Insights on Strategy

Business Makeovers

A Monthly Newsletter published by Strategy Development Group, Inc.                   February 2004

Budgeting Is Not Enough

It’s the beginning of the New Year and budgeting is in the air – at least for some companies with calendar year ends. The ambitious ones already completed their planning in the fourth quarter. For the rest of us who prefer catching up, our annual budgeting process is in full swing.

More and more companies are using the budgeting process as the foundation for their yearly planning. This makes sense because action plans generally require funds, and budgeting is a great structure for rationing limited resources to competing projects.

The budgeting process often starts with a request for department resource requirements for the coming year; for example, staffing, normal departmental expenses, special projects, capital purchases, and so on. Any new expense items are generally highlighted and supported by an ROI calculation or some other justification. Financial executives then organize and present this information to Management so they can choose how best to allocate available resources to existing and new projects.

Throughout the traditional budget process there is an underlying assumption that operating plans will be similar to those in the past with the prior year’s expenditures as the starting point. Consequently, budgeting and the ensuing planning process tend to support and encourage the status quo. SInc.e most resources are committed to already existing needs, few resources are available for real discretionary action. If minimal sales growth is anticipated, there may be no discretionary funds earmarked for new initiatives.

Why do we use this past-based incremental approach to planning and budgeting? First, it’s fast and doesn’t require a lot of new thinking. Second, it’s based on the past and therefore something we already know and understand. Third, it already reflects a consensus among top management.

What it doesn’t provide, however, is access to new strategic positioning to strengthen competitive advantage - a key to business growth and success. Every company has developed some competitive advantage in its market, the strength of which can be measured in the success of that business. Successful companies have developed strong competencies in areas that their customers find important and valuable. That’s why their customers choose to do business with them.

But what if those competencies developed over the years aren’t attracting or retaining customers like they used to? For example, what if your customers would rather have access to up-to-date product information via the Internet than see a sales person? Or get better prices than have product manufactured locally. What if your advertising program doesn’t generate as many leads as it used to? What if your customers are looking for something different or something new?

Past-based budgeting just gets you more of the same. It does not support changes in direction. What if you were able to identify what your customers really want and what competencies you would need to provide that product or service? What if you could see what your company might look like in the future, if you continued to invest in those new areas over time? How would your strategic budgeting process change if you could stand in your desired future and work backwards to the present to see what resources would have to be invested each year to achieve that future? New departments might spring up; current departments might be downsized or transformed. New ways of marketing and selling would be developed, and so on.

Budgeting alone is not enough. It must be preceded by strategic decision-making, which addresses that important question: Are you positioning your business so that you have a competitive advantage in the future? Budgeting is an excellent structure for turning plans into action; but budgeting without strategic decision-making keeps you thinking and doing based on the past; like driving a car by looking in the rear view mirror. A strategic plan gives you the shared vision that allows your management team to shift resources into the strategic choices that will give you that competitive advantage in the future.

For those of you that are still working on your budgeting for 2004, I am not suggesting you put that effort aside. On the contrary, it is important to have a budget in place, even if it might be taking you off course. But I do encourage those of you who don’t have a clear business strategy to begin laying the ground work now so that by next year you will be able to use your budgeting process as a powerful structure for implementing that business strategy and moving you towards your desired future.

If you have questions on strategy-based budgeting, call Paul Ratoff at (714) 572-3131 or email paul@strategydevelopmentgroup.com.