Most organizations’ budgeting process is not truly aligned with its strategy and key participants are unable to clearly articulate the connections.
As famously proclaimed by former General Electric CEO Jack Welch, "the budgeting process at most companies has to be the most ineffective practice in management." One of the key reasons for ineffective budgeting is the disconnect between the budget and the company’s broader strategy. While it seems like an issue of common sense, most organizations’ budgeting process is not truly aligned with its strategy and key participants are unable to clearly articulate the connections. Aside from the mechanics and technology involved in budgeting, there is a human factor behind this problem - mainly, most companies do not have a culture of inclusion. Strategy is often a discussion that takes place at the executive level but unfortunately the resulting insights and decisions made are not permeated through the rest of the organization. Without knowledge of company strategy, the stakeholders who create and manage budgets do not know how they can impact it and where to most effectively allocate their spending and investments.
In order to better align budgets with strategy, here are some steps that Carlson recommends:
1. Start every budget cycle with executive-level participation and insight into company strategy. Make sure it is clear how your strategy translates to business tactics and how every employee’s action and role has a direct impact on the success of this strategy. While almost every company has executive offsite sessions and develops or modifies a strategic plan, often the strategic objectives are never translated into the tactics of the business, the annual budget or financial forecast. The problem is that the individuals responsible for strategy and vision are not always the same people involved in creating the budget. Even when they are, the exercises are often not connected. Every member of the company needs to know how their role and actions help the company achieve its goals. The discussion of budgeting should be viewed as the mechanism to allocate resources to achieve strategic results. The budget is the conclusion of the strategy process. It is validation that the tactics will drive success and should not be perceived merely as a compulsory exercise. Executive management needs to drive this connection from the top.
2. Include a long range plan early in the budget cycle. Budgets are typically for one year, which is an arbitrary range of time. Many business initiatives take longer than 12 months to deliver results and therefore the annual budget provides an incomplete picture. Make sure your annual plan is simply a subset of the long range (3-5 year) business plan. Inclusion of the long term plan ensures that the tactical elements of the budget align with the long term goals of the organization. An added benefit is that the longer term plan enables individuals to focus on strategy as the annual budget is often viewed as the mechanism for bonus compensation. An unfortunate consequence is that it then becomes subject to sandbagging. Inclusion of the long term plan, and validating that the near term fits within it, is key to aligning the budget with strategy. By frequently communicating the metrics that define success, employees are better able to determine whether they are on target and should then be empowered to make adjustments based on this real time information.
3. Measure and communicate metrics critical to success. Surprisingly, many companies perform a budget exercise but have not identified the performance indicators which measure the success (or failure) of their budget and strategy. These key performance indicators (KPIs) include both financial and non-financial criteria as often times the non-financial metrics are the early indicators of success. These metrics should be well defined, clearly measurable and frequently published. Once you create these metrics, if you are intent on building a culture of inclusion, it is critical that this information flow unimpeded to key stakeholders. By frequently communicating the metrics that define success, employees are better able to determine whether they are on target and should then be empowered to make adjustments based on this real time information.
4. Validate goals against key metrics and market data. Are your goals attainable in light of the economic and competitive environment? If your market is flat and you are projecting 30% growth, what are you doing that makes this attainable? How your organization is positioned relative to your market and competition and how you are using your assets and allocating them in a manner to succeed should be clearly articulated. This type of exercise is typical within a marketing department but, similar to strategy, this information does not always find its way through the organization. It is critical not only that this assessment occurs but that there is also a mechanism in your process to have this competitive assessment broadcast and shared throughout the organization to better inform business decisions.
5. Revisit planning and strategy as necessary. It's not uncommon for companies to set unrealistic expectations based on previous performance. Oftentimes, market conditions change leaving past plans unrealistic. Make sure you have a mechanism for reviewing your plans and adjusting if necessary on at least a quarterly basis. By periodically reviewing plans and strategy, companies can course-correct before a problem becomes a crisis and insure that measuring results against your “plan” remain relevant and informative.
All of these elements are the basis for creating a culture of inclusion, visibility and empowerment that is key to aligning budgeting with strategy. This is the foundation to creating business value within the finance function. Other steps and future blogs in this series include the use of rolling forecasts, driver based planning, and the deployment of "best in class" enterprise budgeting and planning software. If you would like to see how Adaptive Insights, the leading cloud performance management solution can help you align your budgets with strategy, then request a demo.