Budgeting is part of a larger, closed-loop process called "performance management." Performance management is a holistic approach to the way organizations direct and manage resources to achieve objectives. In the context of performance management, budgeting's central role is to support execution through the allocation of resources to the activities that drive value.
6 Steps for Linking Corporate
Strategy to the Budget
The budget is supposed to be the tool by which an organization transforms its strategy intoaction. Unfortunately, up to 60 percent of organizations do not link their corporate strategyto their budget. This paper will show you how to link these related management processesand strengthen your business performance management capabilities.
white paperTABLE OF CONTENTS: PAGE
Why Budget? .......................................................................2The Role of Budgeting in Performance Management ...............2Best Practices in Strategic and Operational Planning ...............2The Process for Linking Strategy to the Budget........................4Step 1: Define Key Objectives.............................................4Step 2: Identify Strategies and Impact ................................4Step 3: Document Assumptions ..........................................4Step 4: Develop Tactics and High-Level Operational Budgets.5Step 5: Assess and Mitigate Risks.......................................6Step 6: Check the Plan for Completeness and Finalize It ......6Cause and Effect Visibility and the Role of Technology .............6Creating the Strategic Plan with Extensity MPC ....................7Reviewing the Operational Plan ..........................................11Monitoring Actual Performance ...........................................13Why Linking Strategy to the Budget Makes Sense ....................18
Why Budget?Ask any three people in an organization why they budget and you are bound to get three different answers.They usually include such statements as, "It is something we do every year," "It is a big stick we use tocane those who don't perform," and "It is the mechanism for setting the managers' bonuses." Is this reallythe intended purpose of budgeting? Consider the typical budgeting cycle. It lasts four months-up to125,000 person-days per year for the average billion-dollar company -and starts with senior managers ask-ing the rest of the organization to "guess" the financial numbers that they already hold for next year. Thatguessing is facilitated by a set of spreadsheets that are handed out to budget managers for completion.Once completed, the spreadsheets are returned and numbers are consolidated, only to reveal that the budgetmanagers' guesses weren't right.
So the second round starts with senior managers asking budget managers to guess again. This time, thebudget managers are now focused on what set of numbers senior managers hold and whether they can guessthe right ones. Strategy-the "how" of achieving the numbers-has been replaced by a numbers guessinggame. If the organization is fortunate, then senior managers will reveal their guess by doing a top-down passto the budget holders-who now have a great excuse for missing the budget: it wasn't their guess.
With this type of process in place, it is no wonder, then, that no one says they budget in order to direct theway in which their organization will achieve its strategic goals-the intended purpose of the budget.According to data cited by Kaplan and Norton, creators of the Balanced Scorecard, 60 percent of organiza-2tions do not link strategy to their budgets. For budgeting to become the relevant process it was meant to beand can be, this gap must be fixed.
The Role of Budgeting in Performance ManagementThe budget is similar to a car's gearbox: it doesn't work in isolation. A gearbox's function is to transfer thepower of an engine to a chassis so that the driver can move towards a predetermined destination. If thegearbox is designed without reference to the engine that will power it, the car won't work and the driverwon't go anywhere. Similarly, if a budget is designed without reference to the strategies it is supposed tosupport and the resources available, the corporation will not move towards its desired goals.
Budgeting is part of a larger, closed-loop process called "performance management." Performance manage-ment is a holistic approach to the way organizations direct and manage resources to achieve objectives. In the context of performance management, budgeting's central role is to support execution through theallocation of resources to the activities that drive value. Jack Welch suggests that budgeting can be a pro-ductive and "wide-ranging, anything-goes dialogue between the field and headquarters about opportunitiesand obstac... [download for more]
