Strategic Plans and Budgets – Performance Tools

Understanding how to get the most out of your strategic plan is important.  A robust strategic planning process includes translating the strategic and operational objectives into pro forma financial results.  These financial results, like the strategic plan, typically span a 3 to 5 year period.  Each year of the strategic plan can be translated into financial statements for the period.  Years 1 through 3 of the strategic plan are often detailed by month and as the plan extends into years 4 and 5, the detail may be at the quarterly or annual basis depending upon the organization.

By developing a robust financial forecast, the organization can validate and analyze the impact of assumptions and interpretations of information on the expected financial performance.  The financial data compiled is a forecast of what is expected to occur in the organization based upon the current knowledge of internal and external influences on the company.  The first year of the strategic plan and the accompanying financial projections can usually be developed with a high degree of accuracy.  (Accuracy is constrained by time, availability of resources and information, and the level of sophistication of the tools and experience of the organization’s team.) Subsequent forecast years become less precise as the degree of uncertainty increases.

Once the full strategic plan (with accompanying financial forecasts) has been developed, the organization moves toward the implementation.  This implementation phase converts the first year strategic plan and related financial forecasts into operational plans and budgets.  The process may be as simple as establishing performance measures and assigning responsibility/accountability to various levels of the organization, or it may, depending upon the time lag between the creation of the plan and implementation, include a revision or refinement of the information and plans to update the plan for changes in the organization, its environment or other factors including economic conditions.

Regardless of whether the first year financials are accepted as is or revised, they become “the budget” for the current year.  These numbers are what the organization compares itself to in order to determine if things are tracking as expected, to control expenditures, and to evaluate individual and overall performance.

For some organizations, the process stops at comparing actual performance to the budget.  For other organizations, the process includes periodic forecasting that incorporates the new information from actual performance into new performance targets and expectations.

When organizations choose to engage in periodic forecasts, they incorporate actual performance as it becomes available. Information is “plugged into” financial reports to replace the budget amounts previously used.  This enables the organization to understand the impact of achieving, missing, or out-performing expectations.  Both good and bad news results impact the future budget periods and the type of decisions the business has to make.

The organization can take the forecast process a step further by examining the underlying factors that led (?) to actual performance.  Those factors are then extrapolated into their impact on future periods.  Analyzing the potential impact on the remaining periods in the year, the business is able to adapt and change behaviors to correct missteps, enhance opportunities, or restructure activities to address significant business challenges or opportunities.

Budgets and forecasts are complementary tools that enable organizations to understand what was expected to happen versus what really happened.  Forecasts are looks into the future to project existing structures, operations, and systems onto activities that will continue from today and those that will be added – incorporating new information gained from actual results.

Budgets are the spending plans, a result of strategic planning processes.  The organization can utilize budgets as a point of orientation, comparison, and control.  Budgets can be a means of evaluating new opportunities and information against the expected and planned activities and the allocation of capital and other resources.  Budgets are part of the tool set used to evaluate performance of the organization, products, business units, groups, and individuals.

Financial results are usually maximized through a dynamic planning and operating process.  The plan is a roadmap.  When detours are required due to unexpected barriers or new avenues being identified, they are evaluated against planned activities and enable the organization to reallocate resources, compensate for new information, and evaluate trade-offs between continuing as planned (if that is even possible) or revising the plan to incorporate changes and adaptation.

If your organization does not have a strategic plan or budget process, consider the benefits that can be derived from the process and the product, the plan and budget:

•    Clarity of definition for organizational objective and direction
•    Identification of key processes
•    Clarity on priorities
•    Allocation of resources
•    Alignment of organizational resources with objectives
•    Identification of system gaps – process, people, and products
•    Specification of decision-making guidelines
•    Projection of profitability, as well as sources and uses of cash and
•    Planned cash position

Strategic planning and budgeting require an investment required of resources – time, systems, and dollars.  While some insights are gained through the process, integrating the strategic plan and budge into the core of your operations provides significantly more return to the organization.

If the strategic plan and budgets are robust, but only a “one-time” or “point-in-time” event – an annual exercise, not tied to actual activities and operations, you will not be able to capture the full spectrum of returns.  “Annual events” are often viewed as an exercise to be gotten through, without meaning if it isn’t connected into performance measurement and rewards.  Also, a static strategic plan and budget are limited as a comparator, if analyses of results don’t have a chance of impacting what the business and its resources do.

Copyright © 2004 F.O.C.U.S. Resource, Inc.