Budget Gem 2: Linking budgets to operational activities.

How exactly do you link Budgets to Strategy?

I'm always amazed at how tenuous the link is between strategic goals and budgets. Most senior managers will claim that the budget process is there to help the organisation implement strategy, and yet when you look at the submission sheets budget holders are asked to complete, there is no link.  Sure, the revenues and costs when accumulated with other departments may equate to a strategic target, but budgeting is much more than this. After all we can get a monkey to fill in those sheets and even get them approved by ensuring they line up with targets set by senior managers. But we all know that the numbers themselves are meaningless unless they have been placed in context of organisational activities.
One analogy that I use to illustrate this point is to consider the following (unlikely) scenario. Imagine that you have been put in charge of the country's athletic team as they prepare for the next Olympic games. How do you think performance will be measured? Most will answer in terms of the number of gold medals won, the records set, and how we compare with similar countries. These measures are all outcomes. Now if I was to ask you how you will manage the team, then the measures will be related, but very different. For example, you would want to ensure that there is the right training regime in place, that athletes are having the right diets, that the right equipment is at their disposal. To ensure you were on target to deliver the goals, you would have milestone measures to make sure that the chosen activities were working and delivering value for money. And if they are not, then you would change them and reallocate budgets accordingly. Which brings me neatly to the role of budgeting. Budgeting is a process that allocates an organisation's limited resources to enable operational activities to deliver planned strategic goals. In other words, budgeting is directly linked to the everyday actions of organisational departments. To set a realistic budget requires organisations to determine:
  • What outcomes it needs to generate. E.g.. to achieve sales growth it needs to close x number of contracts at y value; to improve customer satisfaction it needs to improve the call centre response rate from 5 minutes to 2 minutes
  • Next it needs to determine the workload required by departments to deliver those outcomes. E.g. It needs to place x number of adverts to attract y number of enquiries where it plans to close 45% of the deals
  • Last, we need to define how much these activities will cost - which will become the budget
As part of the budget review process management should assess the cost of activities in relation to the outcomes that are to be generated. Is there any way this could be reduced, or maybe improve the outcomes? Once the budget has been agreed it needs to be monitored in terms of what did the activities actually cost, what outcomes were generated and whether these led to the objectives. Finally, forecasts can be collected for resources, workload and outcomes that can be used to assess future performance and to identify what may need to change. This approach provides management with a way to discuss costs in relation to strategy. Now doesn't that make much more sense than an annual guessing game?