This is the sixth in a series of blogs on improving the corporate budgeting process. In the last blog I covered driver-based budgeting. In this blog we look at the perennial problem of linking budgets to strategy. Everyone says that the budget should be linked to strategy. Unfortunately there is very little evidence to support that this is actually the case. Take a look at your budget templates – can you work out what the strategy of the company is from them? If you can’t then it’s unlikely that anyone else can.
The current mode of operation for an organisation can be referred to as 'business as usual'. In other words income and expenditure reflects performance of the current business model. However, organisations function in a world that is continually changing – competitor actions, market trends, and government legislation – all have an impact and cannot be ignored. In view of this, strategy seeks to change the status quo by either improving existing or implementing new business processes. This is usually accomplished through strategic initiatives that are those activities not currently being performed by the organisation. They can cover a range of subjects such as increasing sales through the implementation of a customer relationship management system or in reducing costs by installing more efficient production equipment. As initiatives are identified it is essential that they are properly resourced and tracked for effectiveness where they may be subsequently modified, cancelled or replaced depending on the overall view of the future and what is currently being achieved. This requires budgets to be developed for both ‘business as usual’ and for strategic initiatives. Don’t attempt to mix the two, as you can be sure that any new initiative will soon be starved of resources. Business as usual should be collected first. Then collect individual budgets by strategic initiative. For those initiatives that cut across multiple departments, it is vital they are planned by all departments involved and that each recognise they play a part in its overall success.
Finally, the budgets for business as usual and strategic initiatives should be combined to give the total budget picture. However, when communicating the budget or reporting performance, it’s important that the two parts are kept separate.
- Identify strategic initiatives and the departments/people responsible for their success
- For each initiative identify measures that indicate the status of implementation and the outputs that will be generated.
- Develop a budget model for initiatives that is separate from ‘business as usual’
- Develop a model that combines ‘business as usual’ with strategic initiatives.