Why can’t budgeting be easier?
The truth is, it can be. But for too many SaaS companies, there’s a fundamental disconnect between the strategic planning and budgeting processes.
Strategic planning is a top-down process in which the company’s leadership sets the overall strategy and goals, and budgeting is usually a bottom-up process based on the individual goals of different teams.
In addition, there’s very little collaboration between different teams within the company while coming up with their budgets. There’s no way for one team to know what another is trying to achieve or how much budget they’re asking for.
Then it’s up to the CFO and finance team to work independently with each team in a very siloed way to make the necessary budget allocations. Not surprisingly, when the final strategic budget is rolled out, there’s no shared vision regarding the challenges and opportunities the budget needs to address.
What is Strategic Budgeting?
Strategic budgeting is a relatively new way of coming up with a budget. Simply put, it is the process of aligning your budget with your company’s strategic goals. However, when put into practice, it is a lot more than just that.
It’s important to point out that a company’s strategy for achieving an end goal could cover multiple years and can be broken down into annual and even monthly plans. Therefore, a strategic budget is something that supports a long-term vision of the company.
PivotXL enables companies to integrate strategic budgeting into their financial planning seamlessly. By using PivotXL, SaaS businesses can automate budget updates, ensure alignment with strategic objectives, and improve visibility into financial performance.
The Three Key Activities Involved in Creating a Strategic Budget
There are three key activities involved in strategic budgeting (i.e., the things that make a budget a strategic budget):
- Building Your Budget
- Team heads must spend time assessing their budget requests and how their spending plans contribute to the larger plans of the company.
- They need to work together to ensure that the assumptions they’re using to build the budget are correct.
- PivotXL provides real-time data aggregation to help finance teams validate assumptions and track spending across departments.
- Updating the Budget
- For strategic budgeting to work, it needs to be updated at pre-decided intervals based on the progress or changing market conditions.
- In contrast to static budgets, which are common in the SaaS industry, rolling budgets provide more flexibility to adapt to changing conditions in the business and the market.
- Aligning the Budget with Strategic Goals
- CFOs need to bring their department heads to the planning table to have an open discussion on the budgeting assumptions.
- The end goal should be to align all budget requests with the larger strategy of the company.
- PivotXL’s collaborative planning tools ensure transparency and alignment in budgeting decisions.
How Does Strategic Budgeting Differ from Strategic Planning and Annual Planning?
To avoid confusion about how strategic budgeting fits into the mix of different planning activities that SaaS companies engage in, we offer the following definitions:
- Strategic Planning: A process that provides an overarching vision for an organization and a roadmap to achieve that vision over a multi-year period. The strategic plan usually includes big goals, such as becoming a dominant player in a specific category or moving into new or bigger markets and broadly, the activities necessary to achieve them.
- Annual Planning: A more granular process that delves into the goals and objectives of an organization or individual department over a 12-month period to develop the annual operating plan (AOP). This process includes developing an annual budget, too, which is often static. Annual planning could also be a subset of strategic planning wherein the goal is to achieve a certain portion of the larger strategic plan in the next 12 months.
- Strategic Budgeting: The process of aligning the annual operating plan and budget with the company’s strategic plan.
How Can Strategic Budgeting Benefit Your Business?
Strategic budgeting can benefit your business in several important ways, both tangible and intangible.
Improved Financial Management and Control
- Identifying Cost-Saving Opportunities: With strategic budgeting, you can objectively identify where spending cuts should occur. If a spend doesn’t align with one of the larger strategic objectives of the company, it cannot be justified.
- Allocating Resources More Effectively: Strategic budgeting makes it easier to see where you need to allocate your resources because it connects the activities of different teams with each other and the company’s strategic objectives.
Enhanced Decision-Making
- Prioritizing Growth Initiatives: Strategic budgeting, given its agile nature, always ensures that the company can prioritize growth initiatives.
- Evaluating Return on Investment (ROI): With more frequent updates, companies can keep a keen eye on the ROI and allocate resources to projects that show the most promise.
Strengthened Competitive Advantage
- Ability to Respond Quickly to Market Changes: Adaptability is built into strategic budgeting. Companies can respond to market changes quickly to take advantage of new opportunities or adjust to downturns.
- Alignment of Resources with Strategic Goals: Once the larger strategic goals are set, it becomes easier to allocate resources to the activities that will have the biggest impact.
How Does Strategic Budgeting Differ from Strategic Planning and Annual Planning?
SaaS companies engage in various types of planning, and often, the terms used to describe these processes overlap, causing confusion. For instance, some may equate the Annual Operating Plan (AOP) with a budget, but in reality, they serve different purposes. Understanding these distinctions is critical for ensuring proper financial management and goal alignment.
To clarify where strategic budgeting fits among these planning activities, consider the following definitions:
Strategic Planning
Strategic planning is a high-level process that outlines a company’s long-term vision and the roadmap to achieve it, typically over multiple years. This plan includes major corporate goals, such as expanding into new markets, becoming a leader in a specific category, or scaling operations significantly. The activities defined within the strategic plan focus on broad initiatives necessary to accomplish these objectives.
Annual Planning
Annual planning is more detailed and focuses on a 12-month period. It involves defining the specific goals, targets, and priorities that will contribute to executing the company’s broader strategy. A significant component of annual planning is the Annual Operating Plan (AOP), which details the financial, operational, and strategic objectives that need to be achieved within the year. The AOP includes a budget, but the budget itself is often static, meaning it does not change in response to market shifts unless reviewed periodically.
Annual planning can also be seen as a subset of strategic planning—wherein the company aims to achieve specific milestones within the larger multi-year strategy within a given year. However, without a flexible budget, companies may struggle to adapt to changes in real-time.
Strategic Budgeting
A strategic budget serves as the bridge between strategic planning and annual planning. It ensures that annual budgets are directly aligned with long-term strategic objectives, rather than being created in isolation. Unlike static annual budgets, which remain fixed for an entire year, a strategic budget is continuously updated to reflect changing market conditions, business needs, and growth opportunities.
Strategic budgeting connects resource allocation with corporate priorities, ensuring that every budget request is justified by its contribution to strategic goals. It brings together cross-functional teams and promotes collaboration between finance and other departments, creating a holistic approach to budgeting that supports both short-term execution and long-term success.
How Can Strategic Budgeting Benefit Your Business?
A strategic budget provides several advantages for SaaS companies. These benefits improve financial efficiency, decision-making, and competitiveness.
Improved Financial Management and Control
1. Identifying Cost-Saving Opportunities
A strategic budget helps companies evaluate every expense objectively. Instead of rolling over previous budgets, finance teams can analyze whether a cost aligns with strategic goals. If it does not, it should be eliminated.
This approach ensures that businesses maximize return on investment (ROI) and allocate funds to high-impact initiatives.
2. Allocating Resources More Effectively
A strategic budget breaks down financial silos. It ensures that all departments align their budgets with company-wide objectives.
By linking spending decisions across teams, businesses prevent inefficiencies and focus on what matters most. This helps prioritize high-growth areas while eliminating wasteful spending.
Enhanced Decision-Making
1. Prioritizing Growth Initiatives
Unlike traditional budgets, a strategic budget allows companies to adjust spending in real time. This flexibility ensures that businesses can quickly shift resources to growth initiatives.
For example, if a new market opportunity arises, companies can immediately reallocate funds to capitalize on it. This agility keeps growth initiatives at the forefront.
2. Evaluating Return on Investment (ROI)
With regular budget updates, businesses can track ROI closely. This allows them to:
- Increase spending on high-performing initiatives.
- Reduce funding for underperforming projects.
- Shift resources dynamically to new experiments with high potential.
By focusing on real-time financial adjustments, a strategic budget ensures that every dollar is optimized for growth.
Strengthened Competitive Advantage
1. Responding Quickly to Market Changes
SaaS companies operate in a rapidly evolving market. A strategic budget enables businesses to adapt quickly to new trends and challenges.
For instance, if a competitor launches a disruptive feature, a strategic budget lets companies accelerate product development. Similarly, during an economic downturn, businesses can adjust spending priorities to maintain stability.
2. Aligning Resources with Strategic Goals
A strategic budget ensures that financial planning aligns with company-wide objectives. Instead of focusing on individual departmental budgets, companies fund initiatives that drive growth.
By linking financial decisions to strategic goals, SaaS companies can improve efficiency and long-term success.
Intangible Benefits of Strategic Budgeting
Beyond financial and competitive advantages, strategic budgeting also enhances organizational alignment and decision-making clarity.
1. Shifting Focus to Company-Wide Success
A strategic budget changes the conversation from “Who gets how much?” to “How do we achieve our goals with the resources available?”.
By aligning all teams with a shared financial vision, businesses can foster collaboration and accountability.
2. Making Budget Decisions Easier
CFOs often struggle with budget cuts and reallocations. A strategic budget makes these decisions more data-driven and transparent.
When teams understand strategic priorities, they see why some budgets increase while others decrease. This reduces conflicts and improves collaboration.
Achieving Alignment with Strategic Goals
Ensuring horizontal (between managers and top leaders) and vertical alignment (between different teams) is crucial for the success of the strategic budgeting exercise.
For strategic budgeting to work, the CFO must don a strategic advisor’s hat and act as a bridge between department leaders and the company’s executive-level leadership.
PivotXL provides a centralized platform where CFOs and finance teams can collaborate with department heads in real time, ensuring transparency and alignment across the company.
Strategic Budgeting: A Tool for Success
Deciding to go ahead with strategic budgeting is a crucial step in a company’s growth journey. In some ways, it tinkers with the DNA of the company because it sometimes requires a change in corporate culture – a more collaborative culture with open communication across departmental boundaries.
However, given the ever-changing market environment that SaaS companies work in today, adopting a strategic budgeting approach with PivotXL can be one of the best decisions a SaaS CFO can make.
With PivotXL, your company can move beyond outdated static budgets and leverage a data-driven strategic budget that drives efficiency, growth, and alignment across teams.
