Strategic planning, annual planning, budgeting and forecasting are often interchangeably used, but they are very different.
Strategic planning: Strategic plan looks 2 to 5 years into the future to crystallise what you wish to achieve and then prioritise the strategies for achieving those aspirations.
Annual budgeting: An annual budget is a blueprint for how the company is expected to do business in the next financial year. It forms the basis of Business Operations in the year ahead. It dictates the decisions relating to where to invest, what costs to cut, where to allocate more resources, and where to focus specific efforts. Most organisations do their annual operating plans and budgets once a year with the best available information at that point in time.
Forecasting: A forecast is an estimate of what the company will achieve if it keeps performing as it is. It shows you to what extent you would end up off budget if you continue as is.
After the budgets are done. Every quarter we reflect on what has happened (actuals) versus the budget. Obviously, not everything goes as it was planned. This is where quarterly forecasting becomes important. It helps to quantify and manage the gap between the original budget and the reality. According to the latest insights, a forecast is where the company is genuinely headed.
Coming back to strategic planning. This involves setting goals and objectives, developing plans to achieve these goals, and measuring progress.
Strategic Plans ensure that the company stays on track with its goals, meets deadlines and avoids any potential setbacks. However, these processes can be complicated and time-consuming, so it is important to have an experienced professional help you carry out these tasks.
Business strategy is the vision of where the organisation wants to be in three to five years’ time.
- Setting overall objectives so that the organisation and everyone working there are clear about what they are hoping to achieve.
- Analysing the environment in which an organisation operates and its resources using SWOT analysis – an assessment of business strengths, weaknesses, opportunities, and threats.
- Identifying different courses of action that the organisation can take to achieve its objectives.
Budgeting is a relatively short-term measure. It is just one part of the overall business strategy. It is a tactic tool that is used to implement the activities and projects which senior management has planned.
On one hand, organisations plan for the long-term using a strategic plan. Senior management chooses the strategic options that will have the greatest potential for achieving the organisation’s objectives and then create long-term plans to implement those strategies.
On the other hand, we also plan for the short-term using a business plan which dictates what the organisations must do now to achieve the long-term strategic plan. Budgeting is the tactical implementation of the business plan. It is incorporated in both the business planning and control processes.
These long-range plans are translated into the departments annual operating plans. The business plan is put into practice using the planning and budgeting procedures: what to do when, and the necessary controls (including budgeting) to ensure that planned results are actually achieved.
Let's look at the two levels of budgeting and planning, the corporate level and the business level.
At the corporate level, we have the policies, strategic guidelines, and corporate development plans. So, the aspects we are discussing here are related to strategic foresight, vision, values, corporate development plan, strategic policies, and guidelines. These corporate strategy aspects shape the business process.
At corporate level planning, major assumptions are defined, such as the macro-economic trends, the GDP growth, inflation, interest rate, the minimum required rate of return (hurdle rate), exchange rates etc. The corporate level emphasises key indicators, such as the company's earnings and cash flows.
The Business Unit / Operational level comprises most of the budgeting aspects. The function/ business unit level budget is related to the areas of a company, such as marketing, sales, manufacturing, controlling, and others.
The budgeting process should not start without strategic guidelines. The planning process precedes the budgeting process. The budget should follow the strategy.
Strategy -> Planning -> Budgeting
Here are the steps in detail:
- Senior management engagement: This might sound obvious. But I've personally experienced cases where people in the company experience lack of engagement from senior management.
- Organisational structure analysis: By analysing the organisation's structure, we can assess who does what from the budgeting perspective.
- Identification of accounting structure: If the company accounting structure is established, the responsibilities of the areas are already defined.
Based on 2 and 3 above, Managers of relevant areas are invited to participate in the budgeting process.
- Identification of strategic guidelines: By analysing the business environment, senior management defines strategic guidelines. These guidelines serve as a reference to drive the discussion in the planning process.
- Communication: No planning would be effective without communication.
- Opportunity and feasibility analysis: It helps identify opportunities and detect threats. Awareness of a potential threat on the radar could help mitigate bigger risks.
- Execution: Next, the plan is supposed to be implemented. The outcome of the planning naturally goes into the budgeting process.
- Monitoring and controlling: After the budget is implemented.This is the post-budgeting phase, which comprises the analysis of results compared to the budget.
- At a very high level, the board and executive staff will define the strategic plan. The guidelines include decisions on markets, new products, long-term capital budget etc.
- As we move from the corporate level to the department level, the plan becomes less strategic and more tactical Forecast at the business unit (BU) level is converted into the department budget.
- Tactics on the pricing and marketing of each BU are consolidated into the total company revenues and costs.
- In some cases, if the market conditions prove to be very different from the original expectation. In such instances, the unit's tactical plan needs to be revised. And possibly, the company strategy may also require adjustment. This is called reactive planning.
In conclusion, it is very important to have well-established mechanisms for planning and budget control. So, managers can quickly correct the unit's tactical plan based on present market conditions, and faster it rolls up into the corporate's strategic plan.