Navigating Corporate Budgeting: Linking Strategy and Execution

 Read time: 5 mins

In this edition, we’ll delve deeper into the world of corporate budgeting. While the term may seem intimidating, understanding its connection to your organization’s strategy and the different approaches to budgeting can empower you to make informed decisions in your role, even if you’re not a finance professional.

Why Budgeting Matters to You

As leaders, it’s crucial to understand how budgeting ties into your organization’s strategy, strategic plan, and annual planning cycle. A well-structured budget serves as a roadmap, guiding your team towards achieving strategic objectives. It provides a framework for decision-making, helping you allocate resources effectively, identify potential challenges, and measure performance against set goals.

"A budget is not a collection of numbers, but an expression of our values and aspirations" - Jacob Lew

Connecting Budgeting to Strategy

1. Organizational Strategy: The budget is a financial representation of your organization’s strategy. It outlines how resources will be allocated to achieve strategic objectives.

2. Strategic Plan: The strategic plan outlines the organization’s long-term goals and the strategies to achieve them. The budget translates these strategies into numbers, providing a detailed plan for the upcoming fiscal year.

3. Annual Planning Cycle: The budgeting process is a key component of the annual planning cycle. It involves forecasting revenues, costs, and profits for the upcoming year based on the strategic plan. 

CRITICAL TIP FOR NON-FINANCE LEADERS: A Budget is not a Forecast! A Budget must align with achievement of an organizations objectives (in line with an organizations 3 or 5 year plan, for instance). If a Forecast suggests that a Budget cannot be achieved, the key objective for leaders in the organization is to find ways to make it possible. If you are a Non-Finance leader who feels that their budget cannot be achieved, think through what you need in order to achieve a given budget (as opposed to bringing objections). 

Different Budgeting Approaches

There are several approaches to budgeting, each with its own advantages and disadvantages. As a Non-Finance Leader, you will unlikely have input into the method that is chosen across your organization. The key element here, is to understand where you fit into the budget setting process and what you can do to maximise the outcomes for your team/ department etc. Here are a few common approaches (high level):

1. Incremental Budgeting: This approach uses the previous period’s budget as a base and adjusts it for the upcoming period. While it’s simple and maintains stability, it may perpetuate inefficiencies and doesn’t encourage innovative thinking. For non-finance leaders, this approach can be easy to follow but may limit opportunities for strategic reallocation of resources. This is where we often see the old, add 3% for inflation and move on approach. Its quick, its simple, but often leaves "fat" on the table. 

2. Zero-Based Budgeting: In this approach, every expense must be justified for each new period. It promotes efficiency and cost control but can be time-consuming and may overlook the bigger strategic picture. For non-finance leaders, this approach can provide a detailed understanding of costs but may require more time and effort to justify each line item. Its also the approach that often annoys department leads the most as they are having to justify every expense. I would highly recommend that you spend time understanding the key drivers of costs across your team, if this approach is being used in your organization. The easiest way to build a zero based budget is using a basic driver model (covered in my online course Finance for Non-Finance Leaders). 

3. Activity-Based Budgeting: This method links budgeting to company activities. It provides a more accurate cost picture but can be complex to implement. For non-finance leaders, this approach can provide a clear link between activities and costs, but it may require a deeper understanding of the cost drivers in your department. Given this, organizations with a low level of financial acumen will struggle to effectively utilise this approach. 

4. Top-Down Budgeting: This approach involves senior management setting the budget and cascading it down to the departments. While it ensures alignment with strategic goals, it may not consider the unique needs and challenges of each department. For non-finance leaders, this approach can provide clear direction but may limit your ability to influence the budget for your department. With often one line of communication (downward), limited buy-in to the budget process is often the case with this approach. 

5. Hybrid Budgeting: I've made up my own term here however what I want to stress is more often than not, organizations will employ a mix of approaches. It is very common for organizations to commence a budget setting process with a top down approach to 'frame up' an initial view, and then delegate more detail budgeting approaches like incremental or zero based. The thinking behind this is that t ensure that the organization at a whole is shaped up, then the detail can be worked through at a more micro/granular level. 

Embracing Budget Literacy

Understanding corporate budgeting can enhance your financial literacy and enable you to make more informed decisions. Here are some key takeaways:

1. Link Budget to Strategy: Ensure your budget aligns with your organization’s strategic objectives.
2. Understand the approach being adopted: Each budgeting method serves a specific purpose. Choose the one that best fits your department’s needs and the organization’s strategic goals.
3. Use budgets wisely: Use your budget as a tool for decision-making, performance measurement, and resource allocation.

By mastering these concepts, you’ll be better equipped to contribute to your organization’s success and drive your department’s performance.

I hope you found this breakdown helpful. If you have any questions or would like to delve deeper into financial management topics, feel free to reach out. Stay tuned for more insights in our upcoming newsletters.