Does your company have a separate budget set aside for strategic projects? If not, it’s something you might want to consider creating as part of your next strategic planning process.
Let’s start by quickly summarizing the key differences between operational and strategic budgets:
| Operational | Strategic | |
| Timeframe | Next 12-18 months | Next 2-5 years |
| Nature | Short-term, tactical. Supports day-to-day management of the company. | Defines projects to achieve long term strategic vision |
| Focus | Revenue generation, expense control | Supports longer-term development projects |
| Organizational level | Individual departments | Entire company – crosses department lines |
| Created by | Individual departments, to support organizational goals | Board/executive management |
| Responsibility | Department managers | Board/executive management |
| Reporting | Monthly variance reporting | Periodic project tracking |
It’s important to note that strategic plans should not include items related to the normal operation of the business. Projects for regulatory compliance, routine system upgrades, facilities improvements, new accounting systems, etc. are not really ‘strategic’ in nature and should not appear in a strategic budget. On the other hand, systems and process enhancements related to digital transformation initiatives would definitely be there.
Given that strategic projects often require capital expenditures, these investments are typically included in the company’s capital budget along with non-strategic items. For example, the purchase of new PCs or servers is a capital expense, but not a strategic one. By commingling these items, the visibility of the truly strategic items is diminished and there’s the risk that in practice operational aspects may be prioritized.
The benefits of having a separate strategic budget (which will likely include multiple projects) include:
- Separates day-to-day activities from longer-term strategy, creating more focus on getting strategic projects done
- Demonstrates a financial commitment to achieving strategic goals, and communicates the importance of strategic projects to stakeholders.
- Forces the company to identify sources of funding outside of operational considerations. It also helps assess the impact on longer-term capital levels and may identify needs for additional investor funding.
- Tracking strategic projects separately makes it easier to see what’s being worked on and what is not.
- Makes it easier to identify specific activities related to individual strategic goals.
- Can be used to define responsibilities for the oversight of cross-divisional initiatives.
- Facilitates the reallocation of funding from one project to another within the overall strategic budget.
Strategic projects frequently rely on resources drawn from across the organization. Having a separate strategic budget would also allow individual departments to ‘bill’ ongoing expenses to individual projects, further segregating those costs from routine operating expenses.
Many companies struggle to make significant progress on longer-term strategic initiatives given shifting short-term priorities over the course of the year and the challenges of running the business on a daily basis. By identifying specific funding for strategic initiatives, it makes it easier to track progress through internal reporting systems.
Creating a budget and measuring performance against it will facilitate progress toward critical, longer-term strategic projects.
