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Creating the organization’s strategic budget

16 May 2023 | EN

Another topic, as part of the educational cycle “Challenges of budgeting in a large company” is the topic of going beyond the operational budget and creating the strategic budget of the organization. What is a strategic budget for and whether having it is a “luxury” you will learn later, but to talk about the strategic budget, let’s stop for a moment at the operational budget.

Operational budget

The budget is often locked in the operational management loop. The operating budget includes a number of different financial elements that reflect the costs and revenues associated with the current operations of the company, including:

  1. Operating expenses, which are all expenses related to running the day-to-day operations of the company. They may include employment costs (e.g. salaries, social security contributions), employee salaries, costs of materials and raw materials, service charges, rents, insurance, electricity and water charges and other operating costs.
  2. Revenues operating, i.e. financial receipts related to the operating activities of the company, such as the sale of products or services. Operating revenue may come from a variety of sources, such as the sale of goods, service charges, rents or commissions.
  3. Marketing and advertising costs. These may be expenses for advertising in the media, marketing activities, organization of promotional events or remuneration of marketing agencies.
  4. Sales costs relate to expenses related to the sales process, such as salaries for sales personnel, commissions for sales agents, costs sales training, sales office equipment, etc.
  5. Administrative costs
  6. R&D costs refer to expenses related to research and development of new products or services.
  7. Logistics costs , include costs related to the transport, storage and distribution of products.
  8. Maintenance and repair costs

All of the above elements make up the operating budget, but what if the company calculates costs and revenues in all these areas, conducts market observation, positioning, sets sales budgets, and all the time stands still? Managing only the operating budget means that we do not move forward, we operate on the same markets as before and we fall into the loop again (just like when creating operating budgets we fall into the loop budgets). How to break out of this loop? One solution is the Balance Score Card.

What is the Balance Score Card and how does it relate to the company’s budget?

If you’re dealing with an organization that has mastered all the elements of its operating budget, it’s time to start competing in a new way. The Balance Score Card (BSC) is a tool that allows you to translate the new model of competition into a budget. This tool helps organizations assess their performance and achieve strategic goals from 4 perspectives: financial, customer, internal processes and learning and development. Each of these perspectives has its own goals, measures and actions. In the context of new ways to compete, organizations need to adjust their budgets to take into account the priorities set out in the BSC. This means that the allocation of financial resources should be based on strategic goals and metrics related to each BSC perspective.

Strategic budget in the organization

There are many talks on the link between the operational strategy and the budget, and we will probably not find clear answers in this area, because the level of this link depends on the size of the organization and the stage of development it is at. If we prepare the operating budget well, overcome the challenges related to the budget and start analyzing the market, we are able to generate several percent growth. This is a healthy development of the organization, but compared to the scale of the project, it is often not enough. In order to climb to a higher level, you must provide a budget for strategic activities in the company, which, most importantly, will not be transformed into an operating budget as it is implemented (which unfortunately often happens). The strategic budget is primarily used to define and plan the organization’s long-term goals and priorities. It is prepared over a longer time horizon, usually 3 to 5 years, in contrast to the operating budget, which is usually prepared once a year or more often. The strategic budget covers the entire organization, taking into account strategic goals and initiatives, focusing on such aspects as: development of new markets, introduction of new products or services, investments in research and development, innovations, etc. It allocates resources to individual projects and strategic initiatives.


Use of BSC to plan the organization’s strategic budget

Using the Balance Score Card tool, you can easily create a strategic budget for your organization. To do this, strategic goals are created from the idea to compete, divided into 4 BSC perspectives, i.e. financial, customer, internal processes and learning and development. They have such goals, each of them is assigned a measure, most often a strategic measure, to show whether the goal is being achieved. To such a strategic extent, we set two values, the current value and the target value (and milestones between them that will help us achieve our goals). Such strategic measures often relate to a specific strategic project, often referred to as a strategic initiative. Such a project-strategic initiative has its own separate strategic budget, also associated with the incentive system, then the manager’s evaluation system results not only from the assessment of the implementation of the operational budget, but also of the strategic budget (the implementation of each of these budgets is assessed separately). Only in such a situation are managers able to make a strategic change, which is obviously the goal of the entire strategic budget. Achieving the target value of the measure causes a change in thinking, the way the company works and allows you to generate higher than average increases.