Linking the budget to the strategic plan

Linking the budget to the strategic plan

When preparing a budget ensure that your budget achieves the following critical objectives, such as, being a tool to implement the strategic plan, motivate staff, evaluate performance of the organisation and staff, and allocate resources among others.

Any organisation that desires to succeed needs a budget that will assist it in allocating, tracking and planning its fiscal spending. As such a budget should be driven by the vision of the organisation as expressed in the strategic plan to ensure that the business only spends money in areas that line up with the vision (what we aim to achieve in the future) and mission (why our business exists). The budget is supposed to transform the strategy into action. To enable this to happen, it’s therefore very important that the budgeting process is linked to the corporate strategy.

Budgeting is part of the performance management process which helps in the way organisations direct and manage resources to achieve corporate objectives. The budgeting process’ role is to ensure that resources are allocated to those activities that drive value in an organisation so as to meet organisational goals. In a commercial concern, the objective is to exploit identified opportunities and fight off threats from the environment and improve prior year performance and beat competition.

The way to achieve improvement in performance is one the goals included in the strategic plan, on which budgets should be based and monitored for effectiveness. A good budget should not only contain the revenue and costs figures. It should provide details on how the organisation will achieve these revenue targets.

The way these revenues will be generated will form part of the strategic plan.
Performance management is all about focussing and managing the activities that generate results and those activities should directly support the organisation’s strategic objectives. The linkage between the high level goals in the strategic plan and the day-to-day activities is necessary to achieve corporate goals. The budget should therefore act as a road map, showing the organisation how it should move from its current level of performance to the desired level of performance, based on the perceived economic environment as analysed in the strategic planning process.

The process for linking strategy to the budget requires that management follow the steps below in creating the budget.
The first step is to define the short and long-term objectives for each focus area of the strategic plan. For instance, if the objectives relate to revenue growth or cost reduction, management should identify key performance indicators and then assign values to the KPIs that if achieved will show the success of each objective.

Step two will describe the strategies that should be executed to enable the organisation to achieve these objectives. Each strategy should be assessed on its impact in helping in achieving the stated objective so that management will focus more on those strategies that will bring value to the business. Management should assign relevant departments with the responsibility for implementing each strategy and should determine how they will measure the success of each strategy.

In the third step, senior management will document the key assumptions that have been made about the business environment and those factors that could affect the organisation’s ability to successfully achieve its strategic objectives. This will help when evaluating the performance of the business through budget variance analysis. Assumptions will be interrogated if the business fails to achieve the strategic objectives.

The fourth step requires senior managers to give the plan to operational managers, who are responsible for implementing the strategies through a budget. For each strategy, operational managers develop tactics to implement their part of the strategic plan. The managers will determine how they will monitor the implementation of each action, assign the person who will be responsible for carrying out the action, the time scale to implement the activity and the estimated cost and revenue impact of executing each tactic.

In the fifth step the operational managers assess and mitigate the risks in the tactics that have been developed to meet the objectives. They will assess if the tactics are realistic to make the strategy successful. They will also look for contingency plans for overcoming the biggest risks.
The last step will be to check the plan for completeness and finalise on the tactics and the costs/revenues assigned to each activity.

Once there is agreement this plan can now serve as the starting point for a more detailed budget breakdown. The high-level costs and revenues from the strategic plan become budget targets. This process would have established the link between the strategic plan and the budget by ensuring that corporate objectives are cascaded down the management levels and forms the basis for the annual budget.

Stewart Jakarasi is a business and financial strategist and a lecturer in business strategy, advanced performance management and entrepreneurship. For assistance in implementing some of the concepts discussed in these articles please contact him on the following contacts: sjakarasi@gmail.com, call on +266 58881062 or WhatsApp +266 62110062.

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