How Far Into the Future Should a Manager Plan their Budget?
When planning a budget, the first thing to consider is how far into the future you are planning for. There are several layers to a budget including the immediate upcoming year, the next 3 – 5-year budget and the long-term strategy which may be 10, 15, or 50 years into the future. The further the budget, the less granular detail you require. Before approaching your annual budget, you should start with the end in mind which means beginning with the organizational strategy.
Budgeting for your long-term strategy
The long-term strategy is a high-level business plan that outlines the overall organizational strategy. This level of budgeting should be relatively vague compared to the other two budgeting layers and is dictated from an executive or board level. The long-term strategy should not change drastically from year to year. It should be the stretch goal that keeps the organization innovating year over year to find new ways to achieve the vision
A long-term strategy would include a vision and significant defining points of the vision. For example, a long-term strategy for a consulting firm might be to positively affect 100 businesses in 10 years. This goal provides a manager with a general direction of where they should be aiming. A manager might consider what milestones they need to reach in order to meet the 10-year goal and define their 3-5-year strategy around this vision.
The long-term strategy should not include too many detailed budgeting goals, but instead dictate the 1-3-and 5-year budgets to achieve the organization’s vision as well and influence the organization’s milestones and KPIs.
Budgeting for the mid-term (3 to 5 years)
The mid-term budget should be adjusted each year to reflect dynamics changes in the market and the business. It is not likely that the 3 to 5-year strategy will remain stagnant for the entire 3 to 5 year term. However, it provides the necessary milestones and benchmarks to compare your results to.
In order to stay agile and competitive in the market, you should prepare to be flexibly with how you achieve the long-term goals. Regardless, you should be looking into the future at least 3 years because expansion requires preparation and planning, which will not be fully realized in a single year, annual budget.
Budgeting for the short-term (1 year)
The short-term budget should be comprehensive and detailed. At this level, you should anticipate everything from staffing requirements to asset purchases to marketing campaigns or committed contracts. The time process of planning your annual budget should be a time of reflection on the past year’s financial results compared to last year’s budget, as well as an opportunity to consider possible variances to the master plan (your longer-term strategy). These variances will likely affect the annual budget in the form of expediting a purchase to meet a market opportunity or the expansion of a department to support unexpected growth. The annual budget is the opportunity to re-align actual market conditions to your longer-term strategy and highlight any upcoming challenges or opportunities.
Budgeting is a critical part of any organization’s strategy.
In summary:
- Start with the end in mind
- The long-term strategy will not change year over year, but how the organization achieves the goal should be a dynamic process
- Create a 3 – 5-year budget to provide enough runway for expansion plans
- Your annual budget should be detailed and specific. It should be considered a stretch goal for the department/company.
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