Harris KhanBudget strategies set the main focus of a budget and in most cases don’t fluctuate as often as budget goals. A strategy, for example, identifies what financial objectives the business wants to accomplish while goals define how the budget will achieve these objectives.
What is Budget Strategy?
A manager needs to make crucial decisions that will have a big impact on the future of the company. Budget strategy is the main combination of objectives and constraints that make up the overall business strategy. The budget strategy describes how the company will use its financial resources and how the organization will achieve its strategic goals. Business firms will often use budgets to plan, implement, and evaluate their overall business strategy.
Strategy allows a company to determine its best course of action for the future. There’s a lot of variance in how a company can handle its strategy and what it does with its strategy. Every business needs a budget strategy that maximizes their strengths and resources as well as addresses their deficiency and needs.
A company’s strategy determines the role it will play in the market place. Businesses rely on the information their budget provides to make most of the key business decisions. The strategy portion of the budget focuses mainly on setting your budget goals and budget policies while the budget implementation section focuses on how to deliver the budget.
An Example of Budget Strategy
Take an online business that specializes in the sale of custom-made books. To effectively compete in the market place, the business has determined that it needs to customize each book to its customer’s needs. To do this, the business has determined that it needs to employ a specialized service with expensive equipment.
To stay afloat, the business owner knows that his or her company has to strike a balance between increasing revenues and reducing costs. The company knows that the margin for error is small and the strategy portion of the business budget will focus on the following:
To increase revenues, the company needs to sell more books to a larger customer base. The company needs to sell more books, and the costs to do this are simply a necessary part of doing business in this environment.
To reduce costs, the company needs to purchase more affordable equipment to accomplish the goal of increasing revenues. Once the company reduces costs per book while increasing revenues, the company will have increased revenues and cut costs by buying cheaper equipment.
The overall objective of the budget strategy is to increase the sale of custom-made books while lowering costs.
As you can see from the example, the overall goal for the company is to increase revenues and reduce costs. In order to accomplish the strategic goals and objectives, the company needs to set goals for each of the following areas of the business:
- Revenue goals
- Costs
- Cash flow
- Balance sheet
Cash flow and the balance sheet are the two areas that will create the biggest impact on the company’s overall strategy.
Budget Policy
When a company devises the strategy for its overall budget, it needs to devise a plan to carry out the strategy. The budget policy is the plan in which the company will follow to create the desired changes and results.
Once the company has a strategy for its budget, determining budget policy is relatively easy. The company will devise the strategy with its budget goals and it will devise the budget policy with its budget constraints. The policy will need to describe what the company needs to do and how it will go about achieving the strategy and its goals.
This is an important step in budgeting because it forces the company to determine its level of commitment to the plan. If there are changes in the environment and unforeseen events that emerge, the company will need to change its budget policy. If its budgetary policy does not fit its objectives, the company needs to change the policy and the strategy along with it.
Just because a company’s budgetary policy may initially work, when the environment changes, the company may be forced to go against its policy and strategy to reach its goals.
Budget Goals
Budgetary goals are the direct result of the company’s business strategy. In the example of the custom-made book company, the business’s strategic plans have determined that by cutting costs, the company will be able to maximize revenues. In order to accomplish this goal, the company needs to develop a set of goals that support the overall plan.
The company’s goals for its main revenue streams will be profit and sales goals. Profit goals will also include a return on sales that the company wants to attain. The company will also need to determine any other objectives that it has for its sales and profit goals.
The company will also need a set of goals for its cost reduction strategy. The company will have goals for its cash flow and other financial objectives. There will also be goals for measuring its capital needs. Monitoring and tracking these goals will allow the company to follow up with any changes to its overall strategy in the future.
Budget Policies
Budgetary policies are the various controls and activities that a company uses to obtain the goals it has set. The budget policy states what the company plans to do and how it is going to accomplish the objectives and goals it put into place.
One of the main strategies of a customized bookseller is to buy equipment to lower costs. This may seem like a no-brainer decision, but when it comes to budgeting, there are plenty of things that will affect the outcome of this policy. The overall strategy does not only entail cutting costs of equipment, it also entails maximizing revenues.
The budget policy for this company needs to state when new equipment budgets will be available. It may also state that large purchases can be made in multi-year budget blocks or it may determine a policy just for large purchases. The policy will also need to state what the company’s budgeting process will be.
Overall, the company’s policy will determine how equipment will be purchased and will determine what amount will be spent on capital purchases. It will also state what contingencies will be available in the event that the market changes. For example, if the company needs to spend a large amount of money on equipment, can it postpone this purchase or will it be forced to make sure it receives enough revenue to offset this bill?
The company will also have policies on what its cash flow will be and how it will upgrade its margins. The company will also state what level it will begin taking on debt and how much. It will also state what the term will be.
Budget Implementation
Budget implementation is the part of the budget plan that a manager implements and tracks the progress and results of the company’s business strategy. Budget implementation consists of the budget plan that is set forth and the budget administration activities that are taken by management to carry out the plan.
The overall goal of budget implementation is to achieve the plan and the company’s goals. Budget implementation will focus on providing the necessary funds to internal departments and monitoring their spending progress.
Implementation will also be responsible for controlling the expenditures of departments so that they stay in line with the budget and meet the goals and objectives. Budget implementation will also be responsible for overseeing departmental activities and approving requests for expenditures.
Benefits of a good Budget Strategy
Without proper budgeting, a company is just taking a shot in the dark. Budgeting will help your company see a plan for the future that can be effected by changes in the market and by the economic conditions of a competition.
Benefits to your competition will probably go to your most worrisome competitors. You can compete in many different markets, but budgeting will allow you to compete on a strategy that will give you the best chance of gaining or maintaining market share and profits.
A good budgeting strategy does not only help the company by cutting costs and increasing revenues, it helps it by improving customer service. It helps by decreasing inventory to create a strategic inventory plan. It also helps by improving financial performance, strengthening planning ability, and improving cash flow.
A business that has poor or no budgeting process is losing out on revenue and profits. A business that has a good budgeting process can, in turn, reinvest more profits into the business for future growth.
