions. Changes in the forecast must be
approved by top management.
• In August, the information generated for and during the division planning conferences and fiscal
reviews is consolidated and reviewed at corporate headquarters by top management.
• In September, top management presents the corporate and division forecasts for the next year and
the strategic plan for the next five years to a conference attended by top management and top
officers of each division.
Reporting
• Each month each division president submits to Office of the Chief Executive the President’s
Operating Reporting (POR).
• Corporate top management meets quarterly with each division president and the division’s chief
Chapter 10 - Strategy and the Master Budget
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financial officer to review the most recent POR and monitor overall division performance.
Compensation--Base salary and “extra” salary:
• An extra salary amount is established at the beginning of the year.
• The executive of a division earns the extra salary if the division hits targeted performance.
▪ The targeted performance consists of primarily measurable objectives such as sales,
profits, and return on capital.
▪ The multiplier ranges from 0.35 to 2.0.
▪ Other factors considered include inventory turnover, international sales, new product
introductions, and an accounts receivable factor.
• Stock options and a five-year performance share plan also available to top executives.
Question 1: Evaluate Chief Executive Officer Knight's strategy for the Emerson Electric Company.
In view of the strategy, evaluate the planning and control system described in the case. What are its
strong and weak points?
• Planning at Emerson is top-down with CEO Knight actively involved from the start of the
process.
• The first four exhibits capture the essence of the planning system.
▪ The value measurement chart contains comparisons in five-year increments for
investments, operating profit, return on invested capital, sales, operating capital turnover,
capital charge, and economic profit.
▪ In addition to NOPAT, Emerson uses a measure of "economic profit".
▪ The chart reflects the sales and return on total capital targets set by top management.
• The division sales targets that are set by top management are optimistic. The purpose of the sales
gap chart and the line chart is to identify the sources of five year sales growth and to highlight the
sales shortfall. Exhibit 2 illustrates a 15% target growth rate for sales which results in shortfalls
for each year. Of course, division presidents must provide action plans for closing the gap.
• The comparative profit and loss statements for eleven years in Exhibit 4 seem like overkill. One
advantage is that they show trend. Included at the bottom is the return on total capital.
• The strength of the Emerson process is that it gets commitment from the division presidents.
Certainly, they participate in the planning process to a great degree. There is no reliance on
planning staff. Division presidents are given full responsibility and accompanying authority.
• The linkage between the plan and the detailed forecast (the one-year operating budget) is
extremely tight. Top management must approve any changes from the approved plans. In
addition, divisions are expected to prepare contingency plans at lower level of sales. Top
management may request that a division switch to contingency plans if forecasted performance
falters.
• The key document to the control process is the president's operating report (POR). This represents
an unusual approach to monitoring performance. There are only six items of data on this report:
Chapter 10 - Strategy and the Master Budget
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intercompany sales, sales, gross profit, SG&A expenses, operating profit, and earnings before
interest and taxes. Monthly reporting during a quarter can lead to a change in the forecast data for
that quarter. The CEO and senior managers review performance.
• Divisions are expected to meet the annual forecast performance.
Advantages include heavy involvement of division presidents in the planning process and the cost-
reduction programs:
• There seems to be a lot of discussion and interaction between division managers and top
• Both the short-range and long-range compensation systems reinforce the planning and control
system.
Disadvantages include:
• The possibility of overly optimistic top-down directives on sales and return on investment targets.
• There is no explicit data on market share or other non-financial measures of performance.
• The cost of capital may not be adjusted for risk when applied to different divisions.
Question 2: What role should the eight business segment managers have in Emerson's planning and
control system?
When questioned on the role of the new business segment managers, a top Emerson official remarked that
it was a good observation. Evidently the planning system does not explicitly involve the business segment
managers. What might their role be? Emerson consists of forty divisions organized into eight business
segments. This is an average of five divisions per business segment. The case says the reasons for this
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Case 10-2: Letsgo Travel Trailers
The Letsgo Travel Trailers case is designed to prompt student discussion of the interactions between
various functional areas of the company, for example, the impact of the sales projection and desired
inventory levels on production. The case also allows the instructor to discuss both short-term and long-
term strategy. In the short term, Letsgo’s major problems occur because of an uneven sales and
production schedule, which may lead to product-quality problems. The use of alternative approaches to
production planning and cash management is also introduced in the case.
Letsgo manufactures travel trailers used primarily by young families and retirees interested in a light,
low-cost trailer that can easily be pulled by a mid-sized family car. The travel trailer industry is expected
to experience high growth rates (in the case, at least through 2020) due primarily to the aging “baby-
boomer” population. Yet the environment is changing, and many factors will affect Letsgo Travel
Trailer’s projected sales growth rate. Changes in the aluminum industry and increasing demand for light-
weight construction materials will affect Letsgo’s ability to access a critical raw material. Demographic
trends and changes in the demand for and production of aluminum will have a profound effect on the
future success or failure of Letsgo.
Budgeting, approached as a team effort, can be a powerful coordinating tool. Effective cooperation
among functional areas (i.e., sales, production, purchasing, and finance) would allow Letsgo to negotiate
lucrative prime vendor contracts and implement JIT. Unfortunately, Letsgo currently approaches
budgeting as a mathematical exercise to be performed by accounting, based on narrowly viewed sales
projections. Furthermore, Newman, the company president, does the sales projections with little or no
mention of outside resources or input from Letsgo’s functional managers and line employees.
In the longer term, Letsgo will inevitably face increased outside competition as the desirability of
marketing to the growing population of baby-boomer retirees increases. The case allows discussion of
sales projections and the need to identify both the underlying demographic factors that may affect future
sales and the more finite market forces, such as barriers to entry and lower-cost manufacturing threats.
Suggested approaches to the case questions follow. The instructor need not take the suggested
approach explicitly for all questions, however, since the case allows numerous opportunities for the
instructor to guide the class discussion into more or less depth on many of the case questions. Please refer
to the case addendum in which we provide a recent article from The Wall Street Journal. This article can
be used to update some of the information contained in the case.
Suggested Approaches to Case Questions
Question 1: Discuss the validity and reasonableness of Letsgo’s sales projections
The source of Letsgo’s sales projections is not revealed in the case. The projections may be too
optimistic. Actual sales increased 8.1% from 1992 to 1993, 7.5% from 1993 to 1994, 11.4% from 1994 to
1995, 10.2% from 1995 to 1996, and 18.8% from 1996 to 1997. The projected increase of 20% from 1997
Letsgo’s sales are heavily seasonal, with more than 40% of the sales taking place in just three months
(February, March, and April). It may appear odd to students that people are buying travel trailers in
February and March, until students become aware that the company sells its trailers to retail outlets, such
as L.L. Bean, which begins preparing for the summer season early in the spring.
Does Letsgo plan to concentrate exclusively on the retiree market? The company president appears to
consider the future to be retirees. It is unclear, however, that the company has adequately utilized market
research. Do market data support Newman’s beliefs? Further, the company’s strategy needs to be
Chapter 10 - Strategy and the Master Budget
clarified. Budgeting provides the communications tool to implement strategy. The production budget and
market.
Question 2: Prepare production, purchasing, and cash budgets for Letsgo for the fist six months of
1998. Discuss the advantages and disadvantages of the budgets you prepared. Who in the company
does the budget help and whom, potentially, does it hurt? Does the budget help or hurt the sales
department? What about production and finance? How are the various functional areas affected,
and why?
Note to Instructor: An Excel spreadsheet solution file is embedded below. You can open the spreadsheet
object that follows by doing the following:
1. Right click anywhere in the worksheet area.
2. Select “worksheet object” and then select “Open.” To return to the Word document,
select “File” and then “Close and return to...” while you are in the spreadsheet mode. The
screen should then return you to the Word document
3. You can also use this method to copy a portion or all of the embedded spreadsheet into
an Excel spreadsheet for your own use.
Production Budget: The production schedule appears to be dictated by sales and marketing. The
generous inventory levels are created by the policy of having on hand at the end of each month finished
good (completed trailers) equal to 300 trailers plus 20% of the next month’s projected sales in units. The
“cost” of this policy is in warehousing. Finance is affected by the need to direct significant dollars to
Case 10-2: Letsgo Travel Trailers
Data Input Area
Exhibit 1: Actual and Projected Sales in Number of Trailers
1992 1993 1994 1995 1996
Actual sales 13,765 14,880 15,991 17,809 19,634
1998 1999 2000 2001 2002
Projected sales 28,000 33,600 40,320 48,384 58,060
Monthly Sales Breakdowns for 1997 (actual) and 1998 (projected):
1997 1998
Actual Projected Actual sales dollars for las
January 1,983 2,500 dollars for the first six mon
February 3,218 4,000
March 3,981 5,000 November 1997 (actual)
April 3,240 3,000 December 1997 (actual)
May 1,755 2,000 January 1998 (budgeted)
Chapter 10 - Strategy and the Master Budget
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meet production highs, manufacturing will almost certainly be forced to hire part-time workers or work
extensive overtime, both of which heighten the potential for quality problems and production delays.
would indicate a figure of only 800 (i.e., 300 + [2,500 January sales × 0.20]).
The case notes that the company does not keep track of work-in-process (WIP) inventories. This
appears to be a potentially serious flaw in managerial control. Lack of control over WIP violates
management’s fiduciary responsibility to protect and control shareholder assets. Accounting for inventory
is not, however, the only way to control WIP. Letsgo may be tracking production directly by monitoring
throughput time or output rate.
Is a six-month budget adequate for planning and control? Most companies plan at least 12 months
ahead, a fact that can prompt a discussion regarding “continuous budgeting.” The availability of sales
forecasts five years in the future may also prompt discussion of three- to five-year planning budgets and
the role of budgets in achieving longer-term strategic targets.
Materials Purchases Budget: The uneven production schedule is reflected in the uneven sheet
aluminum purchasing schedule. Preparation of the material purchases budget allows students to begin
recognizing the broader need for cross-functional coordination. Purchasing as well as production and
finance are affected by the product’s seasonality.
adhere to strict payment schedules to maintain favorable relations with prime suppliers.
Cash Budgets: Letsgo will be unable to repay the anticipated $800,000 loan in 90 days (January 1—
March 31). Further, the company will need to borrow an additional $1,411,000 to finance operations
through May 31st.
Letsgo appears to plan an increase in the selling price of its trailer in May 1998, from $1,000 per
trailer to $1,100 per trailer. Students should question the lack of clarity as to selling price. Of potentially
greater importance, however, is the timing and competitiveness of such an increase. By increasing the
selling price of the trailer in April just prior to the slowest selling time of the year (June, July, and
reinforcing Letsgo’s apparent lack of a formalized strategy.
The budgeted expenses for equipment rental, equipment purchases, depreciation, and selling/
administrative costs raise questions. Why, for example, do equipment rentals vary only in the month of
April? Students expect either of two scenarios. Either the equipment rental should vary with production (a
very reasonable but difficult production scenario from a practical aspect), or the amount should remain
flat over the entire six-month period. In fact, what is happening is the replacement of rented with owned
equipment. Newman plans to replace all rented equipment with owned equipment over the next three
years. This replacement of rented with owned equipment is also responsible for the increase in
depreciation expense in April. The company’s policy is to initiate depreciation expense on new equipment
following the quarter in which the equipment was purchased. Students should recognize depreciation as a
Chapter 10 - Strategy and the Master Budget
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non-cash expense.
The replacement of rented with owned equipment, which apparently is being financed either through
operations or with short-term financing, can initiate a discussion of the role of different financing
vehicles. Long-term debt or issuance of capital would, in most instances, be a preferable financing
balance to be maintained, while not necessarily typical, may prompt discussion of the Board’s role and
the responsibilities assumed by its members.
Question 3: Andy Baxter, newly hired by Letsgo from a competitor, suggests preparing the
production budget assuming stable production. Prepare a second and third set of production,
material purchases, and cash budgets with production held constant at 3,000 trailers per month for
the second set of budgets and 3,500 trailers per month for the third set of budgets, using the
following approach for the production budget (the purchasing and cash budget formats remain as
presented above in question (2).
Discuss the advantages and disadvantages of the second and third sets of production, material
purchases, and cash budgets you’ve prepared. Who in the company do these budgets help and
whom, potentially, do they hurt? Do these budgets help or hurt the sales department? What about
production and finance? How are the various functional areas affected, and why?
Production Budget: (NOTE: the solution generated for Question 3 differs from the published
solution by the author of the case, in two respects: (1) treatment of cash outflows for wages (labor)
expense, and (2) treatment of cash outflows for materials purchases (both aluminum and non-aluminum
materials. To generate a solution for Question 3 we made some assumptions, which are clearly identified
in the case itself. These assumptions, however, were not included in the original case.) Alternative
assumptions are possible. This portion of the case, therefore, illustrates the need for assumptions and
sensitivity analysis when evaluating operating policies, such as a production plan (specifically, the plan
for smooth production.
A level production schedule will allow the production department to maintain better quality by hiring
and training a corps of workers. Use of part-time workers and overtime will be minimized. The 3,000
substantial advantages to be gained through JIT, prime vendor, and cash control.
With production level at 3,500 trailers per month, purchasing can attract prime vendors due to the
level demand in aluminum (105,000 square yards per month). However, as reflected in the cash budget,
Letsgo will need to borrow additional funds as compared to the situation illustrated in Question 2. A
number of explicit assumptions were made regarding materials and labor costs and payments in order to
generate a cash budget for Question 3. Students might think of ways to decrease the borrowing needs
associated with a planned production level of 3,500 units per month.
Students should be prompted to see the production problems as a company-wide problem with
dependence on a single seasonal product. The longer-term solution lies either with product diversification
or controlled productions and sales (i.e., limiting the number of trailers available).
Chapter 10 - Strategy and the Master Budget
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The preparation of three separate yet connected sets of production, purchasing, and cash budgets
acquaints the student with the power of budgeting as a planning tool.
Question 4: What should Letsgo use to measure performance for each of the managers in the case?
What bonus system would you suggest that incorporates these measures and also encourages the
managers to work as a team?
Letsgo suffers from a customer-driven sales pattern. Examination of Exhibit 1 in the case reveals
significant swings in sales from month to month. In 1997, for example, sales dropped from a high of
3,981 in March to a low of 793 in July, with the greatest drop (1,485 trailers) occurring between April and
May. This type of demand schedule creates significant problems for production, leading to quality
in turn, negatively affect purchasing, preventing Vicky Draper from implementing JIT. Prime vendors are
reluctant to deal with firms that vary material requirements dramatically, since such fluctuations also
affect their production scheduling.
Letsgo’s difficult, customer-driven production schedule has a negative impact on suppliers, workers,
managers, and customers. Uneven labor demand leads to excessive overtime and inefficient use of
workers, which leads to quality problems. Uneven material demand can also influence quality, as Draper
attempts to fill material order while lowering cost in an effort to earn her bonus.
Recommendations
Letsgo should develop performance measurements with strong quality considerations. While the current
bonus scheme appears to cater to customers, by prompting sales to meet all customer demand, the actual
impact on customers is negative due to quality problems.
Letsgo can best serve customer needs, particularly those of seniors, who value quality, by
implementing performance measures that reward quality. Furthermore, the performance of all managers
should be evaluated in a team atmosphere. For example, an effective bonus scheme would reward the
vice-president of sales and marketing for gains in quality created by a shift to the flat production schedule
suggestion in Question 3. In similar fashion, the production manager should be rewarded, in part, for the
cost savings of JIT, prime vendor contract that can, practically, be obtained only when the production
schedule is consistent.
Chapter 10 - Strategy and the Master Budget
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Case 10-2: Addendum
The instructor might find the following Wall Street Journal article a useful update to the case as originally
written.
Roadside Distraction: The Trouble with RVs
As Sales Soar, Retirees Face Leaks, Breakdowns, Recalls; the Limits of the Lemon Laws
By JENNIFER SARANOW; May 31, 2006; Page D1
Mary Lou and Herb Humphries sold their home in Massachusetts last July to travel the country full time
in a new, nearly $500,000 motor home. But so far, they haven't gone much farther than the dealership lot.
Since they bought the luxury Beaver Patriot Thunder, made by Monaco Coach Corp., they have faced
problem after problem, including burned-out fuses, mold, misaligned doors, and a broken alternator that
caused a breakdown on the highway last fall. Since buying the motor home last August, the Humphries,
who live in the coach, have split most of their time between the dealership and the manufacturer's service
facility, both in Florida.
"We've lost nine months out of our retirement life because of this motor home," says Ms. Humphries, who
says the coach has required about 400 repairs (many of those repeats), covered under warranty. "Our
dream has literally turned into a nightmare."
Sales of recreational vehicles have jumped in recent years, boosted by the large number of baby boomers
reaching retirement age and wanting to take to the road. (Late last month, the movie "RV," starring Robin
Williams, opened No. 1 at the box office.) According to the Recreation Vehicle Industry Association,
384,400 RVs were shipped to dealers last year, up about 4% from a year earlier and a 27-year high. Motor
homes, which can sell for as much as $400,000 or more, make up about a fifth of the RV market and
towable trailers, which generally cost anywhere from $5,000 to $100,000, about 80%.
But as summer travel season starts, complaints about recreational vehicles are mounting. Some of the
downsides: So-called lemon laws, which guarantee consumers replacement motor vehicles or refunds
after a certain number of problems or days in the shop, vary by state and often don't apply to RVs.
Consequently, RV owners, stuck awaiting repairs, often have little legal recourse. Gas prices also remain
high.
The RV Consumer Group, a nonprofit group that rates recreational vehicles for safety and handling, says
it gets about 100 complaints a month related to structural deficiencies with RVs, up from about 50
complaints a month a decade ago. The Council of Better Business Bureaus Inc. received 844 complaints
about RV dealers in 2005, repair issues being among the most common, up from the 488 complaints it
received in 2000.
Nationwide law firm Krohn & Moss, which specializes in lemon laws, has received nearly 1,500 inquiries
about problem RVs since it started an online free case review database two years ago, and it has started a
special division devoted to RV lemon cases. The magazine of Escapees Inc., an RV-owner club based in
Livingston, Texas, included its first article on the topic of lemon RVs in its May/June issue.
Chapter 10 - Strategy and the Master Budget
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RVs often have more problems than other vehicles because they are made in much smaller quantities than
cars and without the same sophisticated manufacturing methods. Unlike cars, motor homes are made by
multiple manufacturers. Auto makers typically build the engine and transmission. RV manufacturers then
assemble living quarters, often by hand, increasing the chance for human error. More RVs on the road
also means a greater chance of problems.
According to the National Highway Traffic Safety Administration, there were more than 100 recalls
involving RVs last year, up from 83 in 2000, for defects varying from faulty microwave ovens to
improperly installed furnace exhaust vents. A 2005 survey commissioned by the RV industry found that
64% of motor-home owners brought their RVs in for services beyond a routine visit, most often citing
problems with the interior, appliances or electrical components. A quarter of owners were dissatisfied
with how problems were corrected.
In response, legislators in Michigan, Pennsylvania and Montana have introduced bills that create RV
lemon laws or expand existing lemon laws to include RVs. According to the law firm Kimmel &
Silverman, lemon laws in 17 states and Washington, D.C, don't cover RVs at all and those in 20 states
cover only their motor-vehicle components. Motor homes are covered in the lemon laws of 13 states --
but often only those under a certain weight.
Manufacturers argue that buyers today unfairly expect RVs to meet the same quality standards as cars
when they should be comparing the coaches to homes. RVs tend to have more problems than cars
"because of the nature of it," says Richard Coon, president of the Reston, Va.-based Recreation Vehicle
Industry Association, which represents the RV makers and component suppliers. "Put your whole house
on a truck bed and drive it down the street and things start happening," he says.
While the RV industry has lobbied against including RVs in lemon laws, manufacturers and dealers say
they are working to improve quality and service.
In regard to the Humphries's problems, a spokesman for Monaco Coach says the company doesn't
comment on specific cases. But Monaco has instituted an inspection system for each vehicle that comes
off the assembly line. Coachmen Industries Inc. has opened a center in California to service vehicles on
the West Coast so that customers there don't have to rely on dealers for warranty repair work. Companies
such as Winnebago Industries Inc. and Thor Industries Inc. are focusing on "lean manufacturing"
processes that cut down on how often parts are handled during production, reducing the chance of
damaging them. Thor Industries says many of its brands have put in place electronic warranty processes
to speed up the repair-approval process.
In states where RVs aren't well covered by lemon laws, consumers who end up with problem motor
homes often have few choices other than to sell the RVs at a loss or postpone trips and make repairs. The
good news is owners often aren't responsible for paying for repairs during the first few years of
ownership. RVs are generally covered under one- or two-year base warranties and additional ones for
various parts.
Earlier this year, the Recreation Vehicle Dealer Association started a new pilot certification program for
dealer service managers to make them more effective at getting the units serviced correctly the first time.
The association, which has had certification for technicians since the early '90s in a joint program with the
Recreation Vehicle Industry Association, has also released a guide for parts personnel to help them
increase their expertise.
Chapter 10 - Strategy and the Master Budget
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In Florida, where the lemon law covers only the motor-vehicle components of motor homes, RV makers
are funding a new mediation program operated by an independent third party, in which RV owners and
manufacturers try to reach a settlement before going through the lemon-law arbitration process. During
mediation, owners can bring up issues that go beyond the lemon law, such as problems with leaks in the
living quarters. As of last July, they also can bring them up in arbitration if manufacturers agree (so far,
none have). The Recreation Vehicle Industry Association says it would like the Florida program to be a
model for other states.
Groups such as the Family Motor Coach Association and publications such as Trailer Life Magazine have
intermediary and ombudsman programs that will help RV owners solve problems they may be having
with dealers or manufacturers.
Attorneys say they can defend RV owners using other laws, such as a federal law that provides protection
to buyers of consumer products under warranty, but say they turn away many RV owners because such
cases are harder to win, expensive and can take years. RVs also don't have many of the protections homes
do, such as state laws requiring owners to disclose problems and pre-purchase inspections.
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Sales of motor homes have started to slow in recent months, partly because of high fuel prices. Motor-
home retail sales fell about 21% to 7,328 units in the first two months of this year, compared with the
same period a year ago, as RV buyers delay purchases or opt for towable trailer models.
To attract buyers, manufacturers and dealers are rolling out a host of discounts. This summer Thor
Industries says several of its brands will be offering gas cards to attract buyers. Terry's RV Center in
Frankfort, Ill., rolled out a loyalty program for customers that allows them to redeem points earned on
service and parts for perks like free RV washes. Lazydays, an RV dealer in Seffner, Fla., where the
Humphries bought their coach, just launched a membership club for owners called Club Lazydays that
provides benefits like breakfast and lunch when customers are on the premises for repairs and 30%
discounts off area attractions.
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Case 10-3: Building Processes for a Solid Financial Foundation—The Case of
Community Health Initiatives
(Source: Sandra Richtermeyer, Strategic Finance, August 2007, pp. 52-57. Note: this case was the case
used as the 2008 IMA Student Case Competition. The Student Case Competition is sponsored annually by
the IMA to provide an opportunity for students to interpret, analyze, evaluate, synthesize, and
communicate a solution to a management accounting problem.)
Overall Case Objectives
1. Primary objective: developing accounting processes to provide decision makers with information useful
for decision support, planning and control.
2. Secondary objective: create a professional development plan for an early career management accountant.
General Context of Case
This case gives students an opportunity to develop and plan accounting processes for an early career accounting
professional (Stephanie) who is making a career transition from auditor (external role) to management
accountant (internal role) in the setting of a nonprofit organization. The case also presents a scenario where
students can learn more about the benefits of the Institute of Management Accountants (IMA) by integrating
Certified Management Accounting (CMA) certification and professional development into the recommendations for
the case.
CASE REQUIREMENTS
Develop a plan for Stephanie to follow over the next three months as she develops accounting processes
that will provide the CHI leadership (executive director and board of directors) with the right type of
information designed to be useful for decision support, planning, and control. In preparing your answer,
you may want to consider some of the specific questions/issues from the case:
▪ How can CHI adopt an effective budget process?
▪ How can CHI demonstrate that their organizational strategy links to their financial information?
▪ How can benchmarking be useful for CHI?
▪ How can Stephanie manage her work relationship with the board of directors and executive
director and evaluate her progress during her first three months on the job?
▪ How can Stephanie develop herself professionally to be prepared for her new challenges at work
Chapter 10 - Strategy and the Master Budget
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High-Level Snapshot of Possible Approaches to Case
Summary of possible recommendations related to primary objective: developing accounting
processes to provide decision makers with information useful for decision support, planning and
control. (See subsequent discussion for more detail and suggestions for each of the points listed
below.)
➢ Develop more formal budget procedures and guidelines.
➢ Determine the “as is” and the “to be” in terms of financial reporting
➢ Develop procedures to monitor metrics and key measures of performance.
➢ Develop benchmarking procedures and educate decision makers on items that may be considered
by charity monitoring organizations.
Summary of possible recommendations related to secondary objective: create a professional
development plan for an early career management accountant. (See discussion below for more detail and
suggestions for each of the points listed below.)
➢ Management accountant (Stephanie) needs to obtain more education on the types of financial
information frequently requested by boards.
➢ Management accountant (Stephanie) develops a plan for her own continued education and
professional development. Possible solutions include CMA certification, CPE courses, IMA
chapter programs, networking with finance directors from similar nonprofits.
Develop more formal budget procedures and guidelines–possible steps:
• Assess the current budgeting style – frequent changes, lack of adherence, limited usability as a
planning and control tool.
• Describe the types of notes/disclosure about assumptions that may accompany the budget
• Require adopted budget procedures to be in place before the beginning of the fiscal year (the case
time frame is four months into the year).
• The budget reporting practices (Table 2) do not provide a format that is useful to compare
specific program budgets. For example, the expenses are not allocated to the programs.
Determine the “as is” and the “to be” in terms of financial reporting
Students should become familiar with the basic nonprofit financial statements prepared under GAAP
(released by the auditor) because that is the best assessment of the “as is” reports. The focus of GAAP-
based audited financial statements for a nonprofit centers on reporting assets, liabilities and net assets
with an emphasis on revenues, expenditures and excess/surplus. A possible solution may compare
components of audited financial statements to reports that are more oriented to specific decisions (such as
program decisions) or that are more “user friendly.” The “to be” statements may incorporate balanced
scorecard, benchmarking reports, reports that illustrate program results, etc.
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Develop procedures to monitor metrics and key measures of performance.
• Consider the use of a balanced scorecard (BSC). Develop a sample scorecard linked to the
strategy of the organization.
• Develop a plan to implement the scorecard that includes board training, review and technology
enablement.
• Link the scorecard to incentives for board, employees, program managers, etc.
• Each program could have its own scorecard or there could be an overall organizational scorecard.
Examples of sample metrics for some programs are presented below (best list of metrics for
scorecard is provided in Table 3 of case):
Program: Relief-Travel and Housing Grant Program (sample metrics)
• Number of constituents served in program – metric = flat number or growth rating
• Volunteer management – # new volunteers in program or volunteer retention ratio
• Volunteer satisfaction ratings – use results of volunteer satisfaction survey
• Volunteer assessment ratings – use results of volunteer assessment form
Program: Moving from Dependency to Independency (sample metrics)
• Volunteer satisfaction survey results
• Constituent success ratings
• Level of in-kind services received
Establish Methods of Monitoring Risk Factors
Start by assessing the risk factors listed in Table 4 of case. Students may introduce solutions linked to the
COSO Enterprise Risk Management (ERM) framework. List examples of each type of risk and discuss
with the board. Once the board agrees upon risk factors, determine the best way to monitor the risk and
report back to the board.
External Risk Factors (see Table 4)
Natural environment–protection of assets (including information) from natural disasters, etc. May
include assessment of program sites where constituents and volunteers are present.
Political–new laws and regulations that could affect the nonprofit’s ability to obtain funding or maintain
exempt status. This risk factor is particularly important to consider if the organization relies on
governmental grants.
Social–changing demographics, social mores, family structures and work/life priorities that can affect
programs and contribution revenues.
Technological–ability to use emerging technology to deliver value to constituents of nonprofit. Data
security related to information maintained on employees, constituents, volunteers, donors, etc.
