Strategy

Time to set goals and compile a budget

Tarmo Rahkama Tarmo Rahkama

Although planning and goal-setting takes place both in the long term and monthly (or at least quarterly) basis, the question becomes an urgent one for management at a time when the next year’s goals and action plans have to be drawn up. Budgeting is very closely connected to strategic planning. Through this manner, accountants and financial analysts have a direct role in the organisation’s development.

Performance management is something that is talked about ever more in Estonia. In this article, I will touch on an important aspect of performance management at greater length – in setting goals and its connection with the process of drafting the organisation’s budget.

Strategic plans are prepared in order to put in place the expectations and views of the organisation’s management and owners, express what the organisation does and how it does it, and define the aims that the company wishes to attain after a certain amount of time. It is thus very important to articulate the objectives. When articulating goals, it is worth remembering that goals should:

  • express a specific outcome
  • be measurable
  • have a specific deadline
  • be accepted by the employees
  • be realistic

The budget’s connection to strategic planning is related to whether goals are realistic.

The current year’s budget as a basis for strategic planning

In the strategic planning process, the organisation’s budget serves as both input and output. The budget for the current year and budgetary compliance analysis are the main sources of information for management about the source of the biggest expenses and the activities that have generated the most important income. These are aspects of which the organisation’s accountant has the best overview and which the management must thoroughly contend with prior to setting the aims for the next year. This is in order to find out whether there are fields where it would be possible to achieve savings or areas where more resources should be allocated to achieve the optimum result. It will allow management to be able to analyse budgetary compliance and set a suitable focus for the next year.

In addition, a well-drafted budget can also be readily used to prevent fraud. If suspicious anomalies have emerged in the budget – for example, if actual spending outstrips planned spending – comparing the current budget to actual results gives a way of quickly bringing such situations to light.

The budget’s role in strategic planning

Once the detailed information on the economic environment is clear, the management can set goals and make strategic decisions for the years ahead. Considering that management must have the big picture and vision about the organisation’s future, we can’t assume that they will be able to consider every single key aspect. That is why it is so important that personnel not in the management tier – above all, accountants – be included in the strategic planning process.

Achieving strategic objectives requires a realistic action plan, but without financial backing, it’s just a set of activities that generates no value added for an organisation’s everyday activity. Thus, drafting such a document would be a waste of time and money. It is important for thought to be given already in setting goals as to what activities need to be added or changed in order to achieve the results set forth in the goals and what the related costs and benefits would be. And the primary consideration – where to come up with the resources for covering the costs? To this end, the organisation’s accountants have a great deal of valuable information to provide to the management.

Why include non-management employees in drafting the budget?

Besides offering detailed information to management on specific aspects, there is yet another important reason for the use of non-management personnel in goal setting and budget drafting. And that’s one of the characteristics of a good goal mentioned in the beginning of this article – that employees accept the goal.

Some management theory scholars have concluded that goals and action plans, including budget plans, that draw on as wide a circle of employees as possible would be embraced better and inspire more commitment from employees. This allows guidance from management to be more understandable, as employees have background information on why the goals and activities were expressed in precisely that manner. Employees will thus gain more information about fields in the organisation that they themselves do not deal with on a daily basis as they perform their jobs. The sense of the organisation as a whole will improve, and there will be a greater chance that the set goals will be achieved and planned activities will be implemented within the limits of the budget.

How can accountants contribute to budget drafting?

I believe that many accountants will help to plan organisational development one way or another if their heart is in their work but they probably do so subconsciously. To raise awareness of the role of the accountant in strategic planning in an organisation, including budget drafting, here are the principal areas where an accountant can support the management.

  • preparing analysis of the budget for the current year, indicating the primary expense areas and income-generating fields of activity
  • keeping the focus on ensuring that planned activities have financial cover
  • proposing options during the preparation of the new budget as to the expenses for which it would be possible and reasonable to redistribute resources
  • giving the management immediate feedback if budgetary compliance in any field varies from the forecast substantially.