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Is Your Budget Aligned WIth Your Long-Term Business Strategy?
February 3, 2021
Most architecture and engineering (A/E) firm strategic plans address activities for the next 3-5 years. Trying to tie a budget to such long-range goals is challenging, yet it’s important to have some metrics to give your plan substance. But if you’re doing quarterly budgets, as we suggested in a previous blog, how do you tie these two things together?
It’s not practical, of course, to create a three-month strategic plan in order to produce some alignment. Strategic plans are meant to make you think “big picture” and help you chart the firm’s course into the future, after all. But there needs to be some level of connection between budgeting and strategy. If your budget says you’re going to do XYZ and your strategic plan says you’re going to do ABC, you’ve got a problem.
Making Your Strategy Tangible With Action Items
Action items break down your strategic plan into things you can actually do. For example, your three-year strategy may call for opening three new offices in three new cities and bringing in $5 million in revenue across them. That’s a great goal, but it’s not actionable. What cities? What clientele? Who will run each office? Etc. Etc.
The connection between planning and budgeting can be that you budget for handling the action items in the plan. This is actually very helpful, since A/E firms too often develop their “big picture” plan and leave it at that. But that long-range view alone doesn’t include any way for you to track progress toward your goal. It’s just something that’s “out there” and that you think you’re working toward.
Plus, there’s not enough specificity in the big picture plan to ensure that everyone’s on the same page. For instance, each person at the strategic planning meeting may have envisioned offices in a different set of cities, servicing different types of clients, run by different people, and so on. But, when you create action items and set aside budget for them, everyone starts “pulling in the same direction,” so to speak.
"A budget should be carefully crafted to help you track progress toward defined goals and enable you to make adjustments."
Action Items and Annual Business Plans
Action items are typically found inside an annual business plan. In our example, the action items would answer the question: “What are we going to do in the next 12 months to move toward our goal of opening three new offices?”
It may be that the firm will:
● Scope out the three chosen cities to get a feel for construction activity
● Contact recruiters in each city to get intel on hiring staff for each location
● Do some internal review to see who might be willing and able to manage the new offices
All of these tasks can be completed within the timeframe of a quarterly budget, and that budget can contain individual items for the cost of each task based on the hours and resources involved.
So, one part of the answer is, “We’re going to have two marketing people spend 40 hours each (at $50/hour) in the upcoming quarter doing research on the cities.” This is much better than trying to say, “In the next year, we’ll have two marketing people who will start the year at $50/hour but will get raises in June, spend, oh, maybe 80-100 hours each…”
And in addition to greater accuracy, having quarterly budgets tied to action items also helps produce more accountability and a positive sense of urgency. Who hasn’t put off a large task until it’s too late and there’s not enough time left to complete it by the deadline? No, you don’t want your budget to be a tool that’s used to control people, but it can be a good motivator and a reminder of everyone’s buy-in when the tasks were assigned.
The Accuracy Snowball Effect
As covered in the prior blog, the accuracy of your budgeting tends to improve from quarter to quarter since you not only have the results of the prior quarter to guide your decision making, but the ongoing accumulation of quarterly results as well. It’s a continuous budgeting cycle that helps you get more accurate at predicting future outcomes including the completion of specific tasks.
Then, in a perfect world, you’d have four quarters of action items and related budgets that equal your annual budget, and three annual budgets that total up to the numbers in your three-year strategic plan. You might not achieve that perfect world vision precisely, but when the process is properly managed, you should be able to start at a granular level and come very close to hitting your long-term targets.
And, of course, at the end of three years, you’ve got very accurate data to use as you craft the strategic plan for the next three years. No more starting from scratch! And no more dealing with the repercussions of having a vague plan with little-to-no accountability.
Budgeting for Budgeting’s Sake…
We’ve learned from the clients we work with that if you’re creating a budget just so you can say you did, that’s a tremendous waste of time. A budget should be carefully crafted to help you track progress toward defined goals and enable you to make adjustments if you’re not on the right trajectory to reach them.
It’s all about having a vision and defining the steps necessary to achieve it. Neither on its own will drive success. Action items by themselves are trackable and measurable, but if they aren’t tied to a broader strategy, you won’t know where you’ll end up even if you complete them all. And outlining an inspiring “future state” for your firm but having no clear way to make progress toward it will leave you spinning your wheels and getting nowhere.
It’s not impossible to have success without a vision and an action item-based budget. Sometimes, you just get lucky. But as we’ve said before, it’s much more empowering for an A/E firm to achieve an outcome that was predicted and planned for rather than one that fell into its lap, even if the latter is the better of the two. Because, of course, some day every company’s luck runs out. The firms that enjoy sustained success are the ones that use thoughtful, quarterly budgeting to control their own destiny.
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