Thursday, 6 October 2016
Budgeting vs Planning
CORPORATE PLANNING (BUDGETING)
So why would I think of corporate planning as operational? Well, l largely because it drives the immediate future of the business, which could be thought of as the next one, two or maybe, at a push, three years. It is what the banks look to when arranging finance; it is what your managers look to when striving for bonuses. So it is operational in my view, which necessitates a high level of empowerment and ownership for your team of managers who assist in compiling this picture of the immediate future. Furthermore, if you do achieve the holy grail of business buy-in at branch level, then the probability of delivering results in line with those forecasts is increased exponentially because increased empowerment and ownership does lead to increased accountability and buy-in.
Strategic planning, on the other hand, is not operational. It should be done by a small group of executives entrusted with ensuring the long-term growth and sustainability of the business. This is the team who are looking at mergers and acquisitions, at branch closures and fundamental changes in business direction. The drivers or events they bring into their planning meetings almost by definition cannot be discussed with the larger body of managers or employees. Many an insider trading case have had their basis in matters considered and discussed at this level.
Once we have established the fundamental difference between the two and rationalised their respective roles we should be comfortable that there is never a question of which to do or which takes priority, as it should be self-evident that both leverage each other. Both are fundamental and pivotal to the success of any business. After all, as Stephen Covey said, ‘begin with the end in mind’. In this context that implies understand your long-term goals (strategy) and then put short-term plans (budgets) in place to support the successful achievement of that plan.
That makes a lot of sense, but there is an alternate school of thought which suggests that defining your strategies should be grounded in currently achievable deliverables, in other words, work out what can be achieved (budget) and let that shape what is achievable in the longer term (strategy).
Once again I don’t think it is a case of one philosophy being right and one wrong; both have solid logic supporting them, and the reality is that while the two could be done in isolation, they need to be reconciled.
I think we would all agree that a strategic plan for commercial flights to the moon would be a tad unrealistic based on the budgeted revenues arising from the company’s taxi fleet, numbering four! Corporate planning and strategic planning are heavily dependent on each other. Without the end goal in mind, your short-term plans don’t have a lot of meaning; but without the stepping stones grounded in current realities, you will never reach your end goal.
When is budgeting planning and when is planning not budgeting?
The answer lies in the debate around current terminologies of corporate and strategic planning – which are fancy words for budgeting, or are they? I would define corporate planning as an operational function while strategic planning is more long term and not operational.
Article first published in Accountancy South Africa Magazine. October 2016