It’s budget season! What milestone(s) is your company trying to achieve, and what resources and constraints have you identified to get you there? Building a financial plan can go down many different paths and several iterations (sigh), and before you know it, you can be late into Q2 without a buttoned-up budget and subsequently the company is blowing into the wind. Know what I’m talking about?
Through years of not getting it right, I have laid out what I believe to be the most successful approach to establishing and driving your budget to accomplish big things.
- Define the company goal to build a plan/budget around.
- Agree on what company resources it will take to get there as well as its constraints.
- Define the company key metrics and appropriate benchmarks to measure success and failure of the budget execution.
- Build a fully functional model that drives the budget strategy and also summarizes key business indicators and direction to its stakeholders.
- Establish a post-mortem with the key stakeholders to discuss actual/budget variance, learnings, and planning iterations.
Define the company goal(s), which can come in many varieties such as revenue growth, new product launches, new territories, etc. A budget is futile if you haven’t clearly defined what the company is solving for. Prior to establishing a budget, start with the company goals and objectives discussed and approved by the board/exec team, and then create a budget to solve for the company milestones. Note, the broader company goal and budget should drill down into individual departmental goals because not all departments are created equal!
Optimize the planning/execution process by identifying what resources are required to achieve the company goal as well as the constraints. A successful budget should solve the cost/benefit analysis of achieving the desired result subject to constraints. No company can sustain growth at any cost (hello WeWork)! A common constraint is cash. An example of involving multiple stakeholders in building a budget around this constraint that drive cash-flow is applying data analysis and input from the Sales and Marketing department to apply funnel and conversion metrics to model the gross booking forecast, partnering with Accounting and Sales Operations to build the customer billing frequency and customer payment timing/collections, and budgeting with all department to understand their one-time accounts payable and hiring plans. Overestimating growth can lead to over-hiring which can lead to layoffs if the budget doesn’t properly account for its resource constraints correctly. Modeling your plan with intelligent data analytics and input from key stakeholders is crucial to a successful budget.
Define the metrics that will measure the successes/failures within the budget. If the company goal is to grow the top line 100% year over year by hiring more sales reps and/or increasing Marketing spend, then measuring Sales Efficiency ratios, Customer Lifetime Value to Customer Acquisition Cost ratios, Payback Period are all examples of a budget metrics that help will guide the Sales and Marketing headcount and expense planning as well as measuring the performance execution. Measuring the metrics merely isn’t enough for a successful budget. Benchmarking your metrics to other companies similar in size, vertical, stage are very useful in defining the metrics target in your budget. For example, if the metric in your budget is Payback Period, what is the number of months of payback that will define the success or failure of your budget? Using a general payback benchmark like 12 months can be a dangerous proxy for companies in different stages or business models. For example, a healthy payback period will greatly differ from an early stage company with less institutional funds, or longer sales cycles, or a less predictable business model, than a later stage company with more VC backing, short sales cycles, or a more predictable business model.
Build an intelligent and simplistic operating model that involves stakeholders and solves for the company budget goals. An operating model should allow for departmental scenario inputs (headcount planning, bookings forecast, churn assumptions, one-time expense planning, financing) that flow into the financials (P&L, Balance Sheet, Cash-Flows) and are well summarized so that the financials encompass key business insights and performance that drive strategic discussion for the decision makers.
The operating model should include each department’s budget and goals with data driven decisions and influence from the departmental leaders.
Because the operating model is the tool used for budgeting and strategy, it’s worth noting that a successful budget model should have error controls and easy to follow assumptions and formula linking between departments and sheets.
The final step to a successful budget, once the plan is approved and actuals come in, is the postmortem process where the pertinent stakeholders discuss the successes and failures in the planning process and how to improve upon the next planning stage (monthly, quarterly, semi-annual, annual). A successful budget should clearly identify the drivers behind the execution phases in each department, so that the leadership team has all the pertinent data points to optimize or tweak the budget planning.
Good luck FP&A team! Let me know how it goes.