As businesses grow, so do their budget requirements. This is one of the most pragmatic financial truths that business owners should strive to incorporate into their financial strategy. As your business expands, it’s important to also have a solid roadmap in place to align your budget with your growth. After all, if you don’t have a clear sense of where your business is headed, how can you reach your goals?
The following best practices will help your business to align your company’s budget with your growth strategy. When both of these factors are working in tandem, your business will be on the right track towards financial success.
The first step to aligning your budget with your growth is to create a unified vision. Start by looking at where you want your revenue to be in the next year, three years, and even five years down the road. Ask questions such as how many additional services will you be adding? What will your team growth need to look like to meet those needs? Or, which new product offerings will you launch in that timeframe?
The best way to make sure that everyone within your company is on the same page with your financial growth plan is to ask for expert advice surrounding these questions. Consider bringing in department heads from multiple areas of the business to build out the vision so that the numbers make sense. By proactively planning ahead and committing to a unified vision, it ensures that each step you take sets the business up for future success.
Using the prior year’s P&L statement, you can easily take your strategy and break it down by each department area. For example, advertising and marketing should be grouped together in your strategy and on your budget. This will give you a quick visual to make sure that the numbers in your projected expenses align with your growth goals.
Then, double-check that the company can sustain this amount of growth with the numbers you are projecting. Be honest about what type of capital investments you will need in your budget (if you need them). Whether growth capital comes from reinvesting profit, loans, or outside equity investment, it is always prudent to be clear on how you will obtain capital before you need it.
Marketing is only one of the many departments in the business that needs a strong strategy. Businesses naturally go through cycles of growth. Companies tend to find themselves either ramping up the expenses to increase their marketing spend during high growth, or (as the business becomes more seasoned) businesses hit a marketing plateau where they don’t need to prioritize growth as heavily. However, no matter which stage the business is in, it is important to have a strong understanding of how your marketing KPIs are impacting your revenue growth. To guarantee your team’s success, your department heads should take ownership over tracking department KPIs and deliverables to ensure your marketing strategy runs smoothly.
One way to quickly see how marketing KPIs are affecting your business is to look at the KPIs from your prior year or prior quarter to consider which ones impacted growth the most. Using this approach will provide a quick snapshot of where the business is at so that you can build out a successful growth strategy based on real numbers.
Some basic KPIs that every company should look at are revenue growth, net profit percentage, Customer Acquisition Cost, and Return On Ad Spend. Keep in mind, it’s important to find out which marketing KPIs are important to your individual business. By looking at the KPIs, you can determine how to adjust your growth strategy to improve your budgeting alignment.
Once you have a unified vision, you need to have a game plan for how you can enact this plan in your industry–since every industry will require specific strategies. For example, if your company sells a product, your product sales should prioritize a strong strategy around inventory. If you sell software (such as a technology company that doesn’t have inventory) then the business may need to prioritize an area like research and development instead.
Another example of industry fluctuations that can affect your budget are the number of personnel you will need. For instance, if you are a services-based business, personnel will be a critical line-item expenditure in your budget, since it will take more employees to expand. You will need to factor in more operational resources (and cash for payroll) to sustain new growth.
On the other hand, if your Cost of Sales is driven by technology, such as a SaaS company, your revenue growth will not be tied to personnel as closely as a services company. Personnel growth is still critical to consider and will grow in any company. It is the rate of growth that will vary. Consider whether your team will be remote or in the office, and ask questions such as will you grow with contractors or employees? This is important because they are different costs associated with each answer depending on which route your company chooses to go. Keep in mind, that every industry requires specific tailoring and fine-tuning to grow your business, and these should all be accounted for in your budget.
The goal of every business is to turn a profit, and as a result, business owners will naturally want to take out cash. Consider how much cash needs to be reinvested into the business versus how much can be taken for distribution as you sustain your growth goals. It is difficult to grow if all profit dollars are distributed to the owners, as the growth capital is needed. There should always be a balance when it comes to the decision-making on distribution and growth. Ultimately, that balance is easy to achieve when you factor in the overall company strategy and your goals for the future.
Tentho Can Help
Tentho is a team of highly skilled financial experts who excel in helping clients plan for their financial futures. Tentho works with clients to create a sustainable, long-term approach to money management, investing, and financial planning. Their capable team of financial experts is ready to answer any budgeting questions you may have and are happy to pass along their expert industry-leading knowledge to you. Tentho encourages business owners to plan ahead for future needs, such as creating a business strategy that can help them scale strategically. Schedule your free consultation today to connect with our experts and let us help you improve your financial outlook in 2021.