Question

1. How is the financial plan and budget related to a company’s strategic plan?

2. How do the various functional departments of an organization use financial planning (i.e. marketing, operations, sales, executive management, finance, etc.)?

Answer 1

1. How is the financial plan and budget related to a company’s strategic plan?

A Budget:

• Derives its linkage from strategy / strategic plan / strategic roadmap
• States the goals and objectives of an organization quantitatively – aligns the strategy and goals
• Drills down the organizational goals to departmental goals and ultimately to managerial goals – All these goals should feed into the balance scorecard (comprising of financial outcomes, business process outcomes and customer outcomes) of individual HODs and Managers
• Lays downs means to achieve the goals – allocates resources, anticipates challenges and provides for resolution
• Helps an organization plan its journey from current state to desired state
• Helps an organization to plan for different time horizon: from short term to long term
• Encompasses nearly all the departments of an organizations
• Ensures communication, interaction and involvement of all the levels and departments of an organization
• Sets measurable expectations and measures achievements against them
• Measures organizational, departmental and individual performance
• Leads to measurement of variance between planned and actual and opens path for variance analysis
• Forces management to think towards corrective action and improvement plans
• Leads to its own updation and revision

A budget / strategy is not an internal document or plan prepared in isolation. Ideally it should be an outcome of interplay of lot many factors – external as well as internal
External Factors impacting budget / strategy
1.    Economy wide factors:
a)    Prevailing policy environment
b)    Regulatory oversight governing industries
2.    Industry Situations impacting budgeting process
a)    Investment plans of the major players in the industry
b)    Demand-supply factors
c)    Price trends
d)    Changes in technology
e)    International/domestic competitive factors in the industry
f)    Entry barriers
g)    Capital intensity
h)    Business cycles
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2. How do the various functional departments of an organization use financial planning (i.e. marketing, operations, sales, executive management, finance, etc.)?

1. The budgeting process should not be conducted in isolation. It should be considered as a part of strategic thinking and planning:
   1. Accordingly, a budget should not be a standalone document. It should derive its linkage from strategy / strategic roadmap / strategic plan.
   2. A budget should be aligned with organizational goals and objectives. These goals and objectives should be communicated to everyone in the organization during the budgeting process. This sets the uniform platform for everyone to work towards achievement of goals.
2. It should be created by an interplay of various departments concerned. It should not be dictated by one department and imposed on others:
   1. All the concerned departments should be forced to plan towards achieving the organizational goals (planning)
   2. There should be a joint discussion and consensus: Different departments such as Sales, Marketing, Business Development, production, Purchase etc must communicate their requirements and plans to each other during the budgeting exercise so that each one can evaluate the impact of others plans on their own.
   3. No blame game: Each department must coordinate the effort with others for best results.

This should highlight any operational challenges or departmental friction at the onset itself for resolution.

A budget helps management break down a strategic goal or objective into a series of smaller objectives; develop plans around them and control operations to achieve them

Let’s look at the example below:

Alpha Beta Corporation hired RcKinsey and Co. for their strategy formulation. After studying macroeconomic variables, industry dynamics, economic factors and external environment, the consulting firm prepared a strategy to achieve the long term plan of securing a market share of 20% by 2025 from the current 8% level. The strategy document is so complicated that CEO of Alpha Beta is clueless about its implementation.

Steps the CEO should follow:

1. Pull out the five year planned revenue figure from the operating plan and send it to Business Development and Sales & Marketing Department
2. Sales Department should translate the revenue figure into a sales budget:

1. Price points that can be charged
2. Expected Sales volume
3. Shortfall, if any

3. Shortfall should then be communicated to Business Development Department by the CEO
4. Business Development Team should then translate the shortfall and lay out their own plan for making up the shortfall. Their plan at high level should contain:

1. New customers that will be covered
2. Planned conversion ratio
3. Expected sales price point and the corresponding volumes

5. The Sales budget and business development budget should then be sent to production / Operations department and purchase department
6. Purchase department should lay down their plan that should broadly contain:

1. Inventory holding policy of the company and hence the desired inventory levels
2. Payment policy to suppliers
3. Materials purchase plan factoring in lead time / delivery time

7. Production / Operations department should lay down their plan incorporating sales budget and inventory levels:

1. Production volumes
2. Plant uptime / downtime – scheduled and unscheduled
3. Quantum of direct labours
4. Labours productivity

And So On…