Quarter four is the time for annual planning and budget development (if not before). It’s also the time of year when some CEOs realize that their budget last year might not have been entirely based in reality. If you have looked at your budget vs reality and realized that the two are only distantly related, the first step to take is to gather the troops and do a strategic budgeting exercise.
Unlike in the BCE years (Before COVID Era), 2023 budgets can’t be a roll-over exercise. With rising inflation, interest rates, and costs, as well as the threat of a potential recession, your 2023 budget will need to be well-thought-out and, as the title of this article suggests, strategic.
“A business needs to have both a strategic plan and a budget.”
What is a Strategic Budget?
A strategic budget provides the tools to set up a dynamic financial model and lay out clear goals for future success. A strategic budget is made up of two elements: A strategic plan and a budget.
A strategic plan lays out the future direction and goals for your business’s overall vision while outlining clear actions to achieve them.
A budget is used to identify financial and key performance indicators to ensure your business is meeting its goals.
When the strategic plan works hand in hand with your annual budget, the combination ensures that your company’s vision is clear and on track throughout the year.
How Do I Build a Strategic Budget?
Your strategic budget starts with a plan. You need to lay out your business goals and what must be done to achieve them. It’s important to take your time on this step, as it’s the foundation for the whole process and will set the tone for your financial year.
Assemble your leadership team, review goals per department, examine the budget from the previous year and discuss discrepancies between reality and that historical budget. This is how you’ll be able to forecast what funds will be needed to implement your plan over the next 12 months and what the expected impact of your vision will be.
As you operate your business throughout the upcoming year, the strategic budget will be your source for identifying financial and operational key performance indicators (KPIs). It will be a guide to give you a clear tool to gauge your business’s financial health as the year progresses.
Why Do You Need a Strategic Budget?
Running a business without a strategic plan and a strategic budget is inadvisable. Doing so, especially in financially volatile times, is borderline reckless. A strategic budget gives your business the financial intelligence to understand and define its needs from its wants. With those insights, decisions can be made to optimally invest available cash and have more available for future needs.
In addition to providing a framework for financial decisions throughout the year and an understanding of predicted cash flow, strategic budgets can provide stability during major events such as mergers, acquisitions, and turn-arounds.
A well-constructed strategic budget, built to support your strategic business plan, gives your business greater stability and puts your business in a position to improve margins, increase profits and make better business decisions.
Download this in-depth e-guide on strategic budgeting and set yourself up for success in the coming year.
If you need help in developing the financial insights and reporting to use in your strategic planning and budget efforts, an outsourced accounting and CFO services team can help. In addition to the free resources, you can find on our blog Signature Analytics provides premium outsourced accounting services with a proven track record of success for our clients. Need forward-facing financial expertise? See how our CFO and business advisory services provide greater visibility into your business financials.