As promised, albeit a bit later than planned… I want to review some basics of the strategic planning process and why it must be integrated with budgeting, if either is to be effective. The planning process includes at least the following steps (and as many of the Company’s employees as is reasonably possible):
- A vision or strategy statement that tells us what business we are in; why we are in business; where we are going (goals); and who we are (core values & image)
- A strategic plan (5 to 10 years) that includes: the business model (how we generate profits and cash); the product plan (products/services, pricing & positioning); a long-term global forecast driven by the strategic assumptions and a detailed operating plan (first 12 months) that comes directly from the long-term, financial forecast [this is the “budget” that is the focus of this post].
- An implementation plan and feedback system to: track, monitor and respond to problems and opportunities; evaluate progress; enforce accountability; communicate and celebrate success and use insights to improve the long-term plan
- A resource plan that anticipates all of the resources that will be required to achieve the goals outlined, including talent (people), fixed assets & equipment and financial capital (debt or equity) and creates a strategy for and a plan to secure each.
We can see that what we refer to as the “budget” is a small, but important part of the overall planning process – it really cannot stand on its own and be truly effective. I find it remarkable that we prepare a 12-month budget without a longer-term forecast already in place. It is equally remarkable that we will prepare a long-term forecast without the benefit of a strategic plan or vision statement.
Alice: Would you tell me, please, which way I ought to go from here?
The Cat: That depends a good deal on where you want to get to.
Alice: I don’t much care where.
The Cat: Then it doesn’t much matter which way you go.
Alice: …so long as I get somewhere.
The Cat: Oh, you’re sure to do that, if only you walk long enough.
The primary difference is that we, as management, don’t actually say or feel that we “don’t much care where we go”, but we do act that way when we budget if we don’t have or fail to communicate our long-term strategy and goals to our team and they never get integrated into the final outcome.
Just as it is a waste of time and effort to budget independent of the strategic planning process, so is it futile to do the strategic planning and not have a forecast and budget as part of the outcome. How else can we visualize and quantify the results of the plan? How else can we determine if we are winning or losing along the way?
This year I hope you will think about these concepts as you initiate a strategic planning process or update before you start the annual budgeting cycle in your business – I promise a better outcome if you take the time and do it well!