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As depressed markets continue to squeeze margins, organisations are struggling to deliver the returns investors expect.

Furthermore, increased public awareness of corporate and social responsibility (CSR) means that management teams need to plan and act ethically.

Wasted effort 

This quest to balance short-term profits and long-term sustainability presents a challenge for finance directors.

To meet this challenge, significant levels of management time and resources are spent planning. Typically organisations spend 4.7 months on strategic planning and 4.1 months preparing an annual budget.

The cost in effort and management time is enormous and supposed to help select and implement the right plan.

Yet research shows that much of that effort is wasted: 56 per cent of financial measures used in tactical plans are not monitored. 60 per cent of organisations don’t link budgets to strategy and only 5 per cent of the workforce understands it anyway.

In an ideal world, every employee would know their role in fulfilling the ambition of the company. In reality there is a disconnect between organisational strategy and its ability to execute.

Too many companies have a grand, long-term goal on one hand and detailed short-term budgets on the other, with nothing in between to link the two together. Why does this gap exist?

Budget madness

Most companies rely on the budget process to implement some kind of strategic intent, while reporting actual results helps monitor success.

That is the intention, but look at your own budget templates: Can your managers work out what they should be doing each day to achieve corporate success?

Probably not, because the budget template is based on the chart of accounts, focusing on revenues and expenses rather than activities.

There is also little communication on what strategic goal(s) need to be achieved and targets are not put in context of the business environment.

The budget should give life to the strategy. Yet many organisations generate the budget as a preset financial figure that must be met, with little or no indication of ‘how’’ this will be done.

Reporting weaknesses

Reporting does not fare much better. All too often reports show what happened, but not why. There is no context to show what activities took place to produce the results.

There is rarely any information of what activities need to happen in the future to achieve long-term goals and consequently the report does not direct the daily activities and responsibilities of managers.

The lack of context means that the report does not tell you what part of the strategy was implemented and its relation to the results.

Best practices in performance management

Successful organisations take a different approach to implementing and monitoring strategy.

Planning, budgeting, forecasting and management reporting are all part of the same process of managing performance.

Hallmarks of such an approach include:

Strategy as driving force

“Where are we going” and “how do we get there” are key questions that the management team must answer before a budget can be put in place.

This requires collaboration with senior managers providing a clear definition of how the business will operate and the major goals, targets and means - or strategy - for achieving them.

Operational managers translate these strategic objectives into practical operational plans that define actions and results expected.

The budget can then be set to resource the agreed tactics.