Budgeting and Your Strategic Plan

Author: Larry Chester

What Are Your Plans?

We are continuously making plans. Some are short term – where are we going to have dinner tonight, or how can we keep the kids occupied on the weekend? And some are long term – should we put a new kitchen in the house, or how do we plan for retirement?

But what are your plans for your business? Do you consciously make the same level of decisions that you do for your life or your family? Budgeting is just one part of the strategic planning process. It is not just a reality check on the elements that are needed to put your plan into place, but it’s an immediate implementation plan for this next year and how it fits into your long-term strategic plan.

I’d boil it down to five things you need to nail down before a strategic plan turns into an actual budget: goals, staffing needs, overall financial impact, operational changes required, plus tracking and adjusting once you’re underway.

Goals

Start by pulling out your strategic plan. What did you say you were going to accomplish over the next five years? More specifically, what needs to happen next year to move you toward those objectives?

• Grow revenue significantly.
• Enter a new market.
• Improve margins.
• Introduce a new product.
• Upgrade your technology.
• Make an acquisition.

Those are good objectives. But saying you want to grow is very different from determining what it will actually take to grow. Exactly HOW are you going to grow. And what does that growth look like. What’s the number you’re reaching for? Is it aggressive, or are you sandbagging it? That gap — between the goal and the plan to hit it — is where most budgets fall apart before they’re even built.

Staffing Needs

Every goal has a people question behind it, and it’s usually the one that owners skip. Who’s actually going to do the work? Do you have the right people already, or do you need to hire? Does someone on your team need to develop a new skill, or do you need outside expertise you don’t have in-house?

Your current team already has a full-time job running the business. If you’re asking them to also execute the strategic plan, with no change in headcount or capacity, you haven’t budgeted for the plan — you’re just hoping that it fits. If your team is already running at 110%, because you like running lean and mean, where is the stretch to get your new goals accomplished? How would that impact on morale and quality of work?

Financial Impact

This is where the plan meets the numbers. How much money does each objective require? What’s the return, and over what timeline? Are you considering a capital expenditure to reach your goals, or is this a day to day cash flow issue? And just as important — will it actually make the company more profitable, or just bigger?

It’s easy to say you want to grow 20% next year. But where’s that growth coming from, what will it cost to generate, and can your current operation actually support it — working capital, inventory, systems, people? Sales growth by itself isn’t the objective. The business has to benefit from the growth you’re creating, or you’re just spending more to make more, which isn’t the same thing as getting ahead.

Not surprisingly, business owners brag about sales to their friends. But the number that really matters is the bottom line, whether you’re looking at Net Income or EBITDA. If you’re spending a lot of effort, money and staff time to grow sales, with the end result being the same bottom line, you’re just running faster to stay in the same place.

Operational Changes

Here’s the one that owners underestimate the most: you can’t hit a new goal by doing things exactly the same way you’ve always done them.

Your normal operations aren’t pausing because you have a strategic plan. You still have to invoice customers, collect receivables, run payroll, manage the banking relationship, and serve the customers you already have. Your strategic objectives sit on top of all of that, competing for the same people, the same hours, and the same money.

If you want a materially different result next year, something about how you operate has to change too — a process, a system, a role, maybe all three. That’s a bigger conversation than this one, and it’s exactly what I want to dig into next month. I like to say, “if it ain’t broke, go ahead and fix it.” Greater profitability only happens when you institute change.

Milestone Reporting and Adjustments

A budget isn’t something you build in December and revisit next December. Set checkpoints throughout the year — ideally monthly — where you actually compare what’s happening against what you planned.

Are you on pace? If not, why not? Was the assumption wrong, did the timeline slip, or did something outside your control change? A good plan isn’t one that never needs adjusting. It’s one where you catch the gap early enough to actually do something about it. Business is a moving stream. You need to be able to adjust to stay on track to meet your goal. That’s why monthly reviews are key in hitting your year end goals. That’s better than finding out in Q4 that you’ve been behind since March.

Before You Approve Next Year’s Budget

Put your strategic plan and your budget side by side. Does the spending reflect what you say matters? Have you accounted for the people and the operational changes those goals actually require? And if you hit every number, will the business be closer to where you want it five years from now?

Because setting an ambitious goal is the easy part. Building a plan — goals, people, money, operations, and a way to keep yourself honest along the way — is where the real work begins.

And that raises the next question: if your strategy requires you to operate differently, how are you actually going to manage that change? We’ll talk about that next month.