What is Strategic Budgeting?

Explanation

  • There are annual operating short-term plans to achieve a long-term goal eventually. A long-term strategic plan usually spreads out the 5-year plan to set goals. Similarly, Strategic BudgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more manifests the annual plan details and allocates funds to specific areas.Spending and the areas have to be in sync. Otherwise, the company might spend on short-term projects without results or unaligned with long-term goals.If the company modifies the long-term strategic plan, it can change the strategic budget accordingly 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 dollar allocation come in high-priority tasks.

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Examples of Strategic Budget

  • Product Development – This is the department that works on years of research and developmentResearch And DevelopmentResearch and Development is an actual pre-planned investigation to gain new scientific or technical knowledge that can be converted into a scheme or formulation for manufacturing/supply/trading, resulting in a business advantage.read more to design and launch a product. So having a long-term budget helps the product team allocate their resources wisely.Programs – As discussed earlier short-term programs and stepping stones 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 achieve their end goal.Infrastructure Budgets – These projects 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, a long-term budget always helps to function.Productivity and Capability – Most of the organizational goals are long-term. However, if there are any process-centric changes like an adaptation 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 converting the goals into a budget. That is Objectives, Strategies, Measures, and Targets. Let us define these step by step, which helps design the strategic budget.

  • Objectives – This defines what 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 where we aim to be by the end of the period.

In the 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 –

  • Forecast the short-term cost and factorize them into the budgetAllocate categorized funds depending on the activitiesMake multiple budgets for the short term, which align with the long term ones.

Conclusion

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 must 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 and examples of strategic budgeting along with their importance and detailed explanation. You may learn more about financing from the following articles –

  • Activity Based BudgetingRisk BudgetingCapital BudgetingZero Based BudgetingJob Costing vs Process Costing