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Strategic Planning and Budgeting - A Must for an Organisation that wants Results

DirectTalk with Winnifred

"Those companies who think strategically, plan competitively and implement intensely, will most certainly eclipse the rest in their field."
Dr Peter Johnson -

Ladies and Gentlemen
It is a great pleasure for me to be here today. From the distinguished line-up of speakers I see that I am the only women here - and more so that I am a marketer - normally seen as the big spenders in a company.

I am here to talk to you about Strategic Planning and Budgeting - A must for an Organisation that wants results.

I believe that the most important word here is results. Because if you are not results orientated you cannot measure or be measured and are therefore not committed to either your company as a whole or its many stakeholders.

The subject is much more complex than what you see or know and normally takes many weeks or even months of explaining, for companies to understand the importance of strategic budgeting and planning, especially if it is tied to results.

I will therefore make it as simplistic as possible not that I underestimate your intelligence but to ensure that we in this afternoon session enjoy the process of budgeting and having fun.

An alarming statistic shows that only 12% of CEO's, thought their budgeting process was completely reliable, while 88% labelled it 'cumbersome.'

Another statement:
"Too many companies have complicated and prolonged the process of planning and forecasting. They report hollow and often obsolete information that can't be effectively applied to managing their business. The global economy is punishing those companies that continue to use only traditional measurements like revenue, profit and expenses for evaluating their operations instead of including customers aswell."

"It's a wasteful effort, driven by a phenomenal amount of detail that generates precisely the wrong numbers," says David Axson, MD at Answer-Think Consulting Group.

What we have to understand is that strategic planning can enable your company to take advantage of new and different opportunities in the future while minimising the negative impact of unexpected challenges along the way.

In this time of rapid change, strategic planning can especially in budgeting also provide great opportunities to support the mission and goals of your company.

The planning effort must, however, be conducted within the framework of the company's planning process and be all inclusive and must consider the company culture, history and resources and ensure that it achieves its strategic financial and other objectives. In addition, the strategic planning process must be 'owned' by the company.

What is interesting, is that many companies believe in only one strategy. As far back as 1968 forward-thinking companies had multiple strategies and business plans within each of their business units.

However, the question begs to be asked - Can the planning and budgeting process be turned into a real business advantage for the company?

Yes, but let us first look at what the key budgeting and planning issues are

  • Budget objectives should directly be linked to business objectives
  • Ensure that your strategic initiatives are properly funded in your budget
  • Identify the biggest pitfalls within your current planning and budgeting processes
  • Ask the question: Should it be Top Down, or Bottom Up budgeting - what best fits your company
  • Does your planning process include periodic re-forecasts or rolling forecasts? Should it?
  • What percent of activities in your budget process is non-value-added?
  • Does your planning system allow you to explore the implications of different and possibly multiple strategies and investment decisions?
  • How should strategic plans and initiatives be monitored and judged for success?
  • Do your planning process link management's goals with shareholder value?
  • Is it the process or the technology that is holding back your budgeting and planning efforts?
  • How does your customers influence your budget planning if at all?

And as a strategic and passionate marketer, the issue of customers is the most important point. And the point that most companies ignore. More than ignore, I would say. Many believe that their customers are an expense and as such treat them as expenditure. Rather than as an investment and should treat them as such.

With this in mind I'm going to turn budgeting on its head. And look at it from the customer's point of view and not the company's product point of view.

The reason for this is that your customers whether they are individuals or businesses are really why your are in business.

"...You are in business to serve and satisfy customers
and profit is the measure of your success
and it is better to make a customer than to make a sale!"

" ... and you should not define yourself as sellers of goods or services
but redefine yourself as buyers of customers. "
Prof. Theodore Levitt 1969

Let me take you through my reasoning
Every customer has a profit and a loss account with you. You invest money in them to build brand awareness, build relationships and loyalty and get them to buy your products or services. They then invest their time, emotions and hard cash in you to obtain that product or service that will satisfy their needs, wants and aspirations.

Now in my many years of experience, most companies and probably your company to is so busy minding your business that you forget your customers. And you are so busy with budget planning for products on how many 'widgets' have to be made or build, how many people do we need to do it, etc. etc., that your customers are actually a secondary consideration.

When really the company as a whole should look at:

  • Who and where are our target markets?
  • How big is it?
  • What is my market-share?
  • What is my share of wallet?
  • What market-share do I want and more importantly, how many widgets am I likely to sell to this market?
  • And is this market-share profitable?
  • Do they need or want it?
  • Can they afford it?
  • And many other customer functions.

And only then ask the question: What would I need from my operations department, sales or manufacturing, administration, etc. to fulfil this 'order' and then budget for it.

I am often asked: "Do you prepare a budget top-down or bottom-up?"
And my answer is always the same: "It depends on where you see your customer!"

However it does not end there. For effective budgeting and to get results you need to know some of these key issues.

  • What is your cost per customer (CPC) or simply put how much did it cost me to get a customer onto my books?
  • How much did it cost to get an order from them? Cost per Order (CPO)
  • How much does it cost or is it costing me to keep my customer?
  • What is their LifeTime Value (LTV) with me?
  • Can I implement my RFM Model to get my customers to buy more, more often for more money?
  • How long are they staying with me? What is my churn?
  • What is the true value of my customers?
  • What is my ROI for each customer?
  • What is my break-even on each and every transaction not necessarily sales?

Everybody in the company needs to know this. Have a little card in your pocket with these facts exactly the same as retailers and traders in the money market industry.

However, this in itself is a different discussion. When your people know what it costs to get a customer and to keep a customer, they will understand that every time a customer walks into your door, that customer is worth R100 for this particular purchase, but their LTV is worth R8000.

And every time a customer leaves your premises unsatisfied, for whatever reason you are losing not only R100 but their LTV with you of R8000.

And all this affects your budget. You need to have a strategy in place to ensure the management of your customers and the continuous investment you make in them.

Why is this customer information relevant to strategic planning?
Simply because we marketers know. It is normally our budgets that are cut time and time again because we are seen as an 'expense' rather than as an investment in our customer's well-being.

Look at what studies in budgeting trends shows us:
"The next phase was determining how to leverage our core team's competencies for a rich customer experience. We need to turn our customers into advocates (loyalty ladder) by examining the areas they find 'uncomfortable' in our businesses and their relationships with us and then create the products and services that will turn displeasure into a great mutual benefit and sales and ultimately profit."

"It sounds simple, but it is actually extremely complicated. We came up with a lot of ideas with an understanding of top-line and bottom-line growth, but we found the best initiatives occurring naturally as we kept 'customer needs' as our primary focus and main objective."

This is where strategy comes into play
Let us first define strategy.

Perhaps the most useful definition and the most simple is: Strategic planning is a process (content and processes) of collective (team) and informed decision making (accurate information and insight into SWOT) that:

  1. helps management and leadership teams position their company for lasting competitive success and
  2. helps these teams intelligently implement changes to their processes, systems, structure and budget to cater for the needs of their customers.

For a company to have direction, they need to focus. They need to know where they are going. And to be successful, they need to have a business strategy in place that is workable, understandable and can be implemented by everyone in the company not only the CEO and finance.

Your strategy should be flexible to tie-in with the changing environment because times and businesses are changing and more importantly your customers are changing.

Your business strategy should be translated into a business plan that is quantifiable. By that I mean, spell it out:

  • We want 1000 customers by this date, and
  • Each customer must buy 10 widgets from me during this period
  • At this particular price from my branches and
  • We have to invest so much money in each of our customers to get them to buy and to retain them.

Marketing, like budgeting is a strategic numbers game.

For a business plan to have any value you need a management strategy with clearly defined objectives that will keep your company on course. Flowing out of this is your management plan (your infrastructure and internal requirements, etc.)

These strategies and plans are important, because
"If you don't know where you are going
any road will get you there."

From this flows the marketing strategy on how and why we are going to talk to our customers or prospective customers to tell them about our products and services. And out of this flows the marketing plan, which tells you how to do what, when where and why.

Also who is going to do what. And what my marketing investment is going to be to get and keep my customers.

This is called the Marketing Investment Strategy and Plan.

My point is. If you know how big your market is, and you know how many customers you have, and how much they have cost you, and you know how many customers you want, and how many widgets you have sold before, then you will know how much you have to invest in each customer to buy your widgets.

Moreover, market pressures dictate that companies plan better because most of them have short windows of opportunity and short time frames to market.

In the old days you could take as much time as needed to perfect a product. Today, customers want the product immediately; and you will have to change your planning processes to satisfy their needs. And that costs money and a budget needs to be in place to cater for this.

What are the inefficiencies in strategic planning?
And let us look at some points to substantiate why strategic planning is so relevant and important

Findings from the 1999 Hackett's Best Practices Benchmark Study of Planning and Performance Measurement. Part of AnswerThink Consulting Group -

  • More than two-thirds (66%) of company's world-wide fail to integrate strategic planning with tactical and financial planning processes. This impacts on planning cycle times as well as the quality and speed of decision-making processes.
  • Clear-thinking companies understand that strategic planning success is dependent on co-operation from every level of a company.
  • World-class companies are defining performance measures up front, tying them to strategies and then building tactical and financial plans around targets. This best-practice approach aligns management motivation to strategies as oppose to strictly financial measures. It also inspires collaboration among the ranks while reducing planning cycle time.
  • Strategic planning is not only a senior management activity, causing executives to divorce it from operations planning.
  • The average company gives only 38% of its managers and less than 10% of employee' access to their plans.
  • Another explanation is the failure to tie incentives and rewards to strategic goals. Bonus pay is linked to financial plans for 97% of the companies in the Hackett benchmark study; however, only 58% of the same companies tie incentives to strategic plans.
  • If a company focuses on strategy, the budget will follow. The companies that share strategies with all corporate levels will more often than not have incentives and rewards that inspire staff to focus on strategy and less on budget.
  • The majority of companies recognise that e-Business will soon revolutionise business, as we know it today, yet research shows that most of them are locked into an old-time annual planning process.
  • World-class companies are ready to embrace the opportunities offered by e-Business, because their planning functions review budgets and forecasts every quarter or sooner, permitting them to be flexible and far more responsive to changes in the marketplace because they can make adjustments in real-time.
  • Nearly 80% of the companies in the study report their management information systems are inadequately integrated with transactional and operational systems, and fewer than half of the companies produce regular reports automatically.
  • The majority of companies in the study continue to use the general ledger as their key information source, so management reporting cycle time is largely dependent on the closing of accounting books.
  • The average company takes too long to produce plans. According to the best-practices study, the typical company budgets for 230 line items versus 40 or fewer at leading companies. Too much detail in a report not only slows down the process but also increases the probability for error. The study's top performers budget only 15 items.
  • Complexity slows down the planning process, it impacts the speed and quality of decision of managerial decision-making, causing a ripple effect throughout any company.
  • The financial analysis staff at the average company spends the bulk of their time (48%) on lower value-added activities. A third of the time (33%) is spent collecting and validating data, and report preparation consumes an additional 16% of time. Variance analysis requires 31% of time, leaving only 21% of the remaining time to analyse the potential impact of the numbers on the business.
  • Poor systems integration limits report customisation. Barely one-third (33%) of them can quickly access management information by geography, product, commodity, customer, supplier or major project.
  • A lack of data standardisation. Less than half the companies employ common enterprise-wide languages and definitions.
  • Advanced technology demands standardisation. Data warehousing, data mining and collaborative software are the most prevalent advanced tools and use of the Internet and Intranets is increasing.
  • Just over 20% of the average company's executives have online access to management information, and only 48% of users at all levels have online access. Top-performing companies have wired 80% of their users for management reports.

The conclusion: World-class corporate planning organisation of the future will produce strategic, financial and tactical plans in less than two months, utilise 15 or fewer budget line items and dedicate less people to the revenue process. The focus of staff will shift from data collection to forecasting and action planning around the customer.

World-class companies are also rethinking their views of planning and budgeting. The traditional focus on operational processes is costly and outdated and doesn't benefit the business in a meaningful way.

The global trend is towards Customer-Centric Budgeting.

And how can you improve your chances of a successful planning process?

  • There is no one-size-fits-all solution
  • Address the root issues that most frequently undermine it. Some of the issues include, lack of accountability, unclear goals and objectives, insufficient connection and integration between long-term strategy and short-term operating plans
  • The one omission that is conspicuous absent from most strategic budget plans are the little (or no) knowledge about your customers
  • Adequately identify your strengths and weaknesses it will give you a solid platform for sound decision-making
  • Over reliance on technology. Technology is there as an enabler not the magic wand. Too often management turns to technology as the solution. It rarely works
  • Inadequate performance measures as a benchmark on all individual budgets. Sources for benchmarking data include trade associations, magazines and consulting firms
  • Look at regular redesign of your budget process with thorough analysis of historical performance
  • The lack of effective performance data shifting and hiding of hard relevant data
  • Shifting the responsibility of strategic budgeting onto someone else
  • Not soliciting the viewpoint of those that matter in the planning process the lack of this is insufficient support
  • If you re-design your planning process or strategic budget thinking validate your thinking or findings across the business. You may even want to set up an Intranet where employees can express their views
  • Set clearly defined measurements to evaluate the process the bars won't keep shifting
  • Success equals streamlining the planning process
  • Planning is not a game about negotiating expectations it is planning your investment in the growth of your business and your customers
  • Developing a workable strategy and planning process is an integral part of running your business, which includes setting quantifiable goals for products, services and employees and even your suppliers and other stakeholders and assessing the resources required to achieve stated goals and track progress along the way
  • Strategic planning is a highly visibility process. (You often hear: "It's budget time." and the world stops no business gets done). Done correctly, it can dramatically transform your company and have an enormous impact on your shareholder value
  • Most companies focus on how to spend less time on planning rather than on how to improve effectiveness within their business and around their customers
  • What gets measured gets managed. Measurement determines where the business will put its efforts

What are your outcomes?

  • Strategy drives the planning process
  • Managers are held accountable for achieving their plans
  • The planning process is widely embraced as a "management" tool to drive results
  • Business unit goals and objectives will move down into functional and individual objectives
  • The value of the planning process outweighs it cost in time and effort
  • Continually monitor plan performance (actual vs. plan results)
  • Take corrective action as required to ensure you meet key plan objectives
  • Finance provides valuable decision and support to functional areas in preparing their plans
  • The purpose and value of planning is widely understood throughout the business
  • Planning is different for different industries and different for different management
  • Your customers are the key reason for being in business

So what lessons have we learned?

  • Budgeting begins with Buy-In
  • Participate in the process and take ownership
  • Market pressure will demand that companies overthrow their current old-thinking planning systems
  • Companies warn that success in this area requires endless patience, prolonged communication with employees, investment in new data-gathering tools, expensive and time consuming
  • Don't think top-down is the only way or correct way look at it from your customers point of view, whether the customer sits at the top or at the bottom
  • Don't believe that all budgets must reconcile
  • Replace static budgets with continuous plans rolling budgets that are 'owned' by department heads not finance. Rolling budgets and forecasts are the wave of the future.
  • 46% of the companies in a 50-company Hackett Benchmarking Solutions study are installing balanced scorecards to identify the key drivers of their business. Another 22% have rolling forecasts.
  • Planning is the most political of all processes that fall under the finance function
  • It also requires finance to evolve from being a reporter to being a facilitator of the process - relinquishing control and assuming the role of facilitator. Finance should now ask: What are your base business needs for our customers and the critical projects you want to undertake that are currently under-funded? And work with general managers to get these projects funded.
  • Budget planning is problematic because it is steeped in a tradition of negotiations (Customer budget planning takes this away)
  • Search for simplicity whatever the trigger, most companies are looking for simplicity in the process.
  • A team will quickly realised that current processes involves a series of events that should respond to its changing customer needs and market opportunities. These are business exercises, not financial exercises
  • Develop a culture of 'Action Now.' By linking a planning process to an ongoing validation of strategic directions and near-term financial dynamics, you can adjust direction to drive growth.
  • The company doesn't cease operations at the end of the calendar year and customers does not stop shopping, so why should the planning exercise?
  • And lastly, the devil is in the execution.

Strategic planning your road map for success
It can be argued that the single most significant contribution a board of directors can make to any business is strategic planning. Strategic planning does not focus on the day-to-day operations of the business; instead it involves long-range planning for the business with integration of its mission and vision.

It involves looking into the future to determine what will constitute success for the business years down the road. Setting the strategic direction for any business includes identifying a plan that serves as a road map for allocation of energy and resources.

It is this plan that determines how resources related to projects undertaken by the business and how employees are used and how it impacts on their most valuable asset customers.

If you fail to plan, you are planning to fail, which is why long-range strategic planning is so important.

In fact, strategic planning is the only way a top management team can plan for economic, demographic, competitive, technological, and regulatory changes that affect the way your company operates and how you do business with your customers.

So, with all of the upheaval in our economy and around the world, and with a clear understanding of the need for strategic planning, why do so many businesses fail at this critical management priority?

  • Why don't more than half of all businesses of any size have a written comprehensive and detailed strategic plan?
  • Why are most employees in most businesses unaware of the strategic plan, or uncertain of their role in its implementation?
  • And how can you prevent these failings in your business?
  • And strategic planning doesn't have a beginning, middle or an end and it is never wrong just ongoing and sometimes incomplete.
  • Why are your customers not a part of your business?

As a forward thinking CEO said: "By choosing the right information to standardise, my company has gained a competitive edge. I'm dealing with data that is close to the market. I can get on my PC with 80 facilities and tell you exactly what my sales and profits are that minute. I know which customers I'm doing business with and making money with. We now spend our time on our customers, instead of on these data-input exercises."

And another:
"We've come up with a concept we call our current expense level; in which finance and unit heads figure out how much it will cost us to stay in the business recognising the importance of getting and keeping our customers. Where we are at the same amount of volume and providing the same service.

Once we figure that out, we extrapolate from it to determine how much money we will need to spend additionally to achieve our tactical and quantifiable targets.

The global trend is truly towards Customer-Centric Budgeting.

Ladies and Gentlemen, to close off
A plan is just a plan it is the implementation of that plan, and the achievement of the goals stated in that plan that is really important.

Strategic budgeting is an essential tool in customer retention, business growth, improved profitability and gaining an edge in our fiercely competitive economy.

I believe that what I have told you should be sufficient evidence of how important Strategic Planning and Budgeting is for a business that wants results.

Remember, you are in business Today for Tomorrow.

Thank You

Presented by Winnifred Knight

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