Annual Operating Plan: Approach to budget allocation

Annual Operating Plan: Approach to budget allocation

Business Development

Debashish Das

Debashish Das

182 week ago — 7 min read

In my last article on Annual Operating Plan (AOP), I had touched on the need and the view business owners need to have in the Annual Operating Plan. In this article, we will speak about the approach to apportion the costs and expenses in the business.


One of the most challenging exercise is to plan the 'middle line' the element which has an impact on the 'bottom line'. 


How to decide the cost/expense to operate your business?

Business owners need to spend focus and attention to the area of cost and expense management as it has a bearing on business continuity and profitability. The key factors to keep in mind are given below. 


Identify costs, expense, and investments

Direct inputs to your business have to be separated from expenses in order to generate and run your business. These must not be mixed with investments for expansion and growth. Business owners must have a clear understanding of these three aspects to form the middle line.


1. Know the fixed from the variable

Very important to forecast and have a sense of what will remain fixed and what would be dependent on the scale of operation.


2. Scale of operation

The scale of business operation will be a major input to determine and decide the middle line. Multiple approaches and models may be referred and if required you can take the help of a business growth coach or consultant can be approached to create such models. The Board of directors, CEO, the business owner need to brainstorm, ideate, and strategise the business plan before putting the numbers into it.


3. Linear or exponential growth

This question needs to be answered at the business owner, Board, and leadership levels of the organisation. Based upon the appetite and hunger these parameters will evolve in the middle line. This will have a significant impact on the costs, expenses, and investments. Smart and competent boards will ensure that optimum resources are available within the defined budget to maintain a healthy top line and bottom line.


4. Organic or inorganic growth

Based upon the vision, and risk-taking orientation the business owner, Board of directors, leaders will assess the opportunity and plan for growth. Inorganic and rapid growth will require investments that need to be factored in and planned in the AOP.


5. Build or buy

Major resources to impact growth and sustainability need to be identified and needful investments and expenses must be mapped. Resources may include people, technology, machinery at a usual level. Businesses must also look at the processes and systems, culture, capability, branding, marketing also as investments for growth. The new norm of doing business may stretch the imagination of growth enablers beyond the obvious. Organisations will have to factor in the build or buy component for these enablers in the AOP. Based on the decision the components will be added in the middle line with needful apportionment.


Also read: Budgeting: Importance & tips to do it right


How to allocate components in the expenses, investments for the AOP?

Once the decision on the direction of the business is taken the next step will be to allocate the costs, expenses, investments by lines of business: This is a delicate balance to ensure that the constraints built are not disturbed and the optimal resources are allocated is the primary task of the owners in the Annual Operating Plan. The key points are listed below


1. Expansion based approach

If the overall direction is expansion and growth the allocation will have to be done keeping in mind long-term investments where returns will be visible over 8 to 12 quarters.


2. Sustenance based approach with innovation

If the overall direction is to sustain the natural growth with innovation and strength of operation then allocation may be to strengthen internal capabilities, systems, delivery in the organisation.


3. Key drivers of business

For some businesses, the key drivers are possible to be identified easily whereas for others it may take slightly longer to identify. Once the key drivers are identified then needful allocation based upon assumptions would provide the numbers.


Also read: Driving your business to success


4. Business scenario building and assumptions 

Creating a business scenario-based upon assessment is the major activity in the allocation of the middle line in the Annual Operating Plan. This activity is an intense and engaging activity where data is analysed to create various business scenarios and models, assumptions, and logic built to allocate figures is done. Wherever data is not available or trends are of marginal relevance additional task of arriving at a reference point to build a scenario is done.


5. Aggregate or parts

Business owners, boards, leadership sometimes look at the aggregate figure and build allocations around that. Post Covid the new norm has brought in the realisation that disruption is a brutal reality in any business. Hence a good start is a blank slate and fresh perspective of the new financial year keeping the trends and patterns as a reference. This will allow board and business owners to look at components in allocation from a current and future need.


6. Cost based or growth based

Rupee saved is rupee earned, but rupee invested is wealth created. The constant debate between saving and cost reduction versus invest to multiply growth and value will always be favourite point of deliberation during the allocation of middle line components during the Annual Operating Plan. It will be the clarity, conviction, and detailed analysis of the business leaders which may convince the Board to allow allocation of the needful funds in the middle line.


In this part of the Annual Operating Plan, we discussed the components business owners, board members, business leaders need to keep in mind while allocating the middle line components. Needless to mention this takes maximum time, attention to detail, skills. Business owners, the board of directors, may at times if required take the help of experts or do it themselves.      


Also read: Annual Operating Plan: A compass for your business in the new year


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Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views, official policy, or position of GlobalLinker.


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Debashish Das

Leadership and Business Growth Coach with over 20 years of experience in coaching and consulting. Specialist in HR, Strategy, Business Growth for SME and Corporates. As a coach...