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Developing a budget is one of the hardest – and most important – exercises a SaaS CFO must do. Getting the budget right can make the difference between the company achieving its strategic goals or falling short.
However, the way the budgeting process takes place in most SaaS companies is broken, and the end result is a budget that doesn’t get the company where it wants to go.
Why can't budgeting be easier?
The truth is, it can be. But for too many SaaS companies, there’s a fundamental disconnect between the strategic planning and budgeting processes.
Strategic planning is a top-down process in which the company’s leadership sets the overall strategy and goals, and budgeting is usually a bottom-up process based on the individual goals of different teams.
In addition, there's very little collaboration between different teams within the company while coming up with their budgets. There’s no way for one team to know what another is trying to achieve or how much budget they’re asking for.
Then it’s up to the CFO and finance team to work independently with each team in a very siloed way to make the necessary budget allocations. Not surprisingly, when the final budget is rolled out, there's no shared vision regarding the challenges and opportunities the budget needs to address.
If this way of budgeting sounds familiar, implementing a strategic budgeting approach can help you break down the silos in your organization. With strategic budgeting, you can build a budget that will not only help you meet your annual targets but also help your company meet its larger strategic objectives.
What is strategic budgeting?
Strategic budgeting is a relatively new way of coming up with a budget. Simply put, it is the process of aligning your budget with your company’s strategic goals. However, when put into practice, it is a lot more than just that.
It's important to point out that a company’s strategy for achieving an end goal could cover multiple years and can be broken down into annual and even monthly plans. Therefore, a strategic budget is something that supports a long-term vision of the company.
There are three key activities involved in strategic budgeting (i.e. the things that make a budget a strategic budget):
- Building your budget: Team heads must spend time assessing their budget requests and how their spending plans contribute to the larger plans of the company. And they need to work together to ensure that the assumptions they’re using to build the budget are correct.
- Updating the budget: For strategic budgeting to work, it needs to be updated at pre-decided intervals based on the progress or changing market conditions. In contrast to static budgets, which are common in the SaaS industry, rolling budgets provide more flexibility to adapt to changing conditions in the business and the market.
- Aligning the budget with strategic goals: CFOs need to bring their department heads to the planning table to have an open discussion on the budgeting assumptions. The end goal should be to align all the budget requests with the larger strategy of the company.
How does strategic budgeting differ from strategic planning and annual planning?
SaaS companies do a lot of different types of planning, and very often, people use the same terms interchangeably to describe different processes. For example, some people think of the annual operating plan (AOP) and budget as the same thing. However, we consider them two different processes.
To avoid any confusion about how strategic budgeting fits into the mix of the different planning activities that SaaS engage in, we offer the following definitions:
- Strategic planning is a process that provides an overarching vision for an organization and a roadmap to achieve that vision over a multi-year period. The strategic plan usually includes big goals, such as becoming a dominant player in a specific category or moving into new or bigger markets and broadly, the activities necessary to achieve them.
- Annual planning is a more granular process that delves into the goals and objectives of an organization or individual department over a 12-month period to develop the annual operating plan (AOP). This process includes developing an annual budget, too, which is often static. Annual planning could also be a subset of strategic planning wherein the goal is to achieve a certain portion of the larger strategic plan in the next 12 months.
- Strategic budgeting is the process of aligning the annual operating plan and budget with the company’s strategic plan.
How can strategic budgeting benefit your business?
Strategic budgeting can benefit your business in several important ways, both tangible and intangible.
Improved financial management and control
- Identifying cost-saving opportunities: With strategic budgeting, you can objectively identify where spending cuts should occur. If a spend doesn’t align with one of the larger strategic objectives of the company, it cannot be justified.
- Allocating resources more effectively: Strategic budgeting makes it easier to see where you need to allocate your resources because it connects the activities of different teams with each other and the company’s strategic objectives.
Enhanced decision-making
- Prioritizing growth initiatives: Strategic budgeting, given its agile nature, always ensures that the company is able to prioritize growth initiatives.
- Evaluating return on investment (ROI): With more frequent updates, companies can keep a keen eye on the ROI and can either double down on activities that are giving maximum benefits or do away with the ones that aren’t working. Companies can also, in real time, allocate resources to projects that are working well or for new experiments that have the potential to be game changers.
Strengthened competitive advantage
- Ability to respond quickly to market changes: Adaptability is built into strategic budgeting. Companies can respond to market changes quickly to take advantage of new opportunities or adjust to downturns, allowing them to stay competitive even in rapidly changing scenarios.
- Alignment of resources with strategic goals: Once the larger strategic goals are set, it becomes easier to allocate resources to the activities that will have the biggest impact. Strategic budgeting ties together the larger goals with the resources at hand and provides the necessary money to attain the company’s goals.
Intangible benefits
Strategic budgeting achieves many of the same benefits that benchmarking does in terms of creating alignment with the company’s overarching goals.
By aligning individual teams on a budget that clearly shows how resources are going to be used to move the needle for the entire company, it shifts the focus from who is getting how much to “how are we going to get there with the resources we have?”
Strategic budgeting also makes it much easier for the CFO to make tough decisions. When everyone is in alignment, they better understand why some budgets are cut while others are increased.
Achieving alignment with strategic goals
Ensuring horizontal (between managers and top leaders) and vertical alignment (between different teams) is crucial for the success of the strategic budgeting exercise. Not doing so will result in insufficient data, misaligned goals, and effort duplication.
For strategic budgeting to work, the CFO must don a strategic advisor’s hat and act as a bridge between the department leaders and the company’s executive-level leadership. This is important to ensure perfect alignment on strategic objectives and in turn, the budget.
CFOs should work with all leaders to identify meaningful KPIs, remove data silos, and encourage open communication both vertically and horizontally in the company.
Strategic budgeting: A tool for success
Deciding to go ahead with strategic budgeting is a crucial step in a company’s growth journey. In some ways, it tinkers with the DNA of the company because it sometimes requires a change in the corporate culture – a more collaborative culture with open communication across departmental boundaries.
However, given the ever-changing market environment that SaaS companies work in today, strategic budgeting is imperative if companies want to remain (or become) agile and stay competitive.
While it certainly is more time-consuming and effort-intensive, adopting a strategic budgeting approach can be one of the best decisions a SaaS CFO can make.
