Strategy Management
Six Steps for linking corporate strategy to the budget and the role of budgeting in performance management
An organisations budget is supposed to be the tool that turns strategy into action. Unfortunately, up to 60% of organisations do not link corporate strategy to the budget. This article discusses the importance of budgeting and provides six distinct steps on how to link corporate strategy to the budget and provides reasons why it is important to link these two variables.
Article
In some organisations, budgeting can be a guessing game, which can lead to a budget which is inaccurate. A budget should be created to direct the way in which the organisation will achieve its strategic goals. For budgeting to become the relevant process it was meant to be and can be; this group must be fixed.
Budgeting is part of a large, closed loop process called ‘performance management’. Performance management is a holistic approach to the way organisations direct and manage resources to achieve objectives. In the context of performance management, budgeting’s central role is to support execution through the allocation of resources to the activities that drive value.
In order to achieve a best practice plan that is linked to a budget, the following six steps have been created:
Steps 1 – Define key objectives
Senior executives should create short and long-term objectives for each section of the strategic plan. These objectives can be based around revenue, growth and operating efficiency. In order to measure the success of each objective, executives should assign a value to each objective.
Step 2 – Identify strategies and impact
The second step is to describe strategies that achieve the objectives. A percentage weight should be assigned to each strategy which outlines the likelihood of achieving that objective. Departments should also be identified who are be responsible for implementing the strategy.
Step 3 – Document assumptions
A list of key assumptions and measures should be made to address the business environmental factors that could affect the organisations ability to achieve its objectives.
Step 4 – Develop tactics and high level operational budgets
At this stage senior executives give the plan to the operational manager who implements the document strategy. For each strategy, managers must develop tactics to implement this part of the plan.
Step 5 – Assess and mitigate risks
Once the tactics have been created, the plan can be assessed. The plan must be: realistic, affordable, and alternative plans must be in place.
Step 6 – Check the plan and finalise it
The final step is to agree the amended tactics and costs/revenues assigned to each activity. The plan can now serve as a starting point for a budget breakdown.
Why is it Important to Link Strategy to the Budget?
This article has focused on one aspect of performance management – strategic management and provided 6 steps to achieve a best practice plan that is linked to the budget. When strategic performance management is linked with other performance management functionalities, the result is a closed-loop performance management system.
It is thought by Waal (2002:24) that organisations that focus on performance management and use performance management software outperform those who don’t. In a survey of 437 publicly traded organisations, those that had structured performance management systems produced better results than those who didn’t.
That is why many companies are turning to performance management to improve budgeting and to enable them to successfully link their corporate strategy to their budget.
About the Author
Strategic Management -Part 1 of 7
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