Business strategy is the vision of where the organization wants to be in three to five years’ time.
It includes,
1. Setting overall objectives so that the organization and everyone working in the organization are clear about what they are hoping to achieve.
2. Analyzing the environment in which an organization operates and the resources that it possesses using SWOT analysis – an assessment of business strengths, weaknesses, opportunities, and threats.
3. Identifying different courses of action that the organization can take to achieve its objectives.
Budgeting is a relatively short-term measure. And just one part of the overall business strategy. It is a tactic tool that is used to implement the activities and projects which senior management has planned.
On one hand, organizations plan for the long term using a strategic plan. Senior management chooses the strategic options that will have the greatest potential for achieving the organization’s objectives and then creates long – term plans to implement those strategies.
On the other hand, we also plan for the short – term using a business plan which dictates what the organizations must do now in order to achieve the long – term strategic plan. Budgeting is the tactical implementation of the business plan. It is incorporated in both the business planning and control processes.
These long-range plans are translated into the department’s annual operating plans. The business plan is put into practice using the planning and budgeting procedures: what to do when, and the necessary controls (including budgeting) to ensure that planned results are actually achieved.
Let’s look at the 2 levels of budgeting and planning: the corporate level and the business level.
At the corporate level, we have the policies, the strategic guidelines, and corporate development plans. So, the aspects we are discussing here are related to strategic foresight, vision, values, corporate development plan, strategic policies, and guidelines. These corporate strategy aspects shape the business process.
At corporate level planning, major assumptions are defined, such as macroeconomic trends, GDP growth, inflation, interest rate, the minimum required rate of return (hurdle rate), exchange rates etc. The corporate level emphasis is on key indicators, such as the company’s earnings and cash flows.
The Business Unit / Operational level comprises most of the budgeting aspects. The function/ business unit level budget is related to the areas of a company, such as marketing, sales, manufacturing, controlling, and others.
The budgeting process should not start without strategic guidelines. The planning process precedes the budgeting process. The budget should follow the strategy.
Strategy -> Planning -> Budgeting
Here are the steps in detail:
1. Senior management engagement : This might sound obvious. But I’ve personally experienced cases where people in the company experience lack of engagement from senior management.
2. Organizational structure analysis: By analyzing the organization’s structure, we can assess who does what from the budgeting perspective.
3. Identification of accounting structure: If the company’s accounting structure is established, the responsibilities of the areas are already defined.Based on 2 and 3 above, managers of relevant areas are invited to participate in the budgeting process.
4. Identification of strategic guidelines: By analyzing the business environment, senior management defines strategic guidelines.These guidelines serve as a reference to drive the discussion in the planning process.
5 Communication: No planning would be effective without communication.
6. Opportunity and feasibility analysis: It helps not only identify opportunities but also detect threats. Awareness of a potential threat on the radar could help mitigate bigger risks.
7. Execution: Next, the plan is supposed to be implemented. The outcome of the planning naturally goes into the budgeting process.
8. Monitoring and controlling: After the budget is implemented.This is the post-budgeting phase, which comprises the analysis of results in comparison with the budget.
Conclusion:
At a very high level, the board and executive staff will define the strategic plan. The guidelines include decisions on markets, new products, long – term capital budget etc.
As we move from the corporate level to the department level, the plan becomes less strategic and more tactical.The forecast at the business unit (BU) level is converted into the department budget.
Tactics on pricing and marketing of each business unit are consolidated into the total company revenues and costs.
In some cases, if the market conditions prove to be very different from the original expectation. In such instances, the unit’s tactical plan needs to be revised. And possibly, the company’s strategy may also require adjustment. This is called reactive planning.
In conclusion, it is very important to have well-established mechanisms for planning and budget control. So managers can quickly correct the unit’s tactical plan based on present market conditions and faster it rolls up into the corporate’s strategic plan.