The budget process is the key tool or tactic to be used to deliver operational strategy. But more, it is a tool to establish and review operational strategies and deciding if they work.
Budgeting is so often simply an exercise that allows vague control. The budgeting exercise should deliver the strategy.
What are the links between operating (profit and loss) budgeting and strategy? A budgeting exercise should deliver the operational strategy. A budget can be the revealer and deliverer of strategy, showing the strategic path to be followed with milestones of achievement marked out. A budget can be the controller of strategy; it can hinder achieving strategic outcomes. Too often, budgeting processes are not properly integrated with the overall strategy of the company.
Budgeting at a detailed level for day-to-day control takes on a different mantle from the corporate budget level - but budgeting it still is. The focused use of a detailed budget is a helpful tactic in supporting and delivering strategy.
As profitable trading is vital to any business, inevitably one, if not the prime, objective of a financial strategy will be the delivery of sales; that is, growing sales or at least a target figure, along with control of, and reduction in, costs, the aim being to maintain and improve the net profit or margin.
For many entities the formation of a budget may well be the extent of a strategic plan. For example, if an objective is to hit target sales of x and deliver a profit of y per cent on the sales, then monitoring, responding as necessary and delivering the thought-out and achievable budget is the strategy to be followed.
This chapter covers the stages of the budget process and the significance of each stage in support of the process, from formulation to delivery of operational strategy. It is surprising how the budgeting process is often underused, even in what are considered the best of companies. Unfortunately, budgets are so often simply exercises used for vague control.