The role of budgets and variances in strategic planning AO2
AO2 You need to be able
to: Demonstrate application and analysis of knowledge and understanding Command
Terms: These terms require students to use their knowledge and skills to
break down ideas into simpler parts and to see how the parts relate: Analyse,
Apply, Comment, Demonstrate, Distinguish, Explain, Interpret, Suggest
A business needs to have both a strategic plan and a budget.
The strategic plan lays out the direction and goals of the business and
guidelines for actions to achieve those goals, while the budget looks
at the money needed to support achieving those goals. Budgeting is only one part of the strategic planning process.
approaches to strategic planning are available. One approach is to
start with a strategic analysis of where the organization is now,
including its strengths and weaknesses (SWOT) and the economic, social,
political and technical environment (STEEPLE)
in which the business operates. The next step is to decide what
direction the business wants to head; this process may involve
developing a mission statement or strategic philosophy and setting goals. The next step is to identify tactics or action steps for achieving strategic goals.
A budget is a forecast of all income and expenses, and helps a business identify future financial needs and plan based on expected profit, expenses and cash flow.
The budget therefore must support the strategic plan. If a business
doesn't have the budget to support its strategic plan, the business
needs to either modify its plan or find the financial means to support
cover a certain period of time. Most businesses develop monthly,
quarterly and annual budgets. The "Entrepreneur Small Business
Encyclopedia" recommends developing budgets that cover at least the
next three years, and preferably five years. Budgets can be periodically updated based
on current information; however, "Entrepreneur" warns businesses
against getting so caught up in the budget process that they forget to
keep doing business.
Variance analysis is important to assist with managing budgets by controlling budgeted versus actual costs.
In program and project management, for example, financial data are
generally assessed at key intervals or milestones. For instance, a
monthly closing report might provide quantitative data about expenses,
revenue and remaining inventory levels. Variances between planned and
actual costs might lead to adjusting business goals, objectives or strategies.