A good business plan and a budget are critical for every business and organization hence a structured and organized strategic plan should be made before budgeting.
What is Strategic Planning?
A strategic plan includes strategies of an organization for potential actions and operations, targets, guidelines, and sources needed. Its duration is 3 to 5 years or more. Current and expected market environment is also included. These marketing forecasts help in clearing a view about demand and supply assessment, market inflation and financial needs.
Strategic Planning and Tactical Planning:
Tactical planning includes determining exact objectives and resources that will be used to accomplish strategic tactics. Tactical plans are of two types:
- Long-term, for example, in some tactical plans, corporate policy statements deal with cyclic situations. Short-term (1 to 18 months), are made to deal with specific situations or a particular phase. They are usually for single use. An example of a tactical plan is the annual budget which is used for a sole plan. A budget is the resource used to achieve goals of strategic and tactical planning.
- Quarterly and monthly plans are incorporated into the annual budget to formulate it more successful.
The budgeting process is not strictly associated with strategic and tactical planning. According to the former CEO of General Electric, Jack Welsh, the most ineffective management practice of a company is the process of budgeting. The disengage among the budget and the strategic planning is the most significant reason for an ineffective budget.
Here are several steps for a better connection between budgets and strategic planning recommended by Carlson:
Executive-level must participate in the initial step of the budgeting process:
The individuals who are involved in strategic and tactic planning must be involved in a budgeting cycle to ensure formulation of an effective budget. There should be a clear connection between strategy and budget. Most strategic goals are achieved through the budget. The connection between strategic goals and the role of every employee should also be assessed. How the role of every employee can be helpful in accomplishing goals should be discussed at all levels.
The budget cycle includes a long-term plan:
The Annual budget is for one year only and outcomes of the business plan are not delivered within this short period. A yearly plan should be a part of a business plan. In this way, the tactical planning of the budget aligns with strategic planning of the company and this connection should be validated time to time. Consequently, the level of goal achievement can be determined and any adjustments could be made if needed.
Measurement of KPI success:
KPIs (key performance indicators) of achievement should be formulated. They should be regularly calculated and discussed with all to determine level of goal achievement and any adjustments could be made if needed.
Validation of targets:
The percentage of successes should be determined according to the economic setting and better decisions should be made according to this information.
Review of strategic and tactical planning:
Strategic and tactical planning should be reviewed at least quarterly to determine their validity as a measurement of success. Organizations sometimes set idealistic expectations based on better past performance but a changed market environment makes their strategy flop. Periodic assessment enables organizations to make necessary changes to meet the targets successfully and within the stipulated time.
Key budgeting and planning points are:
- There should be direct relation between budgeting and planning
- All strategic plans are covered in the budget
- How market affects budget planning
All of these elements are the root for creating the alignment of strategic and tactic planning to the budgeting process. The strategy is the planning to achieve goals while the budget is utilized to achieve this goal. For achieving goals, strategy and budget should be a true interlink.
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