In an economic climate characterized by staggering inflation figures, strategic corporate spending has become more important than ever. A price tag that is too high in one area can limit funding in another, limiting your organization’s potential to gain benefits, discover efficiencies, and create new product or service lines.
Unfortunately, many leaders struggle with effectively prioritizing spending. Why? First, it can be difficult to put together a budget when so many departments, initiatives, and projects need support. It’s not always clear what the most important line items are. Even if you’re sure, it can be challenging to articulate the reasoning behind your financial decisions.
Yet none of these challenges detract from the simple fact that you must develop, sell and defend a budget. If you can’t clearly explain the rationale behind a line item, the company may be missing out on growth opportunities.
How to develop, sell and defend a budget
Budgeting is a continuous process. It is necessary to constantly review the numbers and defend any change. Fortunately, it’s entirely possible to make smarter spending decisions. You just need to know how to do these three things:
1. Develop a budget.
To prioritize spending, you need to consider numerous factors. Because these factors multiply as your organization grows, it can become easy to lose control of finances. For this reason, a single source of truth quickly becomes a necessity if you ever want to control your company’s cash flow. The last thing you want is for the “squeaky wheel” to receive the majority of available funding, regardless of actual needs.
Take facility management, for example. Low-quality or poorly organized data can lead to disastrous budgeting decisions. “If an organization doesn’t know what it has, it’s often due to poor data about its overall facility portfolio, including outdated, incorrect, or missing information,” explains Michael Nichols, PMP, executive vice president of R&K Solutions. “Facilities are made up of complex systems and components, and without good data it becomes difficult to track information in a consistent way that can be related to cost estimate data.” When the cost of supporting day-to-day facility operations consumes so much of your time and money, prioritizing future capital investments can quickly become compromised.
If you have the tools to track and organize financial records, you can quickly bring that information together to analyze costs in relation to your goals. Once you’ve done that, it’s all a matter of working with the numbers. Trimming the fat, so to speak, can do wonders for your bottom line. It also allows you to run through some worst-case scenarios that can help you build some much-needed slack in the budget.
2. Sell a budget.
Ultimately, you need to sell your budget to stakeholders to get buy-in. How? Selling a budget based on economic data, for example, can be a good move. Research economic indicators such as inflation and unemployment to see how they can affect your business. Then bring your support to the table, such as financial projections, trend analysis, and industry-standard benchmarks.
The use of growth forecasts can also be persuasive. After all, the best budgets support the company’s growth objectives. Start by identifying areas with the most growth potential. Maybe it’s new product lines or an increase in existing customer revenue. Perhaps expanding into new markets makes the most sense. Once you’ve identified some growth opportunities, set realistic goals for each and provide evidence of their potential returns.
You can also use company values as another possible way to sell a budget. To get started, review your company’s mission, vision, and other guiding principles. Look for ways to link the proposal to those values. For example, if sustainability is a core part of your business, highlight how the budget includes investments in eco-friendly technology or initiatives to reduce waste. Use concrete examples to show how specific budget line items align with company values and deliver long-term benefits. Vagueness is rarely compelling.
3. Defend a budget.
Just like developing and selling a budget, defending a budget will largely depend on data. What does the data tell you? More importantly, what does it tell you about the most likely future? Descriptive analytics are important – after all, they can help guide budget decisions. But it is often necessary to focus on the predictive side of analytics to defend your proposal.
“This is the stage where an organization has to answer: ‘What does the data say?’ That said, it should do so with a clearly forward-looking mindset,” writes Kevin Troyanos, chief of analytics at Publicis Health. “At this stage of the process, an organization should have little interest in evaluating—much less in justifying—past decisions. The totality of his interest should be in how his data can provide his insight into what is likely to happen in the future.
Of course there will be some uncertainty, but eliminating the most unlikely scenarios can put you in a much better position when it comes to planning. It also puts you in a much better position to defend the budget if someone comes back asking for cuts in other areas. You’ve already calculated the impact on the business, and you can explain why such a cut could erode your market position, hurt the customer experience, or limit cost savings in the future.
Prioritizing business expenses is an essential aspect of effective financial management. By paying extra attention to the budget, you ensure that your company’s financial resources are used effectively and efficiently.