Many executives struggle with strategic budgeting and forecasting. Perhaps this is because budgets take different shapes according to a company’s needs, providing the foundation for sales targets, staffing plans, inventory production, cash investment/borrowing, and capital expenditures. Regardless of the decisions they drive, budgets are valuable tools for translating executive-level plans into specific, action-oriented decisions and activities.
The reality is that many businesses experience these issues on an ongoing basis, leaving business owners and finance personnel without the information they need to make the best decisions on a timely basis. While budgets don’t guarantee success, they certainly help increase the chances of meeting your business goals.
We will share three ideas that can bring more structure to your budgeting and forecasting process. In this article, we will discuss the first: focusing on linking your budgeting process to your business strategy, and will cover the second and third in subsequent articles.
Linking your budgeting process to your business strategy is vital to avoid failure. Typically, less than 10% of an organization’s staff understand its strategy while less than 25% of managers have incentives linked to the company’s strategy (https://corporatefinanceinstitute.com/). More often than not, we see executive teams talk less about strategy and spend more time on day-to-day activities. This is where a well-defined budgeting process can enable your business to set clear goals, priorities, and spending caps, and – more granularly – detail funding sources and areas of opportunity.
The following is an example of a similar exercise we conducted with a client. Paraphrasing:
In order to increase our top line, we need to increase average spend per customer. We have four tactics to achieve this goal, namely expand our product offering, source new suppliers, promote our products, and conduct marketing and pricing research. We will measure our results using three metrics: (1) average weekly spend per customer, (2) spend by product type, and (3) order frequency.
These metrics then need to be built into the budget so they can be tracked on an ongoing basis without substantial manual effort. A proper planning tool (or an analytics tool) will allow these metrics to be designed and built one time and then tracked close to real-time. On each forecasting cycle, you will be able to track the trends of each metric, the budgeted goals to actual results, and have visibility to how they are impacting financials of the company for each period.
Transparency to these budgets will:
Ultimately, your business goals must be tied to your budgeting process to think strategically while being realistic and communicating needs arising with your team. In our next editorial, we will discuss various budgeting methods, variance analysis and forecasting techniques.
If you have any questions regarding this article, please contact Carlos Catalan at firstname.lastname@example.org.