What is Strategic Budgeting?

Strategic budgeting is the process of creating a long-range budget that spans a period of more than one year. The intent behind this type of budgeting is to develop a plan that supports a long-range vision for the future position of an entity. This may, for example, involve the development of new geographic markets, the research and development needed to introduce a new product line, converting to a new technology platform, and the restructuring of the organization. In these examples, it is not possible to complete the required activities within the period spanned by a single annual budget. Also, if only annual budgets are used, it is possible that the funding needed for a multi-year initiative will not be continued for the necessary full duration of the initiative, so that the project is never completed. Thus, only by engaging in strategic budgeting can an organization hope to achieve long-term improvements in its strategic position.

A strategic budget is less concerned with the detailed revenue and expense line items typically found in an annual budget. Instead, these classifications are aggregated into a smaller number of line items. By doing so, there is less emphasis on the accuracy of specific items and a greater focus on the overall goals to be achieved. The focus of strategic budgeting therefore shifts away from the minutiae of budget-building and into such matters as:

Strategic direction
Risk management
Competitive threats
Growth options
Reallocations of resources to higher-growth areas

Disadvantages of Strategic Budgeting

Few organizations actually prepare formal strategic budgets, for the following reasons:

Variability of markets. When a business competes in a market that is constantly changing, it is difficult to create a reasonable budget that is good for a single year, much less one that covers several years.
Management time requirements. The labor required to create a strategic budget is in addition to the time needed to create an annual budget. There may be pushback from management about this extra time commitment, especially if there is no obvious benefit to be gained by doing so.