Many companies have budgeting processes that are not aligned with their strategies and key participants who are not able to identify clear organizational connections. Want to evaluate patterns in your company to optimize its performance? Here’s how to effectively align your budget with strategy.
British Prime Minister Winston Churchill once famously declared, “Let our advance worrying become advance thinking and planning.” What is the fundamental cause of ineffective budgeting? It’s the lack of congruency between the budget and the company’s overall strategy. With alignment, comes the truly important financial insights that help companies succeed.
Budgeting encompasses many various elements, especially the human factor. To be effective, companies must create cultures of inclusion. Within the inclusive culture, strategy is brought to the table for discussion at the executive level as well as throughout the company. When all stakeholders are in the know on strategy, they can more effectively allocate their spending and investments as part of their budgets.
We recommend you implement the following steps to align budget with strategy:
- Begin every budget cycle with executive-level participation and insight into company strategy.
First and foremost, clearly communicate how your strategy translates into business tactics. How does each employee’s role impact the success of your strategy? Draw those connections.
Even though many companies host executive sessions to develop their strategic plans, their objectives are not always translated into business tactics, the annual budget, or the financial forecast. Additionally, the people responsible for strategy and vision are not always the same people involved in budget creation. When they are, the exercises are different. To get everyone on the same page, put the following in motion.
Let every employee know how their role contributes to the company’s vision. A discussion about the budget should also explore how the company can allocate its resources to achieve its goals. Rather than viewing budgeting as merely a necessary exercise, think of it as the way to ensure your tactics lead to longer term success. Executive management must emphasize the budget-strategy connection to everyone within the company.
- Include a long-term plan early in the budget cycle.
Effective budgets have a sense of vision, which calls for longer-term planning. With budgets typically set at one year, that’s an arbitrary range of time. Because many business initiatives take longer than 12 months to deliver results, the annual budget provides an incomplete picture. The financially-savvy solution? Make your annual plan a subset of the long-term (3-5 year) business plan.
By having a longer-term plan, you’ll align your company’s budget with its goals. An added benefit? Since the annual budget is considered the mechanism for bonus compensation, employees will be more apt to focus on strategy.
Overall, a longer-term plan that’s compatible with the near-term helps align your budget with strategy. When you consistently communicate the metrics that define success, employees have the insights to determine whether they are on target and to make adjustments when necessary.
- Measure and communicate metrics critical to success.
Interestingly, many companies will perform budget exercises; however, they will not identify the key performance indicators (KPIs) that measure the successes or failures of their budgets and strategies. These same companies can elevate their results by measuring KPIs. Because non-financial metrics are the early indicator of success, these KPIs should include both financial and non-financial criteria.
What are the ideal qualities for these metrics? They should be well-defined, clearly-measurable, and published frequently. After you’ve defined your metrics, create your culture of inclusion to ensure the information flows smoothly to stakeholders. When your employees are empowered with real-time information, they can make decisions that empower the company.
- Validate goals against key metrics and market data.
Are your goals attainable? That’s a good question to ask yourself when evaluating the current competitive and economic environment. For instance, if the market is flat and you are projecting 30% growth, how will you make that growth happen? You should clearly articulate how your company is positioned relative to the market and competition, as well as how you are allocating your assets.
Even though marketing departments commonly conduct this type of exercise, the information does not always flow throughout companies. Therefore, it’s essential you perform the competitive assessment evaluation, then leverage a formalized system that broadcasts the information throughout the company for better business decisions.
- Revisit planning and strategy as necessary.
Oftentimes, companies will have unrealistic expectations based on past performance. Market conditions change, making previous goals out-of-date. To keep your goals current, ensure you have a system in place for reviewing them and adjusting when necessary on at least a quarterly basis. When you periodically review plans and strategy, your company can course-correct before an issue escalates. As well, you evaluate your results using a relevant and realistic plan.
When you bring these elements together, you create a culture of inclusion, visibility, and empowerment that is essential to aligning budget with strategy. It’s the foundation to creating business value within the finance function.
Additional resources on effective budgeting include the use of rolling forecasts, driver based planning, and the deployment of "best in class" enterprise budgeting and planning software, such as Adaptive Insights, the leading cloud performance management solution. Want to learn how Adaptive Insights can help you align your budget with strategy? Request a demo today.