From Strategy to Budget: The Planning Hierarchy

Four layers of planning

Most organisations plan at several levels at once. Each layer answers a different question and uses a different level of detail. Confusing the layers is one of the most common reasons a budget feels disconnected from what the business is really trying to do.

The strategic plan sets direction for three to ten years: which markets, which products, what kind of organisation. It is mostly words and a few headline numbers. The medium-term plan, usually three to five years, turns strategy into a financial path: revenue, margin, investment and funding by year. The annual budget breaks the first year of that path into departments, accounts and months, and grants authority to spend. The forecast is updated through the year and says where the organisation now expects to land.

Each layer should be derived from the one above. A budget that does not deliver year one of the medium-term plan either means the plan is unrealistic or the budget has lost its link to strategy. Both are worth knowing early.

Two cases

A logistics company decides in its strategic plan to enter cold-chain transport. The medium-term plan shows the investment in refrigerated vehicles in years one and two and the revenue building from year two. The annual budget for year one therefore shows heavy capital spend, recruitment of specialist drivers and almost no new revenue. Without the link to strategy, the year-one budget would look like a failure. With it, the board can see it is on plan.

A software reseller prepares its budget bottom-up from each sales team. The total shows 4% growth, while the medium-term plan requires 12%. The gap is not a reason to inflate the sales budget. It is a strategic conversation: either new actions are funded to close the gap, or the medium-term plan is revised.