Strategic Budgeting [2023 Comprehensive Guide] (2024)

Strategic budgeting is the use of multi-year planning and quantified results to achieve specific goals through the budgeting process.

Traditional budgeting relies on incremental, line-item considerations when making budget decisions. High-level strategy about what an organization wants to accomplish doesn’t play a role in this kind of budgeting, because category-specific considerations don’t leave much room for strategic thinking.

Two closely related line items—or even two closely related department budgets within a local government—will be viewed separately from each other, even though looking at them holistically could help achieve goals shared by both departments.

In contrast, strategic budgeting provides frameworks for considering the outcomes an organization wants to achieve with its budget, allowing it to look beyond the current fiscal cycle and tackle long-term, multi-year goals.

In this in-depth guide to strategic budgeting, we’ll walk you through everything you need to know about how local governments and other public sector organizations are changing the way they budget to drive toward long-term outcomes.

Although we are primarily focused on the budgetary needs of local governments, we’ve designed this guide to be useful for anyone looking to learn more about strategic budgeting for the public sector.

Here is a table of contents to help you navigate the guide:

• What Is Strategic Budgeting?

• Strategic Budgeting Methods

• Strategic Budgeting Advantages and Disadvantages

• How Do You Create a Strategic Budget?

• Get Started with Strategic Budgeting

What Is Strategic Budgeting?

Traditional budgeting applies a one-size-fits-all approach to budgetary decisions, requiring organizations to look at each item in a budget one by one.

Strategic budgeting, on the other hand, is the latest advancement in finance processes. Itallows governments and organizations to consider the budget as a whole, incorporating initiatives, goals, and even ways to budget, such as the importance of including community input, into the budgeting process.

The importance of strategic thinking in budgeting often comes up in times of crisis. During the 2008 recession, local governments had to look closely at budgets, scrutinizing how funds were allocated, and these efforts led to strategic budgeting considerations.

The same thing happened during the COVID-19 pandemic. Both governments and private companies looked carefully at budgets, applying a strategic lens to see how they could plan to make sure they achieved long-term goals despite sudden shortfalls in funds.

As consulting group McKinsey put it in a report for CFOs, the hard-earned lessons of 2021 presented the potential for enduring opportunities in linking strategy to value in the financial planning process.

“CFOs recognize that they need real budgets . . . to match resources with strategy. But they also know that the business-as-usual budgeting process, with its traditional inputs and standard approaches, is no longer fit for the task.”
McKinsey & Company

And looking specifically at governments, in the wake of the COVID-19 pandemic both the GFOA and ICMA have encouraged local governments to “move away from ‘incremental, line item budgeting’ by taking advantage of new ways of thinking, new technologies, and to better meet the changing needs of communities with a limited budget.”

Is Strategic Budgeting A New Term?

Yes! Despite its rise in common usage over the last few years, the term strategic budgeting is still a fairly new phrase.

You won’t find it in most accounting or budgeting textbooks or official documentation, nor will you find the contrast we’ve been making in this article between traditional budgeting and strategic budgeting.

This gap in vocabulary is largely due to the newness of strategic budgeting as a concept—newness that can be attributed to the advent of new tools, like cloud-based budgeting software, which allow local governments to take a comprehensive look at all of its department budgets and plan in a holistic way, instead of one by one. Previously, this kind of budgeting could be difficult or even impossible to accomplish given the complexity inherent in taking a holistic approach to budgeting.

On a side note, budgeting for governments has an added layer of complexity as compared to most companies or organizations because governments typically have several different budgets housed under one roof.

These independent—but also sometimes interdependent—budgets can make planning challenging, and this is why new tools are providing so much value to governments in the budgeting and planning process, because they allow governments to gain insights into all of their budgets and plan in a unified way.

Strategic Budgeting In Action

We’ve talked about strategic budgeting at a high level. Now let’s drill down to make things more concrete, and illustrate the difference between the traditional and the strategic approaches to budgeting that we’ve been discussing.

Consider school districts. Using a traditional “old school” budgeting model, a school district will rely on last year’s budget to make incremental, line-item changes in planning for the next year.

Strategic budgeting frameworks, on the other hand, help district leaders to align their budget with the district’s priorities, allowing them to create long-term budget plans that drive community outcomes.

Now let’s look at a specific example. Using a traditional, incremental model for budgeting, a school district expecting a 1% increase in student population will increase its non-administrative budget by 1% across the district to continue the expected level of service and operations.

But using a strategic model for budgeting, a school district will start the process by looking at the board and district priorities, and the performance of each of the schools against those priorities. After this review, it will modify the holistic budget per school to ensure investment into those specific priorities, reallocating funds that do not directly support board or district priorities.

FREE DOWNLOAD — learn more about how school districts can implement strategic budgeting.

Strategic Budgeting Methods

There are several strategic budgeting methods you can use to help your government or organization focus on long-term goals in its budgeting.

It’s important to note that these strategic budgeting methods—also called strategic budgeting frameworks—don’t have to stand alone. In fact, many of them are complementary, and you can often use more than one strategic budgeting method within the same organization, depending on your goals and priorities.

This image of the strategic budget cycle shows you where the different strategic budgeting frameworks fit into the different stages of the budgeting process.

Below we cover all of the strategic budgeting methods shown in the budget cycle image above in more details. You can use the list to jump down, or continue reading to learn more about each one.

• Program-based budgeting

• Priority-based budgeting

• Performance-based budgeting

• Outcome-based budgeting

  See Also

  4 Ways To Manage Your Money More Effectively - Great Basin Federal Credit Union

• Participatory budgeting

• Evidenced-based budgeting

Program-based Budgeting

So Long to Department Silos

What: Physical Budget Structure

How: In program-based budgeting, the budget is built from proposals submitted by programs instead of departments. This approach means that departments have to collaborate in order to coordinate services and budget proposals.

Who: Governments and organizations that want to bring all their departments’ needs to the planning table.

“We see an actual return on investment versus some additional subsidies for the community… It just really forced our executive team to have a broader conversation. It forced our departments to think about the broader community goals. But I think we made strides in that strategic discussion just simply by reorienting, reframing how we talk about our investments.”

Mark Woulf | Budget Manager, City of Boulder, CO

Priority-Based Budgeting

Rank Your Goals and Fund Them Accordingly

What: Setting Funding Priorities

How: In priority-based budgeting, the budget is built from a predetermined list of priorities and criteria. These priorities are used to pre-screen proposals before they are added to the budget process, making sure only those initiatives that are a priority get considered. To implement this priority-based approach, finance leaders ask the same set of questions against all proposals to rank and evaluate them as a team.

Who: Organizations that want departments and community members to apply specifics when budgeting.

“It really highlighted the importance of resources in alignment to meet our goals and objectives as a city… Conversations can get lost in incremental budgeting where we’re not really talking about: Are we addressing the prosperity of our community? Are we addressing the safety of our community? We’re hoping to sit down with our county and regional partners to talk about our top priorities, and how to align our resources to meet some of these challenges and goals.”

Krista Morrison | Budget Officer, City of Kansas City, MO

Performance-Based Budgeting

What Do We Get for What We Are Budgeting?

What: Include Performance Data

How: In performance-based budgeting, the budget is built based on performance data with a focus on what you get out for what you put in. When building a performance-based budget, those in charge of planning include historic and anticipated performance metrics and ROI in the proposal details for their proposal evaluations, using these criteria to help them choose which proposals to fund.

Who: Organizations that want to make sure their budgeting process produces results.

“We track data on affordable homes, good paying jobs, reliable mass transit, and an overarching view of resiliency and sustainability so we can measure our progress. We have data that tells us how successful we are in certain areas and the work we have to do in others.”

Jane Castor | Mayor of the City of Tampa, FL

Some of the goals for the City of Tampa include affordable homes, good paying jobs, and reliable mass transit.

Watch this video to learn more about how the City of Tampa has focused on performance in its budgeting.

Outcome-Based Budgeting

Focus on Strategic Initiatives

What: Strategic Initiatives

How: In outcome-based budgeting, the budget is built based on linking proposals to strategic goals to ensure money is going to fuel the organization’s desired results. Those in charge of planning evaluate and prioritize proposals based on how they impact the strategic plan.

Who: Organizations that want to directly tie the budget to strategic priorities.

“It’s all about allocating your resources towards those strategic priorities that you’ve laid as an organization. Where is it that you want to go? What are those outcomes that you’re trying to achieve? How can we align those resources to be able to achieve those outcomes?”

Harpreet Hora | Executive Director of Budget Services, Atlanta Public Schools

Watch this panel with Harpreet Hora to learn more about her work to implement strategic budgeting in Atlanta Public Schools using an outcome-based budgeting method.

Participatory Budgeting

Everyone Is a VIP

What: Community Voice

How: In participatory budgeting, the budget is built based on including the community in the budgeting process. This strategic budgeting method is almost always used in combination with another method, since community voice can be an important driver to define goals but will probably not define the entire budget. Regardless of the other strategic budgeting method you choose, participatory budgeting is a powerful tool in strategic planning, allowing finance leaders and budget decision-makers to bring the voice of the community into key decisions.

Who: Organizations that want to bring the community into the budget process

“We’re an open book when it comes to city finances. If you want to see the last 10 years of expenditures, budgets, actual, it’s online and available for the community.”

Kristina Alfaro | Director of Admin Services, Cupertino, CA

After an embezzlement scandal, leaders in Cupertino decided to bring the community into its planning process to rebuild trust.

Watch this video to learn how leaders in Cupertino implemented participatory budgeting, helping its residents regain confidence in the local government.

Evidenced-Based Budgeting

Use What Works

What: Evidence and Data

How: In participatory budgeting, the budget is built using evidence. Leaders consider specific evidence when reviewing budget proposals, looking at where that evidence either supports or does not support budgetary requests. Evidence-based budgeting can be thought of as performance-based budgeting on steroids—with evidence-based budgeting, leaders track the actual outcome of investments and adjust budget accordingly. Evidence doesn’t just mean historical data and projections. It also means active monitoring of programs to see whether the investment yields the intended result, and making changes based on progress.

Who: Organizations that want to be incredibly careful and targeted with their budget, and make sure funds are only allocated for initiatives and products that have a proven track record.

“Relying on data and evidence to make spending decisions, which has proved useful in times of prosperity, is critical . . . during a recession.”

Results First, a Pew Charitable Trusts initiative

Read the Pew Charitable Trust’s report,How Public Officials Can Use Data and Evidence to Make Strategic Budget Cuts.

Strategic Budgeting Advantages and Disadvantages

Up to now, we’ve been discussing strategic budgeting as if it’s an obviously better option than traditional budgeting.

But are there disadvantages to strategic budgeting?

In this section, we’ll take a look at both the advantages and disadvantages to consider when implementing strategic budgeting processes within an organization.

Advantages of Strategic Budgeting

1. Better allocation of resources

Strategic budgeting helps governments, organizations, and school districts allocate their resources in a way that aligns with their goals and objectives.

By prioritizing where funds should be spent, leaders can ensure that the most critical needs are met first. This focus on allocating resources where they’re needed can be especially important during times of scarcity, such as a recession, or the extremely difficult times experienced by both governments and private companies during the COVID-19 pandemic.

2. Better outcomes

The work to achieve government and organizational goals is driven by initiatives, and the success of these initiatives is judged based on the outcomes they produce. Strategic budgeting allows organizations to focus on the outcomes leaders want to achieve by providing a framework for allocating resources for those outcomes, helping them achieve a greater impact with limited funds.

3. Improved financial planning

Strategic budgeting allows for better long-term financial planning by identifying future expenditures and revenue sources. This long-term planning helps to avoid short-term solutions that may not be sustainable over time.

4. Enhances community engagement

Stakeholders such as residents or employees are more likely to engage with the budgeting process if they see their input reflected in budget decisions.

Sometimes, traditional budgeting can unintentionally pit stakeholders against each other. Since funds are limited, taking a line-item approach to how all are allocated can mean that some may view an increase in one budget as a direct result of a decrease in theirs. Strategic budgeting can alleviate this problem by engaging the community and other stakeholders in the budgeting process, creating shared goals established through consensus and collaboration, ultimately helping organizations make better decisions overall.

5. Better transparency and accountability

Because strategic budgeting requires an organized view of where funds are allocated, it is often complemented by increased transparency and accountability, with local governments and organizations improving how they share budget information internally across departments, and externally with their communities.

6. Increased efficiency

By analyzing spending patterns and identifying areas for improvement, strategic budgeting can lead to more efficient use of resources.

7. Facilitates decision-making

By providing a clear overview of available funds and priorities, strategic budgeting can enable informed decision-making by leaders in government and organizations.

Disadvantages of Strategic Budgeting

1. Resistance to change

Departments or stakeholders may resist changes proposed in the budget if it affects their current operations or resources.

Remedy: Include stakeholders in the budget process, giving them a voice and helping them understand the importance of adopting a new approach so that your government or organization can achieve its long-term goals.

2. It can be time-consuming

Strategic budgeting can require significant up-front time and resources to develop, implement, and monitor.

Although it can be a complex process that takes away from other important tasks, the end goal of implementing strategic budgeting should be to improve the overall impact of an organization’s spend. But the up-front time requirement may give some pause, and make them decide to push off implementation, or only partially implement strategic budgeting practices (by seeking community engagement, for example).

Remedy: Find a software partner like OpenGov (if you’re a local government) to reduce the amount of time spent crunching numbers in your budgeting and planning, allowing you to focus on the work of deciding what to prioritize in the budget.

3. Overly narrow focus

Conducting strategic budgeting without all the appropriate stakeholders involved could run the risk of prioritizing some initiatives while overlooking others, leading to inadequate funding for critical needs that happen to fall outside the scope of the budget plan.

Remedy: Including all the stakeholders that will be impacted by budgetary decisions, including both department members and community members, can help avoid having an overly narrow focus in your budgeting work.

How Do You Create a Strategic Budget?

A strategic budget can help organizations plan, prioritize, and allocate funds in a way that aligns with the agency’s goals and objectives.

But how do you actually create one?

Here’s a step-by-step approach to creating a strategic budget.

1. Collect Input by Engaging Your Stakeholders

To implement strategic budgeting you’ll need to identify your goals and objectives. And in order to do that, you need to get input.

This input may come internally, from department leaders. It may also come externally, from community members and leaders.

You can collect feedback by holding meetings, sending out surveys, or hosting live or virtual town halls.

When you seek to engage all of your stakeholders, make sure you’re asking clear questions so that you can get clear input. Try to encourage those providing guidance to think about goals and not specific one-off needs—so, instead of identifying a pothole that needs to be filled on a specific road, to think instead of about a community initiative to ensure that roads are properly maintained throughout your city.

2. Choose Your Strategic Budgeting Method(s)

Drawing fromthe list of strategic methods above, identify the method or methods that you’d like to use.

To do this, start by identifying the outcomes you’d like to achieve from the budgeting process.

Here’s some questions to help guide your decision-making:

• Do you have a desire to change to or are currently using a program-based budget structure as opposed to a department-based program structure? If so, you may be interested in program-based budgeting.

• Would you like your team to submit proposals based on standard evaluation criteria and a developed process for approving proposals? Priority-based budgeting may be the way to go.

• Is ROI and historical performance important to determine how we spend funds next year? Then consider performance-based budgeting.

• Is tying your strategic plan to your budget a goal for next year’s budget? Then outcome-based budgeting may be the right fit for you.

• Do you need to improve how you show the need for your activities? If you’re a state agency and asking this, evidence-based budgeting is for you.

Remember, you don’t have to align to a single budgeting strategy.

Your government may want to start by building a program inventory, evolve into tying the budget to the strategic plan the next year, and then go back and implement a prioritization process the year after that.

It may be challenging at first to identify the strategic budgeting frameworks you’d like to use, but the work of identifying these frameworks is part of the core work you’ll be doing to improve your budgeting process over all. By discussing the frameworks you want to use, you’ll be having a conversation about what’s important to your organization’s stakeholders.

And keep in mind—the strategic budgeting methods you choose to use this year can be changed next year.

3. Set Your Goals

Goal setting will be one of the most important parts of your work to create a strategic budget. What do you actually want to accomplish with your limited resources?

The input you’ve received from the first step should give you a starting place, since it’s likely that priorities may have emerged from the feedback you collected.

Goals may include improving public services, enhancing infrastructure, or ensuring public safety. It’s important to prioritize these goals based on their importance and urgency.

Setting goals can be challenging, so don’t expect it to happen overnight. In fact, it can be one of the most difficult parts of moving towards more strategic budgeting in government, and many governments spend a lot of time and resources overcoming this challenge.

However, the work is well worth it. If you can succeed in setting goals and incorporating them into your planning process, the outcomes you achieve with your limited resources will be much more impactful to your community.

Jump down to see some tips for getting started with strategic budgeting, including tips for setting goals.

4. Create Your Strategic Budget

Now that you’ve collected input and identified your goals, it’s time to actually start the budgeting process.

Here are some things to consider while doing this work:

• Assess revenue streams. Doing this will help you decide how to pay for the goals you’ve set. Once your goals are identified, assess revenue streams such as taxes, grants, or other sources of funding available to the organization. This helps determine how much money is available for each goal and objective.

• Prioritize spending. Based on goal prioritization and revenue assessment results, prioritize spending by allocating funds according to community needs while considering trade-offs between different goals. Prioritization may involve making difficult choices about funding allocations among various departments or programs.

• Develop cost estimates. Develop cost estimates for each goal or objective based on research and analysis so that potential funding gaps can be identified early on in the process before finalizing the budget plan.

• Identify performance metrics. As you build your budget strategically around your goals, keep in mind that you’ll want to evaluate the success of your efforts to achieve your goals down the road. Now is the time to identify the performance metrics that will define success. These metrics should provide measurable indicators of progress, allowing for tracking results over time, allowing you to track results over time. Identifying performance metrics will also help ensure accountability and transparency within your community.

What Comes Next?

After you’ve created your budget it’s time to launch the programs you’ve identified to help achieve your organization’s goals.

Once the budget is approved and implemented, it’s important to monitor its progress regularly using performance metrics established earlier in the process. Monitoring progress helps identify issues early on so that corrective action can be taken if necessary.

When it’s time to go through the budgeting process the next year, you’ll have metrics to draw from to guide your planning. And, just as importantly, you’ll now have some experience under your belt to use in your strategic budgeting work.

Most likely, the process you follow will be iterative, with each year seeing incremental progress toward better budgeting around the most important goals in your community. The first time you begin implementing strategic budgeting may not be a huge success, but it will be a big step in driving toward the outcomes most important in your community.

Get Started with Strategic Budgeting

Where is your organization right now when it comes to budgeting?

Below are five key stages we’ve identified in the budget maturation process. By identifying where your organization or government currently stands, you can help to define the work needed to move forward toward greater maturity.

In a recent OpenGov survey, 50% of respondents positioned their budget in the Initial or Managed stage, while only 6% considered their budget Optimizing. Regardless of where you currently sit, there are actions you can take now to move up the ladder.

After you see where you are, here are some tips for helping you get started with moving forward.

Tips for Getting Started with Strategic Budgeting

1. Be realistic

It’s important to be realistic about how many goals to set, especially when you’re just getting started. A good number to shoot for is one-three goals per department.

These goals should be clearly laid out with defined steps and milestones, including things like:

• The core mission

• A vision statement

• Strategic priorities within the goal

• A rollout/implementation plan

By having a realistic number of goals staff can allocate funds and efforts to areas that have been historically underperforming. The most successful governments are the ones that are laser-focused on strategic goals with realistic, achievable performance measures.

For more on performance measures, download our ebook Measure What Matters: Tips for Aligned Strategic Initiatives and Better Performance Management.

2. Leave room for innovation

Set aside controlled spaces for experiments, so there’s room to try out new ideas that could advance the ball.

Testing out and piloting new ideas, in the beginning, allows for failure and learning. Trying the same thing over and over and expecting a different outcome, does not improve community outcomes. As part of this innovation, collaboration is also essential to make sure all departments are on the same page.

3. Invoke a sense of urgency

Bureaucracy can create roadblocks and slow down processes, whether it’s at a government or an organization.

To overcome Bureaucratic challenges, successful governments find a way to drive a sense of urgency. To do this, you can incentivize performance by tying it to goals. Another way to create urgency is to start from the top up by using your leadership to bring everyone to the table.

However you do it, invoking a sense of urgency can help drive the push to implement strategic budgeting. Without urgency, it’s likely that the effort may be put off, and ultimately never actually executed.

Ready to get started? Learn more about how modern governments are adopting strategic budgeting in this free ebook.