How to budget for change in your strategic plan

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We’re quickly approaching budget season, which for many business leaders means weeks spent number crunching and forecasting for 2020. While many businesses do simple growth calculations to project their revenues and expenses for the coming year, the more successful businesses apply a more strategic process to budgeting that not only informs their business plan for the year, but also helps them to potentially innovate and outmaneuver the competition.

When starting the budgeting process, most companies begin with a review of current performance against last year and this year’s targets (actuals to forecast). This gives a starting benchmark for next year’s budget.

From there, many companies typically use one of two dominant approaches to budgeting: traditional budgeting, which takes historical performance and modifies it for the future; and zero-based budgeting, which creates a completely new budget from the ground up with no regard for financial history. While both have its pros and cons, it’s really a blend of the two approaches that can result in the best outcome.

At Creative Business, we encourage businesses to carefully incorporate change into the strategic plan and budget. Although it’s good to track your budget to historical performance, you don’t want to get too comfortable in your financial assumptions—any major changes can suddenly throw off your numbers for the year and put your company in an uncomfortable position. Annual planning should first start with changes that are outside your control, before you consider any changes you want to make internally.

Evaluating threats to find opportunities

There are a number of changes outside your control that could potentially affect your business: market forces, labor markets, new government policies or tariffs, technological developments, cultural or political movements, even climate change. These issues are what will have the biggest impact on your products, employees or your ability to hire, sales and how you sell and capture customers, as well as your access to capital and ability to move to new markets. Although it’s good to have an eye on the long-term, the annual plan is for the short-term, so consider the year ahead.

Some potential questions you may want to ask:

  • What does the supply and demand for my business look like? What are my competitors planning? Are there any major changes to our customers base that we should anticipate?

  • Could an economic downturn or recession affect sales? How might currency fluctuations affect sales overseas? How might it affect our supply chain?

  • Should we anticipate new government regulations that affect our business? How would new tariffs affect our business? How might compliance issues affect our resources?

  • Are there new technologies out there that might hurt or help us? What new tech developments affect us in manufacturing, logistics, fulfillment, operations, marketing or sales? Are we overly dependent on third-party technologies that might change suddenly?

  • What’s happening culturally or politically that affects our business? For example, will more cultural awareness about data privacy affect how we can advertise to our customers? What impact will the 2020 election have on the markets?

  • How might climate change affect our business? Will changes in weather or seasonality affect sales or operations?

One of the benefits of doing this exercise is that it can help to unveil new strategic opportunities that fit with your long-term vision of the business. It’s a chance to explore some of the existing or potential pain points of the business and come up with creative solutions.

Worried that your supply chain might be affected by a potential trade war with China? Now might be the time to explore nomadic sourcing or mobile factories that allow your business to quickly shift production to other geographies.

Worried that changes to Amazon’s rules might affect one of your biggest sales channels? Now might be the time to reconsider your e-commerce strategy and explore new technologies like blockchain or new platforms like Public Market.

Integrating changes and opportunities into your annual plan

Once you’ve identified the biggest threats and opportunities to your business for the coming year, you can build them into your annual plan and budget. Not every idea or opportunity will make sense for the short term or fit the long-term vision. Keep the plan focused on the few opportunities that have the potential to generate outsized impact without shouldering too much risk—and of course, don’t put all your eggs in one basket.

With your strategic plan in place, now you can plan and budget for the things that you can control, such as entering new markets, hiring staff, expanding your product line or services, investing in new technologies, or changing processes to bring more efficiency to your operations.

Think thoughtfully through your expenses and forecasts as a management team, and question team leads about their financial and operational assumptions. Are my current pricing strategies profitable (especially as a service business)? Will price increases from my vendors affect costs of goods sold? What is the ramp up time for any marketing campaigns to effect sales? What is the ramp up time to hire and train a new team? What are the implementation times for new technologies and processes and when might we see ROI?

A big mistake we often see in budgeting is assuming quick returns or quick timelines. A marketing campaign for a new product line might require months of preparation and planning before it’s available for sales. A new POS system may take weeks of implementation and staff training before you see gains in operational efficiency. In the meantime, they incur costs, which affect your company’s cash flow; you must account for this in your budget.

Lastly, always add a buffer into your numbers so that you are protected from unknowns. If you’re a business focused on profitability, having a 20% profit margin and positive cash flow in your budget gives you breathing room in case you miss your sales targets. An experienced CFO or financial advisor can help you to build in these margins into the annual budget.

The journey is as important as the destination itself

Implementing a rigorous planning and budgeting process is just as important as the actual plan. This is the plan your entire company must align on for an entire year, so it must be created with plenty of thought and care. Evaluate outside threats and identify areas of opportunity. Budget for growth, but carefully calculate expenses and question financial assumptions. Maintain a buffer in your budget to protect from unexpected changes.

By taking the time to account for change in your strategic plan, you can open up the mindset to produce truly innovative thinking and also position your company for growth, stability and success in a constantly changing world.

Jeanne Hardy