What is Strategic Budgeting?
Strategic Budgeting is a budget prepared by the companies that takes into consideration long term objectives and costs that take more than one year to achieve. This involves preparing multiple budgets and forecast for short term costs that are aligned with the long term. And thereafter allocating and categorizing funds depending on the activities.
- A long-term strategic plan usually spreads out the 5-year plan to set goals. There are annual operating short-term plans to achieve a long-term goal eventually. Similarly, Strategic Budgeting manifests the details of the annual plan and allotment of funds to specific areas.
- Spending and the areas have to be in sync. Otherwise, the company might end up spending on short term projects yielding no results or unaligned with long term goals.
- If the company modifies the long-term strategic plan, then it can accordingly change the strategic budget to meet the needs.
- It can be very crucial to the company for effective planning and prioritizing. The costs have to be prioritized to satisfy the stakeholders. Usually, the areas with the highest amount of dollar allocation come in high priority tasks.
Examples of Strategic Budget
- Product Development – This is the department that works on years of research and development to design a product and finally launch the product. So having a long term budget in place helps the product team to allocate their resources wisely.
- Programs – As discussed earlier short-term programs and stepping stone to achieve the long term goals, a strategic budget plays a vital role here for both. For instance, an aeronautics company takes ten years to develop a rocket. So in this long tenure, this budget helps them to achieve their end goal.
- Infrastructure Budgets – These are the projects which can develop a nation, city, or any organization. If the projects are long term and may take several years to complete, like railways or national highways, long term budget always helps to function.
- Productivity and Capability – Most of the organizational goals are long term. However, midway, if there are any process-centric changes like an adaption of new technology, risk management, and many more, the strategic budget allocates for such needs too.
Strategic Budgeting Process
There are four dimensions we need to look for when we are in the process of converting the goals into a budget. That is, Objectives, Strategies, Measures, and Targets. Let us define these step by step, which helps in designing the strategic budget.
- Objectives – This defines what exactly we are trying to achieve, which are our goals.
- Strategy – The second step would be to develop a strategy to achieve a set goal.
- Measures – After implementing the strategy, we need to track and evaluate its performance using relevant standards.
- Target – Finally, the goal is the place where we aim to be by the end of the period.
In the whole process, we need to allocate funds to all the functional departments and help them achieve their objective to achieve the final target. Significant steps in designing the budget would be as follows –
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- Forecast the short-term cost and factorize them in the budget
- Allocate categorized funds depending on the activities
- Make multiple budgets for the short term, which align with the long term ones.
A Strategic budget is an essential element for any organization. It provides a long-term road map for the success of the company. A company with a long term vision and goals have to be very constructive and accurate in designing such a budget.
This article has been a guide to Strategic Budgeting and its definition. Here we discuss the process, examples of strategic budgeting along with its importance and detail explanation. You may learn more about financing from the following articles –