In an economic climate characterized by staggering inflation rates, strategic business spending has become more important than ever. An inflated price tag in one area could restrict funding in another, limiting your organization’s potential to achieve advantages, discover efficiencies, and create new product or service lines.
Unfortunately, many leaders struggle to prioritize spending effectively. Why? For one, 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 are sure, it can be challenging to articulate the reasoning behind your financial decisions.
Still, none of these challenges take away from the simple fact that you must develop a budget, sell it, and defend it. If you can’t clearly explain the rationale behind a line item, the company could miss out on growth opportunities.
How to develop, sell, and defend a budget
Budgeting is an ongoing process. It’s necessary to continuously revisit the numbers and defend each change. Fortunately, it’s entirely feasible 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 account for numerous factors. Because these factors multiply as your organization grows, it can become easy to lose your handle on its finances. For this reason, a single source of truth quickly becomes a necessity if you ever hope to control your company’s cash flow. The last thing you want is for the “squeaky wheel” to receive the bulk of available funding regardless of its actual needs.
Take facilities management as an example. Low-quality or badly organized data can lead to disastrous budgeting decisions. “When an organization does not know what it has, it is often due to poor data on its overall facilities portfolio, including outdated, incorrect, or missing information,” explains Michael Nichols, PMP, executive vice president of R&K Solutions.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 manner that can be related to cost estimation data.” When the cost of sustaining day-to-day facility operations consumes so much of your time and money, the prioritization of future capital investments can quickly fall by the wayside.
If you have the means to track and organize financial data, you can quickly pull 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 a few worst-case scenarios that can help you build some much-needed slack into the budget.
2. Sell a budget.
Ultimately, you’ll need to sell your budget to stakeholders in order 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 could impact your business. Then, bring to the table your support, such as financial projections, trend analysis, and industry-standard benchmarks.
Using growth projections can also be persuasive. After all, the best budgets will support company growth objectives. Start by identifying areas that have the most potential for growth. Perhaps it’s new product lines or increases in existing customer sales. Maybe expanding into new markets makes the most sense. Once you’ve identified some growth opportunities, set realistic targets for each one and provide evidence of their potential return.
You could also use company values as another potential avenue for selling a budget. To start, review your company’s mission statement, vision, and other guiding principles. Look for ways to tie the proposal to those values. If, for example, sustainability is a core part of your business, highlight how the budget includes investments in environmentally friendly technology or initiatives to reduce waste. Use concrete examples to show how specific budgetary line items align with company values and provide long-term benefits. Vagueness is rarely compelling.
3. Defend a budget.
Much like developing and selling a budget, defending a budget will depend largely on data. What is the data telling you? More importantly, what is it telling you about the likeliest future? Descriptive analytics are important—they can help inform decisions around the budget, after all. But it’s often necessary to focus on the predictive side of analytics to defend your proposal.
“This is the stage where an organization should answer, ‘What does the data say?’ That said, it should do so with a distinctly forward-looking mindset,” writes Kevin Troyanos, head of analytics at Publicis Health. “At this stage of the process, an organization should take little interest in evaluating—and even less in justifying—past decisions. The totality of its interest should rest with how its data can inform its understanding of what is likely to happen in the future.”
Naturally, there will be some uncertainty involved, 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 and requests cuts to other areas. You will have already worked out the impact on business, and you can explain why such a cut could erode your market position, damage customer experience, or limit cost savings in the future.
Prioritizing business spending is an essential aspect of effective financial management. When you pay extra attention to the budget, you ensure that your business’s financial resources are being used effectively and efficiently.