Why Your Annual Budget And Your Strategic Plan Make Such A Great Combination…
It is that time of year when your business should be finalising details of your strategic plan for the year ahead. The financial impacts of that strategic plan are represented in your annual budget, which needs to take into account each of the following issues:
- Where will your future growth come from?
- What impact will this growth have on your margins?
- What level of overhead can your business sustain? And what outcomes do you require from those overheads?
So, for example, how do you know whether you’re spending the right amount on sales and marketing? Are you spending too much… or maybe not enough?
- What impact will growth have on your working capital?
- How will your planned growth impact on your break-even point?
- Which strategic options should you prioritise due to their more meaningful impact on performance outcomes?
These are just some of the questions that you have to answer during the strategic planning process for the year ahead. Your annual budget will clarify the likely or possible scenarios that your business needs to accommodate…
Know Your Key Performance Drivers
As you develop your strategic plan, you must identify the drivers of performance in your business and construct your budget based on those drivers.
However, if your business does not have a well-developed budgeting and reporting framework, the behaviours of these drivers may not be clearly understood. This is a critical learning area for most independent businesses. Understanding the performance of your business involves testing these drivers and reviewing how they are impacting on your outcomes during the year.
You probably already feel that you have a good understanding of these key business drivers. However, your budget delivers two excellent tools for managing these drivers:
- The measurement and reporting of performance in relation to the key drivers. This ensures a proactive focus on the management of these critical business activities;
The analysis of these drivers to build a deeper understanding of how their impact on performance may change over time (alerting you to key issues to respond to).
Whilst your strategic plan is a key document in your business, it is not a static document. Business takes place in a dynamic environment and the key elements of your strategic plan need to be reviewed constantly.
Experience shows that the development of successful strategic plans as represented by the annual three-way forecast (ie, your budget), is often a long-term, three stage process.
Stage 1 – Your Budget Foundations
You develop your budget from known but often untested drivers. It is an important document; as well as being a framework for more effective review and learning, it is a performance management tool.
Stage 2 – Your Refined Budget
The learnings from Stage 1 result in a budget based on a greater knowledge of the drivers of business performance. Therefore, variances to budget become more meaningful and more likely to result in performance review of key drivers.
Stage 3 – Continuous Learning
The learning process never stops. The performance review of core business continues to improve, whilst the learnings continue for new strategic areas of the business.
Businesses with well-understood and well-tested drivers are likely to be more successful than businesses that do not understand their drivers well enough. Whatever stage your business is up to in the strategic planning/budgeting process, you should start this process as an urgent business management activity… and there’s no time like the present! The start of a new financial year gives you just the opportunity to begin this crucial planning. Now’s the time to get started!
Got questions? Get in touch!