ACCTG 202

STRATEGY IMPLEMENTATION
& BUDGETING
OVERVIEW
A well-designed strategy needs to be carried forward into an effective operational plan. This
is the budgeting process in the organization. A successful budgeting system is aligned with
the strategy and focuses the organization's resources, is responsive to the organization's
environment, is informative and motivating for employees, and provides a feedback
learning loop in the organization to strengthen future processes.

Upon completion of this lesson, candidates should be able to:

Describe the role that budgeting plays in the overall planning and performance
evaluation process of an organization (1.B.2.a).
Explain the interrelationships between economic conditions, industry situation, and a
firm's plans and budgets (1.B.2.b).
Identify the role that budgeting plays in formulating short-term objectives and planning
and controlling operations to meet those objectives (1.B.2.c).
Demonstrate an understanding of the role that budgets play in measuring performance
against established goals (1.B.2.d).
Identify the characteristics that define successful budgeting processes (1.B.2.e).
Explain the role of budgets in monitoring and controlling expenditures to meet strategic
objectives (1.B.2.r).

I. THE ROLE OF BUDGETING IN STRATEGY IMPLEMENTATION

Spending money and investing resources represents the organization's strategy

1. To the extent that spending and investing decisions are not supporting the
strategic position and role in the strategic plan, the organization is not
effectively implementing its strategy.
2. Hence, effective budgeting should focus on spending and investing that
clearly ties to the organization's strategic objectives.
3. Budgeting is the natural translation of strategy into quantifiable terms!

Strategy implementation by the organization's managers follows the strategy design

by the organization's leaders.

1. Strategy implementation involves identifying short-term objectives and

then establishing processes to achieve those objectives.
2. Short-term objectives and processes must be constantly evaluated and
adjusted to ensure alignment with the organization's long-term objectives
and overall strategy. This is particularly important as the organization's
strategy evolves to address new economic and competitive conditions.

REFER TO THIS LINK: Implementing the plan - Budgeting

II. RESPONSIVE BUDGETING

A good budget must be both firm and flexible. Employees, departments, and divisions
should be able to depend on a budget that makes firm commitments on resources
that will be available, and that firmly establishes expectations on performance.

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 On the other hand, a good budget must have the flexibility to respond appropriately to
changing conditions. While budgets should not be constantly adjusted, when the
occasion warrants change, the budget needs to flex.

1. For example, when conditions in the organization's setting make a significant

shift, the budget should likely respond. Remember that the PESTLE analysis tool
(politics, economy, social, technology, legal, and environment) represents
different conditions that can affect the budget.
2. As another example, competitive conditions can also shift, necessitating a
change to the budget. Porter's Five Forces provides a useful tool for assessing
competitive conditions. These forces include the power of customers and
suppliers, the threat of new entrants and substitute products, and the intensity
of competition in the industry..

III. ALIGNING THE ORGANIZATION

Managers work to implement strategy by establishing operational objectives.

Achieving the operational objectives is a decision-making and management process
that involves planning, controlling, and evaluating operations in the organization. This
process is a feedback loop that can be illustrated here. (See below)
Operational planning is where the strategy is defined into operational objectives,
performance measures are set, and resources are committed. This is the budgeting
process for the organization.
Controlling operational processes requires that expectations are established and
incentivized, results are gathered and reported, and variances from the budget are
computed.
Evaluating the operations involves rewarding performance, analyzing results to
understand why objectives were met or not, and using the insight gained to complete
the feedback loop and inform the planning stage for the upcoming operational cycle.

REFER TO THIS LINK: The Three Primary Responsibilities of Management

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CHARACTERISTICS OF SUCCESFUL BUDGETING

There are a number of important characteristics of successful budgeting. This lesson

has already emphasized two of those characteristics. The first characteristic is that
the budget clearly connects to and supports the organization's strategy.
The second characteristic of successful budgeting is an intelligent balance between
firmness and flexibility. As stated earlier, employees depend on the budget to
represent resources, measures, and incentives that won't change unless there is a
compelling need for the budget to respond to significant shifts in the market.
The budget should accurately represent forecasts of the overall business
environment (external factors) as well as represent realities of the organization's own
environment (internal factors). Accountants tend to favor conservatism, but
conservatism is not nearly as valuable a characteristic in budgeting as is accuracy.
Everyone in the organization needs to clearly understand and strongly commit
themselves to the budget. These qualities are present when everyone feels ownership
of the budget, which results from the opportunity to participate in building the
budget.
The budget should be motivating for everyone in the organization. Budgets effectively
represent goals and performance standards. When budget incentives are
appropriate and budget expectations are reachable with effort (i.e., stretch targets),
then the budget will exhibit motivational characteristics.
Finally, as seen in the diagram above, budgeting is a learning feedback process.
Every budgeting cycle should be assessed to understand what was unanticipated or
misunderstood, and that insight should then inform and improve the next budgeting
cycle.

SUMMARY
A great strategy isn't worth much if it can't be translated into an effective operational
budget for the organization.
Good budgets are aligned with the strategy and are based on short-term operational
objectives that guide the deployment of resources across the organization.
The realities of environmental factors must also guide budgets, and budgets need to be
responsive (flexible) to significant shifts in the environment.
Employees should feel ownership of, and be motivated by, the budget in order for it to be
effective in implementing strategy.
Budgeting is part of an overall decision-making and management process that involves
planning, controlling, and evaluating processes.
These processes connect together as a feedback learning cycle.

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 ACCTG 202
THE BUDGETING PROCESS
OVERVIEW
Budgets are how strategy is deployed across the organization. Effective budgets establish
communication, coordination, and motivation to achieve a long-run strategy by executing
on short-run plans. You'll learn in this lesson that successfully creating an effective budget
entails clear objectives and an open process of participation across the organization.

Upon completion of this lesson, candidates should be able to:

Explain how the budgeting process facilitates communication among organizational

units and enhances coordination of organizational activities (1.B.2.f).
Describe the concept of a controllable cost as it relates to both budgeting and
performance evaluation (1.B.2.g).
Explain how the efficient allocation of organizational resources is planned during the
budgeting process (1.B.2.h).
Identify the appropriate time frame for various types of budgets (1.B.2.i).
Identify who should participate in the budgeting process for optimum success (1.B.2.j).
Describe the role of top management in successful budgeting (1.B.2.k).
Identify best practice guidelines for the budget process (1.B.2.l).

I. ALLOCATING RESOURCES
Strategy defines how the organization spends money and allocates resources. In fact,
the organization's strategy (intentional or not) can be observed in how it spends its
money and allocates its resources (i.e., positions its assets).
That said, the real work of spending money and positioning assets is carried out in
the day-to-day decisions taking place during the organization's period of operations.
These decisions are planned, controlled, and evaluated as a core aspect of
budgeting.

REFER TO THIS LINK: Allocating Resources

II. BUDGETING TIME FRAMES

Budgets are built working backwards from a long-run view based on the
organization's strategy. Conversely, budgets are achieved working forwards using a
short-run focus on operations.
1. Beginning with the three-to-five year focus of the strategy plan, budgets
are typically designed by working backwards from the strategy to design
one-to-three-year targets, followed by quarterly targets, monthly targets,
and perhaps weekly targets.
2. When actually operating with the budget, performance is achieved by
focusing on short-run operations (weekly or monthly), and working forward
to achieve more long-run objectives in the quarterly and annual budgets.
3. As organizations work through each operating period, the budget is
continuously built forward to always maintain a one-to-three-year
operating plan. This is the process of a “rolling” budget.

Remember, the time frame of operating budgets always needs to tie back to the
long-run focus of the organization's strategy, which will be closer to the three-to-
five-year time span.

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III. COMMUNICATION AND PERFORMANCE EVALUATION

Budgeting should be one of the key tools in the organization to facilitate

communication and coordination between individuals and divisions within the
organization.
1. The bigger and more complex the organization, the more crucial it is to
develop clear budgets to support communication and coordination.
2. Budgets help divisions know what resources they can expect to receive,
and what deliverables they are expected to provide.

Budgets serve multiple purposes, and sometimes those purposes can conflict.
Another key deliverable of budgets is to support performance evaluation.
1. When evaluating performance by comparing actual results to the planned
budget, the concept of controllable costs is crucial.
2. Successful budgeting requires accurate estimates of costs, which
managers help provide. However, some planned costs are not controllable
(e.g., property taxes, certain salaries, etc.). Managers should be responsible
to help accurately plan (i.e., forecast) all costs, but their performance
should be evaluated only on costs they can control.
3. When managers are held responsible for costs they cannot control, the
incentive is strong to overestimate costs in order to build slack into these
cost estimates. Budgetary slack provides cushion for the manager in the
event uncontrollable costs are higher. However, budgetary slack reduces
the accuracy and usefulness of budget plans for the whole organization.

IV. ROLES IN THE BUDGETING PROCESS

The diagram shown below illustrates the traditional budgeting cycle.

REFER TO THIS LINK: Example of Budget Process: The National Budget

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 1. The process begins with the formation of a budget committee. In some organizations,
the committee is not limited to executive leadership, but will also involve directors of
selected strategic business units (SBUs) and other managers.
2. Budget guidelines are established by the budget committee and include strategic
objectives, major organization goals, and incentives.
3. To the extent the organization values significant participation in the budgeting
process by lower-level managers, initial budget proposals are submitted “bottom up”
by managers (rather than “top down” by executives).
4. As budget proposals are submitted across the organization, an iterative process of
negotiation and revision begins as the organization works out expectations and the
sharing of limited resources between divisions across the organization.
5. The negotiation and revision continues in the final step as the budget committee
reviews and provides feedback. Eventually, the budget is completed and presented
to the organization's leadership (executives, board of directors, etc.).
6. The actual process of building a budget will illustrate a key aspect of the
organization's culture—employee participation.
7. Organizations make important choices regarding the extent of top-down versus
bottom-up budgeting, which effectively describe how different levels of employees
will participate in the management of the organization.
8. Bottom-up (participating) budgeting involves more time and resources, but results in
a more informed budget with higher ownership by the employees.
9. Top-down (authoritative) budgeting takes less time and resources and doesn't
exhaust the employees as much, but the budget may have blind spots and may be
resisted by the employees.

V. BEST PRACTICE GUIDELINES

1. Link the budget to strategy. This linkage is critical since budgets determine how
resources will be allocated and what measures will be used to evaluate progress.
2. Design budgeting processes that allocate resources strategically. Every business unit
needs funding for both capital investment and operating expenses, and funding
needs usually exceed available resources. Hence, competition for resources within
the organization is inevitable. Tradeoff decisions must be based on long-run strategy.
3. Establish budget targets based on realistic expectations and based on stretch goals.
Budgets are used for both planning purposes and motivation purposes, and these
purposes can conflict. Budgets needs to carefully balance these two purposes.
4. Reduce budget complexity and budget cycle time. Organizations need to constantly
strive to reduce budget complexity and streamline budgeting procedures. Overly
complex budgets that take too much time and resources to complete will disrupt the
organization's core activities.
5. Develop flexible budgets that accommodate change. Organizations should review
budgets regularly and make adjustments if needed. Knowing that budgets have
some flexibility frees managers from the need to build slack into budget estimates to
cover unexpected and uncontrollable developments.

SUMMARY
Budgets are, hopefully, an intentionally strategic effort to tie short-run spending and
asset deployment decisions to long-run strategy.
The time frame of an operational budget typically rolls out across weeks, months,
quarters, and then years.
Effective budgets are used by employees and divisions to communicate and coordinate
with each other.
When budgets are also used to motivate performance, it is important that only
controllable costs are used in the evaluation process.
The budget process traditionally follows a cycle of budget proposals that are submitted,
negotiated, and revised until the final budget is established and approved by the
organization's leadership.
Best practices in the budget process include clear linkage to the organization's strategy,
budget targets that are realistic and stretch the employees, budget processes that are
fast and efficient, and periodic reviews to adjust budgets as needed based on changing
circumstances.
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