We are coming to the end of the year. Budgets have been submitted and either approved or…not. Black Friday is coming up rapidly and there seems to be no shortage of needs and wants which require spending.
I’m going to make a few assumptions and stay out of the details, if you are looking for a detailed breakdown of capital gains expenditure and if one policy idea is right or wrong, this is probably not for you.
This is for you if
· You approve budgets
· You submit budgets
· You spend money based on a budget
Three different ideas, which are probably too late for 2017’s budget but over the course of next year, see how they can impact how you use what you have or try to have conversations which means that 2018 can be a better year.
Value to Cost Ratio
The basic principle is that when we spend money on solving problems or opportunities to grow, the question should be, if we spend this much in time or money, do we get a higher return in value.
The difficulty is that we apply a different value lens to areas disproportionately. One simple example is a company who spends £1000 on marketing/advertising each month. Therefore, the extra sales from customers lead to a value higher than the cost. Spend more and make more.
In another area, we spend £10 a month for the tool which allows the sales teams to process these extra sales. Although the tool is at the cheaper end of the market and sometimes the leads don’t get processed quickly enough, leaving frustrated customers. The value to cost balance is out of order. This is not to say we should spend money at the same amounts universally. It does mean that if we have a high value opportunity, we need to spend the correct amount.
Part of what makes this hard to get right, is that identifying the true value of a product/service is difficult. If we do not understand the value we’ll receive from something, then it is important not to buy it until you understand it.
Rewarded for Failure, Punished for Success
The top person in the organisation wishes to save money. Therefore, the message goes to the leadership team, that if a department budgeted for more money than they spent, they should have their budget amount reduced.
It sounds obvious, all the departments spend as much of their budget as they can on wasteful items rather than saving money by improving. CEO is unhappy because money is still not being saved & the department members are not motivated to serve the business. Especially if a team performs exceptionally well and frees up time for other projects, their reward is a member of their team is fired purely based on cost saving, Ouch.
Which brings us onto the final idea…
Budgets mean more is wasted, Value harder to find.
Gaining approval for projects is lengthy, drawn out and a risk for team members who ask their superiors to trust them to achieve a result. (In some teams this is not the case but still)
If you can get the shiniest gadget because your budget allows it, most people would do that. The main directive is, don’t go over-budget. The main directive should be, bring the most value to the business…with the lowest cost possible.
Part of this is a communications failure between the team and the leadership. The leadership must create a culture that rewards staff for adding value whilst saving money rather than prescribing