Allocating High-Level Budgets to Strategies

Summary

In addition to budgeting based on the prior year plus expected revenues, it is recommended to examine the budget in the context of the organization’s missions, objectives, and strategies. This assures strategic alignment in the budgeting process. This best practice makes a case for top-down financial planning (aligned with strategy), and explores the dynamic tensions between that and the bottom-up plans that come from programs and projects.

Top-Down Budgeting Alignment with Strategy

Top-down funding distribution to business units, aligned with objectives and strategies, is generally conducted as a first pass approach to organizational budgeting. Consider first, that the strategic hierarchy is generally Mission, Objective, Strategy, and then the programs and products that support the strategies. Since the high-level missions are not constrained by a defined scope of work or time period, the first level available for financial alignment purposes is the Objective level of the strategic hierarchy. However, it is often most practical to first tie budgets to the Strategy level, and then roll up those results to the parent objectives. This enables spending and valuation to be determined and assessed by strategy managers based on organizational strategies, and is the best way to operationalize top-down financial planning.

Keep in mind that this approach assumes that the entire annual (or other fiscal period) budget distribution will be accounted for during the top-down funding process. Also keep in mind that budget estimates should be developed in line with the organization’s unique accounting requirements (i.e., departments, cost centers, capital vs. expense, etc.). As an order-of-magnitude plan that is expected to be refined in subsequent passes, this high level budget should be kept as simple as possible, using a limited number of cost categories and time periods.