Strategic Planning and Budgeting

Quick reference

• 00:04 Hello, this is Ray Sheen.
• 00:05 I'd like to talk with you about strategic business planning and
• 00:09 how that integrates with the annual budgeting process.
• 00:14 Let's start with strategic planning.
• 00:16 Everyone has heard the term business strategy.
• 00:19 But how does that affect the operating manager?
• 00:21 Well, business strategy is a long range plan for the business operations, and
• 00:25 that plan will require resources to implement.
• 00:28 That means these resources must be budgeted to ensure they are available
• 00:31 at the right time.
• 00:33 Normally, a business strategic planning process looks out three to five years,
• 00:37 although in some industries, it may be longer or
• 00:39 shorter, depending upon the life cycle of the products and services.
• 00:43 Strategy needs to be based in reality, so the strategy planning event
• 00:47 should include a macro-economic view, along with industry analysis.
• 00:51 And then it should focus on specific trends, issues and
• 00:54 market conditions about the company and the competitors.
• 00:57 This would include what is happening with customers and regulatory bodies or
• 01:01 government oversight.
• 01:02 The results should help the company make wise decisions about their
• 01:05 business operations and investments.
• 01:07 In particular, the strategy should identify changes, such as mergers and
• 01:11 acquisitions, new products, new markets, new facilities,
• 01:14 new systems or new initiatives like Six Sigma or customer experience.
• 01:19 The bottom line is the strategic plan should explain
• 01:22 how the company will achieve and maintain a competitive advantage.
• 01:26 Let's look at the strategic planning process.
• 01:28 First let me say, there is as many strategic planning processes
• 01:32 as there are strategic planning consultants.
• 01:34 And all of the processes can work, if the company uses it.
• 01:38 So let me define strategic planning as the process creating the list of initiatives
• 01:42 with time frames and resource requirements needed to implement the strategy.
• 01:47 That means that the company can translate the strategy into specific actions,
• 01:50 projects, and initiatives.
• 01:52 Now many companies do their strategic planning as an event on the calendar.
• 01:56 The senior managers go to some conference center up in the mountains,
• 02:00 they think deep thoughts.
• 02:02 And they come back with actions, projects, and initiatives.
• 02:05 When that happens, it is normally tied to the annual budgeting process.
• 02:09 I find that most large companies do their strategic planning three to five months
• 02:12 before the next fiscal year.
• 02:13 So that inputs can be used in the annual budgeting process
• 02:17 which normally starts about two to three months before the new fiscal year.
• 02:21 Which leads to one of the reasons that many operating managers dread and
• 02:25 despise the strategic planning process.
• 02:28 They're in the middle of the current fiscal year,
• 02:30 working like crazy in the hopes that they'll meet the targets for this year.
• 02:34 When along comes senior management with a lofty strategic plan
• 02:38 that has new targets and new projects, and these must be planned and budgeted,
• 02:41 and if they don't get it right, next year's budget will be all messed up.
• 02:46 Let's talk for a minute about the annual budgeting process and
• 02:48 its link with strategic planning.
• 02:50 The annual budget should be implementing the next segment of the business strategy.
• 02:54 If a strategy is a three-year plan,
• 02:56 the upcoming annual budget should include about one third of the work.
• 03:00 As part of the annual budgeting process, each department must first budget for
• 03:03 running and sustaining the business.
• 03:06 Then they need to include the projects and
• 03:07 initiatives that are their department's portion of the strategic plan.
• 03:11 This will often require coordination between the departments,
• 03:15 which can be difficult, because for new projects to be started the next year,
• 03:19 there probably is no project manager or project plan in schedule yet.
• 03:23 This means everyone must make a number of assumptions, and
• 03:25 often different departments use different assumptions.
• 03:29 A good finance team can sort this out, but keep in mind, they're trying to close this
• 03:34 years books at the same time they're helping to set up next years budget.
• 03:38 The result is often a half-baked budget with massive holes.
• 03:42 I wish it wasn't so, but that is the reality.
• 03:45 All of this annual budget planning is encompassed in the operations plan,
• 03:48 or op plan.
• 03:49 We'll have another module that goes into more detail about the op plan.
• 03:53 However, it should include sales forecasts, spending plans for
• 03:55 all the departments, and high level plans for major projects and initiatives.
• 03:59 And it should be time phased throughout the year.
• 04:02 Let me summarize the time frames we're working with for all of these.
• 04:06 The strategic plan normally is looking out several years in the future.
• 04:10 But it should have milestones and targets of business performance along the way.
• 04:14 The annual budget or op plan looks at one year.
• 04:17 It implements a portion of the strategic plan,
• 04:18 and it's established every year based upon how the business is doing.
• 04:22 Then there are the projects and initiatives.
• 04:25 Some of these may be completed in one year.
• 04:27 Some may span several years.
• 04:28 The op plan will include that year's portion of these projects.
• 04:34 As you can see, strategic planning integrates with the annual budgeting
• 04:38 process, which will impact how you manage your operation or your project.

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