Florida CFO Group partners Dawn Johnson, Mike Meyer, and Dan Polen discuss the importance of aligning strategic plans and annual budgets.
Mike: A lot of companies, and not just start-ups, struggle with planning and especially with aligning their annual budget and strategic plan.
Dawn: Yes, too often each is developed independently of the other without any effort to integrate them.
Dan: When this happens the annual budget is generally based on the previous year's numbers and not on the strategic goals and objectives of the organization. I work with my clients on developing a strategic plan that creates an overview or picture for how the management team sees the company over the next three years. Then the shorter-term is managed to a one-year budget.
Mike: I know I've been called in to work with companies that either have too many people involved in the planning process, or too few, for it to be effective. With too many a clear picture fails to emerge. With too few, the plan fails to reflect an effective image of the future.
Dawn: Strategic planning is a top-down exercise led by the CEO and CFO that involves the senior management team, and aligns with the overall strategy established by the highest governing body of the company, i.e., the Board of Directors. Developing an annual budget is a bottom up exercise led by the CFO involving the organization's middle management.
Dan: Yes, that's important. If middle management does not buy into a budget, it's a waste of time. This can never work and can create a chasm between the senior management team and middle management. Unrealistic budgets are a waste of time and effort.
Dawn: I see this in a number of companies that are having difficulty making their numbers and retaining key employees. Often when this is the case I can trace it back to a planning process that excludes the managers responsible for executing against the annual budget.
Mike: Frequently, politics or a lack of experience with strategic planning and budgeting are the key contributors that prevent budgets and strategic plans from aligning.
Dan: That and a lack of effective measurements and adjustments to the annual budget. Organizations should measure and adjust quarterly.
Mike: If you find that the strategic plan and annual budget are not in alignment and it's a short-term issue, you adjust the numbers in the annual budget to reflect the current situation. The danger in this is in making adjustments quarter after quarter and moving away from the direction for the organization laid out in the strategic plan.
Dan: And in making the adjustments to the annual budget without explanation it is difficult to gain buy-in from middle management.
Dawn: It is critical to align your budget with your strategic plan to ensure your company is heading in the right direction to achieve your strategy. Your annual budget should be representative of the first year of your strategic financial plan. Lacking this alignment, you may find your company unable to achieve your financial goals, and, consequently, your overall strategic goals.
Dan: Yes, your annual plan should establish milestones guiding you and allowing you to monitor if you are on task with your strategic plan. By monitoring performance to plan on a timely basis you can make operational/financial/tactical changes to get back on track.
In our next blog Florida CFO Group partners Joe Price, Dick Trueblood, Tom Walker discuss Cash Forecasting.
