Part 5 in the 10-part “Collaborative Enterprise Planning” series
If you ask any senior manager about the purpose of the budget, the response would probably be that it is to help with the implementation of strategy. However, if you were to ask departmental managers the same question, they would probably respond very differently. They might be of the opinion that, among other things, it’s a numbers game where expenses are suppressed and income projections are set unreasonably high.
Part of the issue is a corporate culture where managers are kept in the dark regarding strategy, or are not trusted to do “the right thing.” The other issue is that plans are often devoid of any form of strategy, containing a set of numbers for income and expenses that could represent anything. As a test, take a look at your current template used to collect the budget and see if you can figure out the company’s strategy. If you can’t, it’s unlikely that anyone else can.
Planning model design: business as usual
To connect strategy with operational plans from a technology point of view involves setting up the model in two parts. The first shows the organization as it currently stands, which we can refer to as “business as usual.”
In this part of the model, budget areas are split into “fixed” and “variable” items. The fixed items are those whose cost (or income) is known a long way in advance. Things such as rents, loans, or other contractual payments and some taxes could be set years into the future. For most of these items, there isn’t much that can be done, so for planning purposes, these should be separated and dealt with centrally without wasting anyone’s time.
However, other items will be variable as they depend on “events” that are sometimes unpredictable. These might include sales volume, the impact of weather, or the delivery of a project stage. For these items, budgets will be dependent on the business judgment of managers or those responsible for assessing their expected value. These values can either be set through driver-based models, or they could be the focus of the budget collection process.
Planning model design: strategic initiatives
The second part of the model is for strategy, which is primarily about making changes to the current “business as usual” model, either by either improving existing business processes or implementing new ones. This is usually accomplished through strategic initiatives whose activities are not currently being performed by the organization. They can cover a range of activities such as increasing sales through the implementation of a customer relationship management system or in reducing costs by installing more efficient production equipment.
As initiatives are identified, it is essential that they are properly resourced and tracked for effectiveness to allow modification, cancellation, or replacement, depending on the overall view of the future and what is currently being achieved. To do this, each activity or initiative should have its own expenditure – and possibly income stream – through which individual budgets are set.
Planning model design: putting it all together
As described here, operational plans come in two parts: “business as usual” and “strategic initiatives.” Don’t attempt to mix the two, as you can be sure that any new initiative will soon be starved of resources. “Business as usual” should be collected first, followed by individual budgets for each strategic initiative. For those initiatives that cut across multiple departments, it is vital that they are planned by all departments involved and that each recognizes that they play a part in its overall success.
The total operational plan can now be prepared by combining the two sets of budgets. However, when communicating the budget or reporting performance, it’s important that the two parts are always kept separate.
The next blog in this series will examine the importance of ongoing feedback loops in the planning process.