Summer is officially over, so companies should start thinking about their goals for 2025 and beyond with plans for how to achieve those goals.
It’s great for a company to know what it wants to accomplish, but things don’t just happen magically…the next step after formulating these plans is to determine how the company is going to get from the current Point A to the future Point B.
This naturally begs the question…
What initiatives will be undertaken to realize the company’s goals?
As I discuss in a previous article on identifying and selecting the best strategic initiatives, this process isn’t a matter of running wild with random ideas, which is a trap many companies unfortunately fall into.
Today’s article focuses on one of these filters, specifically, the budget. What would it cost to complete a particular initiative? Examples can include:
- Direct financial cost or expense
- Any tools and/or systems that will be needed
- Any specialty skills or services
- Any loss of revenue
The above examples are all different types of tangible costs, which is the focus of today’s article. The other side of the coin is intangible costs, which have an impact on a company’s financials but can’t be quantified in monetary terms. Examples of intangible costs are opportunity costs, reputation, customer satisfaction, and company culture.
Okay…back to tangible costs and needing to budget for strategic initiatives.
If a company does not budget for strategic initiatives, management has no idea what it is spending and no idea if the revenues will cover the expenses plus that little thing called profit.
Since resources are finite, no matter what your company is, it is therefore vitally important to:
- Understand scenarios of where and how it is allocating its money.
- Know what is and isn’t an acceptable level of spending.
- Know when it is okay to spend more and when to tighten the belt.
- Know where it is okay to spend more and where not to spend.
In the process of understanding these different parameters of budgeting for strategic initiatives, establishing a baseline should be the first step.
The reality is, in addition to pursuing strategic priorities, management must account for the company’s day-to-day expenses.
Like many things, there are different approaches to creating a budget.
The first approach involves starting from a clean slate each year, with each departmental leader answering the question “what do I think it will take to run my department? What is my contribution to the corporate-level expenses?” This route is not one I would recommend for several reasons, such as the amount of time it would take to build a budget from scratch. Having to go back and think about every single expense needed, justifying each role and salary, explaining the variety of expenses. Are these great questions? Yes. Do people realistically have the physical time and mental energy to do this every year? No.
Instead of taking such a cumbersome route, another option is to take the current year’s budget and the expenses incurred year-to-date. Figure out the expenses associated with non-typical items and remove those from next year’s budget, unless you plan on rolling them over (partially or fully) into the next year.
After adding up this information across the company, management now can see what it costs the company for day-to-day, normal expenses. Now add in different projects to see how they impact the budget. One individual project may be okay from a budget perspective, but upon aggregating different projects together, you may discover trends that may or may not be acceptable.
When projecting costs for the year ahead, a common assumption is that costs will go up 3-4% across the board. I think we have all figured out from our personal lives that this general increase is not how these things typically play out. The reality is there will be all kinds of variances from year to year – some costs will remain flat, some will go down, while others will go up.
Budgeting for strategic initiatives is really a back-and-forth, or tension, between the needs of pursuing goals and risk management.
It should be well understood that nothing happens in isolation or in a vacuum. All these different realms – strategy, risk management, and budget – all interplay with each other.
Take risk management for example…
There will be action plans for risks that are outside of acceptable ranges, and some of these plans will affect the budget outside of day-to-day expenses. Now there may be a line item in the company’s budget – a risk management contingency fund if you will, but a lot of companies create a specific project or line item to allocate and track expenses for risk-related action plans.
But what happens once these funds are exhausted?
Will the company have to cease these activities to leave other areas intact? Or will something else in the budget need to be cut to continue with the action plans? Are some of these risk-related action plans big enough to be considered a strategic initiative?
Of course, there are intangible costs – opportunity costs – related to these action plans as well, so all of this has to be factored into the budgeting process.
This is why proactively looking at different options or scenarios is so important.
- What modifications will be needed to ensure outlays are at an acceptable level?
- To one or more specific goals?
- To one or more strategic initiatives?
- To one or more risk-related action plans?
If a particular project is going to have some really specific, measurable, and tangible benefits, then it’s okay to spend more…but maybe only up to a specific amount.
Budgeting for strategic initiatives shouldn’t be done from a standpoint of scarcity as this limiting mindset can have drastic consequences for a company’s future.
The whole purpose is to understand what is best for the company’s long-term success.
Similar to risk analysis, taking the attitude of “go forth and conquer,” and not taking the time for due diligence will mean the company is focusing on things that could potentially be harmful to its long-term prospects.
Therefore, it is imperative that management be diligent in taking the time and effort to thoroughly understand the tangible costs of the company’s goals as another crucial step to ensuring its long-term success.
How does your company approach budgeting for strategic initiatives?
I’m pleased to announce an upcoming webinar where we will be discussing this topic in much greater detail. Register to join Nick Lamparelli of Insurance Nerds and me on Monday, September 16th at 1pm ET for a little conversation to learn more about this (often neglected yet critical) part of pursuing strategic goals. Plenty of time to ask us questions on this topic too.
In the meantime, please share your personal insights by either leaving a comment below or joining the conversation on LinkedIn.
And if certain aspects of strategic planning are a struggle for your company, consider reaching out to discuss your specific situation and potential options to help you get unstuck.
