Question

Strategic planning and budgeting components

Answer 1

Strategic planning- Providing an overall sense of direction for the corporation is the most important responsibility of top leadership. Followers look to leaders for a strategy that assures future viability/prosperity. Unless that direction is clear, the staff resources of the corporation may wander away from the high priority needs of the marketplace or service area.

The following are the major elements of a sound and complete planning system:

1. Mission Statement/Purpose

This is a single sentence or paragraph that states the purpose of the organization. Why are you in business? What is your business? What difference do you intend to make? What is your unique niche? Note: sometimes this is called mission although most mission statements are a combination of purpose and vision or intended outcome. In our view these should be separated.

2. Core Values

These are the prioritized guiding principles or credo for everyone in the organization as to how they should operate, what is important to always be or do. Core values are the 3-5 values that are so fundamental to the organization and deeply held that they govern the choices made even to the point of a competitive disadvantage, Core values are independent of what is popular, “universal”, or competitive.

3. Long-term Vision

This is the picture of what it will be like when you get there. It is a statement of accomplishment or condition you are seeking. It may be stated with a timeframe, e.g. “By 2020, we will be “. In the earlier example from Disney, it is a statement of the result they always want, not just in the long-term, but today, and it works, i.e. ““Every guest will leave with the same smile they entered with”. In any case, it should represent a call to action, a galvanizing statement for staff. It should provide a clear sense of direction and target for all effort. The vision should be viewed as a real stretch, just shy of unattainable, yet real to everyone.

4. Strategic Agenda

What is the discrete set of projects we are going to undertake in the next 1-3 years to move toward our vision and make the needed improvements to our operations? The answer here is the strategic agenda. Note the strategic agenda is not restricted only to projects that move the company toward its vision, expand its client base, etc. The agenda also encompasses those internal projects that “fix” the organization and give it the ability to tackle its long-term goals. The estimation in the eyes of employees (the followers) of the quality of leadership in the organization, including the board, will hinge in large measure on whether they view leadership got the strategic agenda right. Do they understand the true condition and what needs to be fixed? Have they developed a winning strategy that assures a secure future for the company and all those who work within it?

5. Project Plans

For each of the projects in the approved strategic agenda, a project plan should be developed. Each project plan should include the following list of elements.

• One year target for accomplishment for the project; a result or condition to be achieved
• Two or three year target for accomplishment on projects that will take more than a year to implement
• Metric: the measure that will show whether the project is having its intended impact, e.g. growth in revenue, market share, reduced employee turnover, improved customer satisfaction. Note that a solid metric is not one that measures whether or not a project is being completed, but rather that it is accomplishing the intended goal. Not all projects will have a metric, either because of the nature of the project, e.g. construction of a new building, or because it is not time- and cost-effective to do so, e.g. improved employee morale. Good metrics are ones in which it is cost-effective and appropriate to gather and assess data on a monthly basis.

  6. Annual Budget

  The budget for the year is the financial map for accomplishing this year’s objectives described in the strategic plan. The strategic plan makes clear what the priorities are and where resources should be concentrated. The budget outlays the use of resources to complete objectives and goals.

  7. Capital Expenditures Plan

  This is the plan leadership puts in place for replacement of facilities and equipment as needed. The reason for such a plan is that if equipment suddenly breaks down and must be replaced, the money has to come from reductions in funding for operations, unless you have already planned for the replacement. This can be disruptive to the financial condition of the organization and thus to operations.

  Budgeting components-

• Income

  One of the two main components of a master budget is income. This includes not only your sales, but also any interest, dividends, royalties or other capital gains you earn. If you won’t be using these latter forms of income to run your company, leave them off your master budget, making it an operating budget focused on income from sales. Some master budgets include a bad debt entry, calculating it using a percentage of the sales income.

  Expenses

  The other main component of a master budget is expenses. Many small-business owners create sub-components of their master budget expenses to help calculate spending areas they can cut during slow times, or to help calculate production and overhead costs. After you’ve listed all of your expected expenses for the year, label each as a fixed or variable cost. A fixed cost is one you can’t easily change from month to month, such as your rent, insurance premium, loan payment or copier lease. You will be more likely to be able to cut variable expenses if you’re short on cash, because many of these are discretionary. Designate recurring variable expenses you can’t easily cut, such as utilities, phone bills or labor, differently than variable expenses you can’t modify, so you can quickly find places to cut when the need arises. To create a flexible budget, use formulas that change your discretionary spending based on your income.

  Overhead and Production

  Once you complete a master budget, break out your production and overhead costs to help with pricing your product or service. Identify costs directly tied to making each unit or delivering each service. Depending on the type of business, these costs might include machinery, materials, extra energy, or labor. Mark these as production costs. Identify non-production costs, such as marketing, phones, office supplies, and general and administrative costs, and mark these as overhead expenses.

  Totals

  A common component of a master budget is the "Total" function, which shows you how you are doing each month and for the year. You can total your income and expenses by month to show your net income or loss each month. You can also total your income and expense by category to see how a particular area of your company is performing. Using totals to track your monthly income and expenses will help you manage your cash flow better if you prepare a separate budget that shows when bills are due and when income is expected, rather than using monthly averages. For example, instead of dividing your insurance premium costs by 12 and putting the average in each month’s expenses, enter insurance premium payments only in the months they are due.

  Projections

  A helpful component of many budgets is the projection total column, which shows you how you’ll end the year if you continue performing at your current levels of income and spending. These can be skewed if you have large expense or income amounts early in the year. Looking at your performance for a particular month usually isn’t a realistic indicator of your overall performance, because you will have more bills come due in some months. Periods of higher bills can include the beginning of the year when fees are due, dates when quarterly insurance premiums or taxes are due, or times when you have seasonal sales peaks and valleys. Averaging your monthly income and expenses can help you project your annual performance if you don’t have seasonal swings and your expenses are fairly steady.

  Other Budgets and Report

  Some businesses create the master budget in conjunction with other budgets, such as sales, marketing, general and administrative, production, labor, materials, and overhead. This allows each department to amend its numbers, updating the master budget when they do, which alerts management to any problems or opportunities that occur when departments or functions change their performance.