What if the operating budget is not related to the company’s strategy? Thinking deeper about this topic, which is part of our series “Budgeting challenges in a large company”, you have to go back a bit. The first question to ask is is there a strategy at all in the company?
Company strategy or lack thereof as a budgeting challenge
Contrary to appearances, it is not natural that the company’s full strategy is a functioning document, known to everyone, with clearly defined strategic goals and where the company is heading. Most companies do not have a strategy understood in this way, and the role of a full strategy is fulfilled by the so-called emerging strategy. Technically, a company can function without a formally defined strategy, but the lack of a strategy can lead to problems and limit the company’s growth potential. Companies most often do not have strategies because:
- Unstrategic Awareness: Business owners or executives may not be aware of the importance and benefits of having a strategy. They may focus on day-to-day operations and responding to immediate problems, underestimating the importance of long-term planning.
- Knowledge or skills lacking: Some companies may not have the in-house knowledge or skills to develop and implement strategy. They may lack experience in strategic planning, market analysis, identifying competitive advantages, or setting strategic goals.
- They operate on a small scale: small businesses, especially those run by individuals or with a small team, can focus on current tasks and operations rather than strategic planning. In such cases, the strategy may be less formal or informal.
Operating budget and company strategy
The lack of linking the operating budget with the company’s strategy can lead to a number of problems and difficulties for the organization. Here are some consequences of not having this link:
- Spread of resources: Without an operational budget tied to strategy, there is a risk of dispersing an organization’s resources over irrelevant goals or initiatives. This can lead to time, energy and money being wasted on activities that do not contribute to the company’s strategic goals.
- Non-prioritized: Linking budget to strategy helps you prioritize investments and spend. If these two spheres are not synchronized, there is a risk of allocating resources to projects of low strategic value, while important initiatives may remain underfunded.
- Difficulty in monitoring progress: linking the operating budget to the strategy allows you to track progress towards goals strategic. If there is no such link, it is more difficult to assess whether operational activities are delivering the expected results and contributing to the achievement of strategic performance indicators.
- No accountability: Linking the budget to the strategy helps establish accountability for the results and effectiveness of operations. When this link is missing, it can be more difficult to determine who is responsible for achieving strategic goals and making decisions in line with the company’s strategy.
- Inflexibility: the company’s strategy should be dynamic and flexible to adapt to the changing environment business. Linking the operational budget to the strategy allows you to react quickly to changes and reallocate resources to achieve strategic goals. Without this link, the organization may be more rigid and unable to adapt to new market conditions.
- Lack of long-term planning: Linking the operating budget to strategy helps prioritize investments and spending over a longer period of time. Without such a link, it is difficult to plan long-term spending, which may lead to financial instability in the future.
A key function of the finance department
Due to the challenges presented above related to the lack of connection between the operating budget and the company’s strategy, the finance department and its leaders are responsible for proper cooperation in this area. The finance department should work with other departments to set investment priorities and adjust the budget to changing market conditions and monitor the implementation of the budget and evaluate it regularly to ensure that funds are allocated in an effective manner and in line with the company’s goals.