The word “budgeting” is enough to make many managers cringe. It’s often viewed as a dreadful, time-consuming process that, once completed, is subject to awkward negotiations or outright challenges.

But when approached properly, budgeting can be a fruitful exercise not only in financial planning, but in strategic planning as well. In fact, linking strategy to the budgeting process ensures that an organization is on the right path and allows it to be more responsive to rapidly changing needs.

Perhaps the most difficult task is making certain that resources are directed to the most important elements of a company’s strategy. The budgeting process is the perfect opportunity to strengthen that vital link between an organization’s strategic planning and its resource allocation.

Link budgets to strategies

A well-conducted budgeting process is crucial to organizational success. The best approach involves the people closest to the spending, the individuals most knowledgeable about the business unit’s needs, and managers who control the purse strings. Most processes can be easily improved just through a broader sharing of information and by soliciting stronger participation. But the most significant improvements will occur when budgets are clearly tied to company strategy and when the overall process is simplified.

Linking budgets to strategy makes the process a more focused assignment for staff and frees up time for greater efficiencies. The simpler the budget, the easier it will be to tie it to strategy. One of the greatest benefits for simplifying spreadsheets and other details captured in the budgeting process is that it leads to more transparency and greater accountability among team members. With better metrics, hiding poor budget performance becomes difficult. 

Place value on activities and results

Organizations can drive additional value from their budgeting processes by implementing activity- and results-based budgeting, rather than focusing exclusively on the traditional cost elements.

With activity-based budgeting, a management team translates business strategy into the activities necessary to implement it. This method helps ensure that strategy-critical units or departments have enough resources in their budgets to carry out vital activities. It also prompts decision-makers to become more willing to shift resources in support of new strategic priorities. And it gives them a persuasive case to justify resource allocations for activities that may not translate directly to the bottom line.

Communicate strategies to budget for their success

Too often, an organization’s strategy is “written” in one place only -- the CEO’s head. As a result, others in the organization are unaware of the details and unable to determine how this high-level strategy should affect their activities or be represented in their budgets.

Without clear direction or strategy, managers have no guidance to create effective budgets or to make tradeoffs. In some cases, unworthy projects end up sapping the company’s resources, while other more valuable efforts are virtually ignored. This is particularly true for companies with numerous initiatives -- some of which overlap, some of which conflict, and all of which no one person can track.

An excellent way to manage multiple initiatives is again to combine strategy with the budgeting process, particularly as it relates to capital allocation. One person can be designated to “own” the company-wide strategic process, to communicate that strategy, and to chair a committee of senior managers who decide how to fund initiatives approved by the CEO and key business managers. In doing so, only initiatives linked to the list of strategic priorities can be funded.

Alternatively, a team led by the CEO can be formed to set strategic planning goals for all departments, review and discuss each department’s priorities, and suggest ways to allocate resources so that high-value initiatives receive adequate funding.

Avoid these two common budgeting traps

Strategic budgeting enables your organization to seize market opportunities as they arise and to avoid two traps known as “blue-sky planning” and “strategy by spreadsheet.”

• Blue-sky planning emphasizes a vision, but provides few of the details required for execution. It doesn’t force an organization to make choices or a commitment, and employees don’t typically understand it. Plus, it doesn’t identify strategic drivers of financial performance, so no one knows which metrics matter or how to gauge progress.
  
  
• Strategy by spreadsheet, on the other hand, focuses so much on minutiae and modifying figures and formulas in spreadsheets that the company fails to anticipate changes in priorities and in the market, and can’t adapt or change to meet them.

The budgeting process may not be pleasant, but it does provide a critical opportunity to firm up and evaluate organizational strategies -- and rid the organization of the sort of “fuzzy thinking” that can jeopardize the organization’s long-term success.