Linking Financial Strategy to Value


As McKinsey pointed out, the financial-planning process for 2021 presents an opportunity to turn hard-earned lessons from the COVID-19 pandemic into an enduring exercise in linking strategy to value.


Of 127 CFOs they recently surveyed, 43 percent cited the need to streamline their overall budgeting processes to react more quickly and efficiently. Meanwhile, 65 percent anticipated more use of rolling forecasts in 2021 and beyond.


While a “perfect” budget for 2021 may not be achievable, a better budgeting process certainly is. The typical budgeting exercise, whether bottom up or top down, can get stuck in endless negotiations and may not address critical concerns about strategy, value creation, or resource allocation. But it doesn’t have to be this way. Utilizing financial software like DataRails can vastly improve the budgeting process.


Radically redesigned and reimagined strategic budgeting and performance-management processes can generate bolder discussions that are more in line with strategy, deeper insights that can unlock more value, and more agility in resource-allocation decisions. It’s up to the finance department to make use of novel financial analytics tools at their disposal to go deeper into their data and extract more enlightening insights.


In most companies, budgets are typically fixed for the year. But in response to the COVID-19 crisis, many businesses have had to be more flexible, confidently shifting resources as needed to survive.

The COVID-19 pandemic has upended how finance teams work. Most have had to radically change it: at a faster pace, with shorter reporting cycles, and remotely, all while supporting high-stakes budgeting and planning decisions.


To strategize better, we present 6 steps for linking corporate strategy to the budget.

Step 1: Define key objectives

The first step, a senior-executive activity, is the setting of short-and long-term objectives for each portion of the strategic plan. Executives also assign a value (i.e., a measure) that denotes the success of each objective. Most organizations establish between five and seven of objectives.


Step 2: Identify strategies and impact

The second step, also for senior executives, is to describe the strategies that, when executed properly, will enable the organization to achieve its objectives. Executives should assign and record the percentage weight (i.e., the influence) each strategy has on achieving an objective. The total of all strategies for a given objective must equaI 100. Next, the executive team should note which department(s) is responsible for implementing each strategy. The team also should determine how they will measure the success of each strategy.


Step 3: Document assumptions

Next, senior executives document the key assumptions and measures about business environment factors that could affect the organization’s ability to successfully achieve its strategic objectives.


If the strategy is to control costs, for example, one assumption might be that inflation remains steady (the assumption) at two percent (the measure). If the objective is revenue growth, an assumption could be that the number of distributors remains the same in the coming year, whatever that number may be.


Step 4: Develop tactics and high-level operational budgets

At this point, senior executives give the plan to the operational managers, who are responsible for implementing the documented strategies. For each strategy, operational managers must develop tactics to implement their part of the strategic plan. For each tactic they should record the following:


  • A measure that will be used to monitor the implementation of the action.

  • The weight (i.e., impact) of each tactic on achieving the success of the strategy.

  • The person responsible for carrying out the action.

  • The time scale being set (i.e., the start date and the duration, because not all tactics are of the same duration).

  • The frequency of measurement (e.g., calls per hour, revenue per month).

  • The type of activity (i.e., whether it is an activity for sustaining the business, improving the efficiency of an existing activity, or something completely new). This delineation will help to identify what kinds of activities are having the most impact.

  • The estimated cost and revenue impact of executing each tactic. Look at these groupings (we’ll call these “variables” later on) such as salaries, material costs, equipment, etc.

Step 5: Assess and mitigate Risks

Once operational managers have developed their tactics, the completed plan can be assessed. Ask the following questions:


Is the plan realistic? Make sure that the planned tactics will really help to make the strategy successful. Is the plan affordable? Make certain that the financial benefits will outweigh the costs.


What risks do you run in implementing the plan and how can you negate those risks?

How far will you let variances go before taking action? Setting up “best case,” “expected,” and “worst case” scenarios for each measure can help support those decisions.


What alternative plans are there for overcoming the biggest risks? The organization may need to create an alternate version of the complete tactical plan.

Step 6: Check the plan for completeness and finalize it

The last step is to come to agreement on the amended tactics and the costs/revenues assigned to each activity. Once completed, the plan can now serve as the starting point for a more detailed budget breakdown, if required. The high-level costs and revenues from the plan become budget targets.