If your time to you is worth savin'
And you better start swimmin'
Or you'll sink like a stone
For the times they are a-changin'
Bob Dylan's classic lyrics are as relevant today as when he first recorded The Times They Are a-Changin' back in 1964. Of course, he wasn't singing about the world of SaaS, but there does seem to be a message here for SaaS companies today.
We all know the industry is navigating some pretty uncertain times, which has every SaaS company out there looking for more predictable growth amid the shifting tides. And, Strategic budgeting can help you achieve it.
Unlike the business-as-usual budgeting process, strategic budgeting can help you stretch your runway, manage your cash flow, and ensure that the cash you spend is having the impact you expect.
Every company has unique strategic goals, though, so it’s important to choose the right strategic budgeting method to reach them.
Depending on the method you choose, you can create one of four types of strategic budgets – an activity based budget, a zero based budget, a value proposition budget, or a driver based budget.
But, how do you know which budget process is the best one for your business? We’ll show you how to figure that out in this guide.
4 methods SaaS companies can use to develop a more strategic budget
There are four methods for creating a strategic budget. The first thing you'll notice is that the four methods shown below are not new. However, they’re also not particularly strategic either. It is the extra steps taken in the budgeting process that transforms these in strategic budgeting methods.
In addition to providing the resource allocations necessary to meet your annual targets, strategic budgeting takes that a couple of steps further:
- It provides SaaS companies far more flexibility in a highly dynamic market.
- It helps to ensure that budget allocations are not only serving immediate needs but also the overall strategic goals of the company, which often span multiple years.
Achieving that alignment requires more collaboration than a traditional, incremental budgeting approach – another key difference between traditional budgeting and strategic budgeting.
Start by revisiting your company's strategic goals
The first step in choosing the right budgeting method is to have a deep understanding of your company's strategic goals. It is important to align your budgeting decisions with these goals and objectives, including both in the short- and long-term.
Thinking through those goals and objectives can help you make a more informed decision about which budgeting method will help you get there.
Selecting the budgeting method is arguably the most crucial step in ensuring success. It’s worth spending some time doing the necessary research to understand all four methods and how each might align with your company’s strategic plan.
It’s important for CFOs to sit down with the company’s leadership team as well as individual team leads. CFOs need to understand both the overall organizational goals and each team’s goals to form a well-informed opinion on which method will work best.
Factors to consider when choosing a strategic budgeting method
Choosing the right budgeting method involves careful assessment of a few factors. Here’s a quick list to consider:
- Size of the business
- The industry you operate in
- The growth stage of the company
- The financial circumstances of the company
- Industry trends and benchmarking
- Data availability
- Budgeting frequency
Comparing the 4 methods
To help you determine which strategic budgeting process might work best for you, we’ve broken down each method to help you understand (1) its focus, (2) key implementation requirements, and (3) some of the pros and cons, and (4) the types of SaaS companies and/or situations it’s well suited for.
The types of companies and circumstances noted here are not exhaustive. If you don’t see your business in any of these descriptions, we encourage you to explore one or more of these types of strategic budgeting as the benefits of strategic budgeting are quite clear.
Activity based budgeting
- Focus: Focuses on business activities for the purposes of allocating resources accurately based on their actual costs and driving greater efficiency.
- Implementation: Budget is built from the bottom and does not consider the past year’s budget. Requires activity based cost accounting and a thorough analysis of all activities that incur costs to the business.
- Pros: Drives operational and cost efficiency and enables very precise cost allocation.
- Cons: May be too complex for small companies to implement effectively, Management and tracking can be resource intensive as each activity must be tracked individually. Doesn’t scale well; becomes hard to manage manually or with legacy tools.
- Good for: Larger companies with well-defined teams and functions and companies focused on innovation that require cost-cutting to make more resources available for such initiatives.
Zero based budgeting
- Focus: Focuses on reducing expenses and ensuring resources are optimized.
- Implementation: Can be created using a top-down or bottom-up approach and. An evidence-based budgeting approach with no assumptions carried over from the previous cycle. Starts from a “zero” base with all line items set to zero and requires each allocation to be justified. Requires a thorough analysis of every expense.
- Pros: Better resource allocation to current and new priorities. Provides strong cost control and drives operational efficiency.
- Cons: Created from scratch every cycle, making it very time consuming. Can slow momentum on larger strategic priorities where previous funding levels are not sustained.
- Good for: Companies focused on optimizing costs and eliminating inefficiencies and companies in the hyper-growth stage that need to redesign their cost structures to prioritize growth.
Value proposition budgeting
- Focus: Focus is on allocating resources to tasks that will directly enhance the value of the product to customers.
- Implementation: A top-down method that requires thorough customer and market research, along with ROI analysis of historical data for past investments to understand how to increase value.
- Pros: Customer-centric approach with simple logic (do what makes customers happy) that enables easy prioritization. Doubles down on competitive advantage by investing resources to ensure continued customer satisfaction and reducing churn.
- Cons: Measuring customer “happiness” is highly subjective and can lead to stakeholder disagreement, making it difficult to allocate funds across different department budgets.
- Good for: Product-led growth (PLG) companies focused on initiatives that drive customer success.
Driver based budgeting
- Focus: Focuses on key business drivers to accelerate growth.
- Implementation: Can be created using a top-down or bottom-up approach. Prioritizes activities that are contributing the most value to the business. Senior leadership and department leaders use available data to identify top drivers, and scenario analyses might be required to determine their impact on business outcomes.
- Pros: Decisions are data-driven and more accurate; deep data analysis helps ensure resources are prioritized toward drivers with highest impact.
- Cons: Very data-intensive and complex to execute. Requires significant technology resources to track and aggregate all the types of data required.
- Good for: Companies highly focused on growth and require flexibility to revise business strategies as needed for risk management and to leverage new opportunities.
Whichever method you choose, make it a rolling budget
A strategic approach to budgeting marries the short- and long-term goals and the cash in the bank to enable companies to become successful. And, you can leverage the power of a strategic budget even more by making it a rolling budget.
Any strategic budget can be turned into a rolling budget because doing so is simply making a decision to update it more frequently than once a year and how often to do that.
Instead of being rigid and based on dated assumptions made at the start of the financial or calendar year, a rolling budget can be adjusted based on your current reality. With a rolling budget, companies are able to adjust their forecasts and reallocate their financial resources strategically in real time to:
- Capitalize on favorable situations
- Handle a crisis better
- To meet unexpected business needs.
However, many SaaS companies find the task daunting and are reluctant to give it a shot as it seems time-intensive, and tracking the correct data is often challenging. But, with the right processes and technology, a rolling budget isn’t all that difficult to implement.
In Drivetrain, a purpose-built financial planning and analysis tool built for SaaS businesses to help them plan, monitor, and course-correct, rolling budgets are easy to create and use.
With the comprehensive visibility Drivetrain provides, you can review your budget, compare the budget vs. actuals, and assess real-time data with ease. This makes it possible to adjust projections and strategies in response to actual performance.
Given the tumultuous changes we’ve seen in the SaaS industry over the past few years, SaaS businesses of all kinds are going to have to look for innovative new approaches to remain competitive.
It’s now time to let go of the inflexible, incremental approach that traditional budgeting employs and instead choose a strategic budgeting method that will drive your business forward faster…
For the times they are a-changin'.