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The Brode Report  |  January 2012

David Brode profile


January is off to a fast start with a number of new clients and of course some long-time standbys in the mix.  I got so busy I almost didn’t get this one out it time! 

All the best,






I love working through complex corporate finance analyses; I'd be happy to leverage the style of analysis that I applied here to your problem or project then

Call me at (303) 444-3300 or connect with me on LinkedIn.




From Budgeting To Strategic Planning

In San Francisco and Australia I was a 22-year-old management consultant just out of college.  A senior partner instruct us to “loosen our grip on the truth.”  My, how we puzzled over that!  Weren’t we totally evidence-based, busting apart our client’s cherished myths?  What the partner meant was that we needed to focus on larger truths, and every last detail wasn’t important to tell the high level story.  And this leads us to a topic I run into frequently:  the difference between a budget and a strategic plan.  In essence, he was doing strategic planning, and we couldn’t let go of the “truth” of budgeting.  The reality is that both are important tools, and the problem comes when you try to use the one for the other’s purpose. 


Here’s a table that compares how the two disciplines approach the critical financial areas:





Budgeting revenue involves known products & services.  You might be rollout out some new product, but mostly you have known products being sold from known locations.  Revenue change is typically incremental with a  % growth input.


Typically involves new products, services and locations.  Sometimes a mix of existing ventures and new ventures.  Almost always metric driven and constrained by market size, market share, penetration, and pricing limits.  Driven by sales rep counts, marketing spend, market rollouts, etc.


Most corporate budgets are all about having incredibly detailed budgets for every department.  Headcount plans are done to great detail.  Typically account detail runs from many dozens to hundreds of lines. 


Expenses in strategic planning models are typically given short shrift because the focus is on the sexier topics of revenue, capex, and capital.  Often the details are poorly understood.  Often estimates are done against industry benchmarks for EBITDA profitability.  Typically expenses are driven dynamically so as revenue and volume units change, the expenses change as well. 


Capital budgets are prepared for known and approved projects with costs in a tight band.

For capital-intensive businesses there is typically lots of effort here.  Capex and be planned to greater detail in advance than Opex and vendors, looking to make big sales, are happy to provide extensive input.  In non-capital-intensive businesses, $/HC can be sufficient.

Balance Sheet

Balance sheet forecasts are rarely done as part of corporate budgeting.  When considered, the base assumption is that working capital will be about the same as last year.  Very little energy put into this section.

In strategic plan working capital can be very important because it can directly change the capital requirements.


Capital is rarely considered in corporate budgets.  After all, capital is fixed in the short term.  Sometimes a LOC provides liquidity.

Strategic models lavish attention on the capital structure.  Indeed, a primary purpose of a strategic model is to answer,  “how much will we need?  What returns does this generate?”  Often have extensive input options for scale, terms, and timing of debt, scale and timing of equity, and cap table impacts.


Organizational control & short-term benchmarking

Board wants high probability that budget is close to reality.


Setting & communicating vision

Selling Debt and Equity

Boards typically do not expect everything in the strategic plan to come true; i.e. the consider Y1 to be more likely than Y5.

So the problems of using a budget for a strategic plan are commonly:

-          It’s inflexible and hard to add products in the growth trajectory

-          It demands hardcoded inputs instead of metrics

-          Only set to do one year, not five years

-          Not set up to do complex capital expenditure calcs

-          Insufficient complexity to handle a changing cap structure

-          Very little balance sheet  and cash flow statement abilities in general

And on the flip side, while this happens much less frequently, the problems of using  a strategic plan as a budget are:

-          Insufficient time period detail (most strategic plans don’t go to a monthly level)

-          Expenses done at too high a level

-          Not set up to handle multiple departments

-          Doesn’t integrate well with the accounting system and therefore hard to product budget vs. actual reports. 

Clearly these functions are different enough that they require different tools.  I’m sure my readers aren’t the ones trying to cram a square peg into a round hole!

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The Brode Group

Strategic Financial Consulting - Real-World Results

(303) 444-3300