Annual planning: how to ensure that strategy and budget work hand in hand

It's that time of the year again: annual budgeting. CFO peers constantly tell me that planning processes between the CEO and CFO don’t align properly. Strategic planning often lacks clear alignment to financial planning, leading to a disconnect between strategy and budget. 

CEOs might have already finished the 2024 strategic planning process while finance leaders are still working through their financial planning exercise across the organization. 

Which means the strategic plans may be missing key details. To what extent will annual strategic priorities influence growth, profitability, cash flow, and other resource requirements in the upcoming year(s)? 

Can your organization afford such uncertainty in the context of a most likely challenging 2024? And do you want to go back to adjusting your strategic priorities based on resource availability in December, only to revise your budget again soon after? 

What comes first - budget or strategy - is a never ending story. Most companies understandably deal with frustration and fatigue across the organization until finally Xmas is here.

Here are the best ways to avoid common mistakes in the strategic planning process, based on my lessons from CEOs who get it right.

1. Put the CEO in charge of strategy and less in strategic planning

Who actually owns strategic planning? Truthfully, the best person to define the company strategy is normally the CEO/Founder.

The CEO ensures that the company’s 3-5 strategic priorities are clearly aligned to Purpose, Vision and Mission, and creating this alignment every year between shareholders and Management is a lot of work. 

Great decision making processes always try to eliminate biases such as groupthink, halo effects or other common decision making biases. It’s therefore also a lot of work to make sure the process creates great outcomes, and that every strategy stakeholder thinks about the strategy and makes it come alive in the upcoming year. 

In line with this strategy, the budgeting process should then provide a fair representation of what it takes in terms of resources requirements to manage regular operations as well as strategic priorities. That’s for the finance team to oversee.

But while the CEO is best placed to consider the content of company strategy, their time is often not best used in structuring it. When you cut a tree, you don’t see the woods anymore.

2. Put the CFO in charge of strategic planning

What may help you and your decision makers most is to assign one person to manage both strategy and financial planning as one process. And in most cases, the best person to orchestrate great decision-making processes is the CFO.

Ultimately, both the CEO and CFO share the same goal, to develop a kick ass strategy that supports the company’s mission statement. To achieve this, it may make sense to hand over the entire strategic planning and budgeting process to the CFO. 

This lets the CEO and (potentially) shareholders fully focus on coming up with a great strategy. Meanwhile, the CFO is busy working on making sure the strategy is focused, sound, digestible, not influenced by decision making biases, properly documented and well-integrated in the financial planning processes.

In strategy meetings, the CFO and their teams should then be more focused on scoping the impact of strategic priorities on next year’s financials, which means as a downside that they have less time to challenge the strategy during these sessions. But there will be enough (hopefully less than 6) smart people in the strategy room already, and the CFO’s time can be used to create better outcomes from these meetings.

Here is a simplified shared-ownership construct for the CEO and CFO to work with:

And this is a simplified decision-making sequence - prior to budgeting - for the CFO to orchestrate and walk through:

3. Be cautious of “too many strategies” 

Prioritization is really difficult. And often, creative workshops result in way too many strategic priorities. 

According to George Miller, very smart humans can manage seven different priorities max. For mere mortals, it’s more like four or five. Members of the management team are usually smart and opinionated, and it’s hard to compromise down on priorities. 

Both the CEO and CFO have to make sure that the creativity of key decision makers is first channelled into 4-5 priorities, which if necessary can lead into strategic initiatives on a functional level that support these priorities.

Too many priorities makes budgeting a joke, as people cannot quantify the impact of all priorities on their operations and own functional financial plans anymore. As a consequence, your budget is a chaotic, partial representation of your strategy that doesn’t represent the true resource requirements. You’ll reach overload by Q2 at the latest. 

Always keep people in mind and respect the cognitive limits of humans by letting go of too many priorities, even if you think yours is most important and underrepresented.

4. Repetition, repetition, repetition

If there is one thing that repeatedly struck me in my career, it is the great perception bias: If you explain a strategy once for, let’s say 1-2 hours, then everyone instantly remembers it and has the same understanding of what it means to their operations.Bringing a strategy to life is about giving people sufficient context to create a picture in their head, which they in turn can put into numbers. 

Management too often fails to explain the strategy sufficiently to functional leaders before their first budgeting submission is expected. No wonder, then, when the budget struggles to actually push towards strategic goals. 

As CEO, you have to spend sufficient time and communicate the risks and opportunities for your strategy. Otherwise the first bottom-up submission of your budget will not be a representation of the true impact of your strategy on your core business functions. 

Repeat the core strategy as often as possible, and give leaders enough time to talk to colleagues before they prepare their bottom-up submissions.

Finally, don’t start with top-down guidance that is too specific on key KPIs. It will create groupthink or a halo effect, and all the group intelligence gets lost.

5. Find the right depth and planning cadence

When both the strategy and the budget are ready to launch, companies often fail to break strategic priorities down to the right level for follow through or find the right rhythm for execution.

Not breaking your strategy down into objectives at all will likely create limited engagement. Clearly not a good idea. On the other hand, breaking your strategy down into objectives per employee creates a bureaucratic overload. 

My advice: use the OKR methodology, but at the function or department level.

Your in-year planning cadence, which also starts simultaneous to annual planning, is also important. Planning quarterly is tiring, because you already have to start reviewing strategic initiatives and plan your next quarter long before it begins. 

If you’re not a public company, try trimester (4-monthly) planning cycles to give sufficient time for execution between review and planning the next trimester. Against a mostly challenging economic backdrop, the wonderful thing about this time of the year is the opportunity to create tailwinds and optimism across the organisation through forward-looking planning. Let’s get people excited and not already tired before we’ve even begun!