11 Strategic Planning and Budgeting

Laura James and Andrew Kober

Introduction

The discipline of developing plans and measuring progress toward established goals will be increasingly important as media and telecommunications companies converge in the coming years. Neither the cable industry nor the broadcasting industry can afford to bet their future on the status quo. Most traditional broadcasters and cable companies are asking themselves hard questions about ways to sustain and increase the value of their properties. Identifying the strategies that will keep these businesses vibrant and thriving is the key to successful planning. Quantifying and measuring the strategies is a separate but very important step toward achieving goals.

Much of the financial process looks in the rearview mirror to determine how the business performed, and therefore a financial review can be of limited interest to nonfinancial managers because they already have a general sense of how they performed. A strategic plan looks forward, not backward. It is the process of determining a company’s long-term goals and then identifying the best approach for achieving those goals. This forward-looking planning and budgeting process gives managers an opportunity to map out their future and communicate those plans to all parties within the organization.

To be meaningful, a strategic plan must be a dynamic document. A company that goes through the exercise to create a well-written plan and then puts it on the shelf until the next year is wasting its resources. An effective plan that has been developed using input from all company departments provides the yardstick against which all employees can be measured.

Strategic Planning

Developing a strategic plan is the first step for any business to drive forward financially. Basic planning is something that happens naturally, both formally and informally throughout the fiscal year. Strategic planning is the formal process of working through a defined set of steps that concludes with a master plan that is incorporated into a written document. Industry business managers already have an idea about much of what they would like to incorporate into a strategic plan. The process of formally documenting the strategic plan brings together many of the goals of the company’s leaders, organizing their thoughts and putting pencil to paper so that the key leaders/managers are all “on the same page.” The process of determining goals, evaluating business options, and eventually agreeing on a plan can be far more important than the final written product.

One aspect of strategic plan design that is sometimes overlooked is identification of contributors. Who should participate in the planning process? Although design of the planning and budgeting tools can be delegated to appropriately qualified staff members, senior management and department heads must be engaged in the process from beginning to end, or the plan risks failure from the outset due to lack of buy-in from those responsible for its execution. A strategic plan that includes inputs from all parties critical to its implementation will be much more successful than one developed in a vacuum.

Designing a planning methodology, the approach to the process, is an important step in both strategic planning and budgeting. Some public and private companies have a Planning Department that sets deadlines and defines dates, deadlines, and formats for both the strategic and budgeting phases of the planning process. This Planning Department can also provide a framework or tool that will walk participants through the exercises and result in formal documentation. It is incumbent upon the business that lacks the assistance of a formal Planning Department to take the time to design a framework and establish timelines that will achieve the same goal. Determination of methodology and design of the expected outcome should be an independent step apart from the exercise of completing the documentation. The shortcut of figuring it out as you go along can lead to critical oversights.

The first step in planning must be an honest evaluation of the company as it stands today. What are its strengths? Where are its weaknesses? How about opportunities and threats? Often called a SWOT analysis (Strengths, Weaknesses, Opportunities, Threats), this exercise helps company management really understand the current situation and the environment in which it is operating. A good SWOT analysis will thoughtfully consider the pressures on the business that will need to be addressed during the planning cycle, such as:

The first cut at these reviews should be high level without drilling too deeply into specific details. This overview will lead to identification of emerging issues specific to the business. Those emerging issues will be the foundation for setting corporate goals.

With the SWOT analysis completed, the next step is for participants to decide where the company should be at the end of the planning period. This may be easier said than done. But it’s crucial to get consensus on the vision before moving on to the next step.

Once planning participants agree on the vision, it’s time to begin a “gap” analysis. The question to be answered is, “What is the gap between where the company is today and where the planners want it to be at the end of the planning period?” A media company’s assessment may conclude that it is short on technology; that its technology is old; that it is being beaten in a specific day part; that it is not meeting the needs of its viewers, its advertisers, and/or its subscribers; or any of a number of other things.

The planning cycle can be any length of time that makes sense for the specific business, typically between one and five years. One year is a minimum, and may be too short term for any business because it can result in a focus that is too narrow and tactical. Three years is the average planning cycle for most companies, at least for the purpose of identifying strategies. Anything beyond three years becomes so distant that participants have a hard time relating to the outlying years. The planning cycle for the strategic plan does not have to be identical with the cycle for budgets or capital expenditure planning.

Strategies flow directly from the gap analysis. They are the long-term action plans intended to move the company to achieve each of the identified goals. One can say that strategies become the road map to move the company from the present to the future. The next step in the strategic-planning process is to prioritize the business strategies and assess the cost/benefit of each. These exercises are in lockstep with each other, and can result in reevaluation of previous decisions made during this process.

With strategies identified and prioritized, planners need to set intermediate steps on the way to accomplishing these strategies. These tactics are the mile markers in the strategic road map. It’s important to look at the resources needed to complete the tactics assigned to each strategy. If achieving the goals includes people, research, consultants, hardware, and/or other resources, these must be included in the tactics and the budget.

For each strategy, planners should identify key drivers and how they can be measured. When these tactics and their measurements are assigned as responsibilities coupled with deadlines, managers can be held accountable for completing them. These can and should be reviewed at regular intervals to ensure that the company is following the road map it set for itself.

Failure to relate to the strategies can have the dangerous consequence of distancing managers from ownership of the plan, and can result in subsequent disregard for the strategies developed when making tactical decisions. For example, if the goal is to update the company’s technological infrastructure, tactics may include spending heavily on capital equipment. A manager not vested in the process may delay capital spending to improve cash flow. In this instance, the results may look good in the short term, but the decision will negatively impact the company’s ability to achieve its technology goal.

A strategic plan provides a high-level view of the company’s activities for the upcoming planning cycle. The budget quantifies the dollars-and-cents impact of tactics that will be employed to achieve the strategic goals.

Budgeting

Once the strategic plan is drafted, it should be rolled into the budget. The key here is making the tough choices to redirect resources to fund the projects identified in the plan. Usually a detailed budget is developed for the first year of the planning cycle. This budget will project revenues and expenses down to the general ledger line-item level. Outlying years may not require this level of detail, but this is usually determined by the specific needs of the budgeting entity, including upstream reporting requirements.

Due to the cyclical nature of some components of revenue (e.g., advertising revenue and the effect of seasonality on some geographic locations), it is preferable to show the budget month by month. This provides an ongoing measure of strategic performance, and can alert management early on that business plan goals may be in jeopardy. Many companies, particularly those that give guidance to analysts and have quarterly reporting requirements to the Securities and Exchange Commission (SEC) and to their lenders, need budgets subtotaled by quarter.

Budgeting for revenues and revenue-specific expenses should be a top-down exercise based on the strategic plan. Revenues from traditional lines of business should reflect the assumptions adopted in the strategic plan for growth of the markets, combined with the specific goals for the business’s performance within the market. Additional revenues and revenue categories should be included for new goals identified in the strategic plan.

Expenses should be treated in the same manner. Those for established lines of business should reflect the assumptions used in the strategic plan (e.g., if, as suggested above, the company assumes it will have less business from advertising agencies, then agency discounts will be budgeted at something less than historical levels). Expenses for areas under contract (e.g., rent, talent agreements, etc.) are to be included at the rates in those agreements. Budgeted depreciation and amortization expense must include projections for existing assets and budgeted capital expenditures; depreciation and amortization expense are also adjusted for acquisition and disposition of lines of business. And assumptions about costs for new projects should be based on the research done during the strategic-planning process.

There are various approaches to developing the operating expense budget detail, and one is not necessarily preferable to another. Most broadcasters and cable operators ask their general managers and department heads to generate a detailed operating expense budget for their location for each line item. Salary expense and related personnel costs are usually developed on a position-by-position basis using an overall assumption of annual raises or contractual compensation increases, including benefits and taxes. Other line items can be generated either by reference to contracts or by making reasonable assumptions about cost increases and usage variations from previous years.

The first cut of annual departmental budgets generally includes “wish list” items that may or may not be part of the business’s overall strategic initiatives. Once they are combined, it is the responsibility of management to determine which of the items are “must-haves,” which are “nice-to-haves,” and which may need to be deferred or even refused.

Nonoperating expenses such as interest expense are usually budgeted by finance and treasury managers, and are reasonably determinable based on projected debt levels, contractual arrangements, and interest-rate forecasts. Additional financing costs related to execution of strategic plan initiatives should be included as appropriate (planned refinancing, recapitalization, and other financing initiatives).

At the end of the process, the question to be asked about the budget is: Do the numbers make sense? Do they reflect the business initiatives identified during the strategic-planning exercise?

Subsequent Measurement

Although development of a budget can be a useful exercise on its own, it, like the strategic plan, must also be a dynamic document. The business derives maximum benefit by applying the discipline of subsequently comparing actual results to the plan. Variances, both positive and negative, should be explained (preferably in writing) and understood. The measurement period should be frequent enough to allow for corrective action to be taken for correctable misses and to take advantage of unforeseen positive circumstances as they occur.

Variance reports show the various differences (in dollars and/or percentages) between budget and actual for both revenues and expenses. They are the accepted tool for comparing plans to actual results. These reports should align with levels of budget development (i.e., monthly, quarterly, annually, etc.), and should be prepared at least as frequently as the timelines outlined in the budget (typically monthly). General managers and department heads with responsibility for developing revenue and operating expense budgets should subsequently be responsible for generating variance reports for those revenues and expenses.

Capital Expenditure Budgeting

An important component in developing a complete business plan is capital expenditure budgeting (cap ex). To manage capital expenditures, all broadcast and cable television businesses should maintain a three- to five-year capital plan for replacement of equipment, adopting new technologies, and fostering business expansion. These proposed expenditures must be reviewed carefully for urgency, timing, and alignment with the larger strategic initiatives. Management should prioritize the projects when the strategic plan is prepared in order to make intelligent decisions about which capital projects to include in the current year budget, based on pre-determined rules regarding breakeven thresholds, payback periods, and discounted cash flow analysis. For more information on these subjects, see Chapter 7.

In Conclusion

Strategic budgeting and planning, which may seem like a laborious and overly complex process, is an essential key to business success. The time to begin planning is when the company is healthy and growing because that is when it will have ready access to the resources necessary to support the plan. Planning and budgeting activities provide a critical road map in which a company identifies and prioritizes strategies for growth and improvement. An effective plan includes both narrative and statistical (measurable) components. The plan must also include examination and review of proposed capital expenditures. When those who will ultimately be responsible for carrying out the plan are involved from the inception, their buy-in will provide internal momentum to drive the business forward. Finally, it is not enough to simply write a plan. Successful companies measure employee performance against the strategies and tactics in the plan. Subsequent comparison and explanation of variances between the budget and strategic plan and the actual results help companies understand where the plan can and should be modified.