Marketing Budget Planning

BUDGET PLANNING 101  MCC PARTNERS

Marshall Capital Corporation, MCC Partners, Augmented Business Intelligence Corporation, ABI, AdScience Technologies and Webland all endeavour to work with business partners to grow the enterprise value of their business, we do this through a process of active listening, listening with perspective.  While we are good listeners, what sets us apart is our obsession with business,  we live and breath business, loving customers and in particular helping business find a better way to deliver more value to the customer.  When customers realize you are on a mission to make them a better product, provide better service and reduce their costs, like an army they become your advocates.  As long as your focus remains on delivering extraordinary value to your customer the compounding effect of their referrals will become viral.

A key component to delivering value is being able to quantify your message, what is your elevator pitch?  How do you tell your companies story or product story in a couple of sentences?  The entire process of distilling your message is integral to the process of defining who you are as a company and why you do what you do.  ( a little visit to Simon Sinek’s TED Talk  “start with why” )is worthwhile as you begin this process to better help you understand your purpose.

If by chance their are 6 to 8 things you and your company could be doing to deliver and add value to your customers, but between you and your customers it is only realistic for you to be delivering perhaps 4 or 5 of those things both well and profitably within your and your customers current resource (capital both human and money) constraints. perhaps you and your company are doing three things well and one OK,  we may discover of the 8 possibles maybe you should be doing 2 completely different ones, we will develop a reasonable understand of what opportunities lie in house for you already.

A key component of growth is telling and defining your story,  the process of defining and telling the story is both good for your customers to learn and for your employees to learn to better develop and create products and services which match your customers needs.  Part of effectively telling that story is advertising.

This is one of the ways we help,  we make the advertising industry landscape easy to understand, we define the parameters of the language of Advertising and marketing, the costs, the effectiveness of Print, TV, Outdoor (billboards), Radio, the various internet platforms, Facebook, Google and Mobile, Instagram, Snapchat, and how as a percentage of your sales you should define your advertising budget based on your industry and your location, rural, urban, suburban how and why different mediums can be more effective for different business in different industries.  What is currently the most effective dollar for dollar method for driving sales and customers to your business?  How much should you spend to grow your business and be effective in your industry and community where you operate?

Creating Value adding long term sustainable enterprise value and mastering the sales drivers to forecast and develop better budgets.

Is your budgeting, planning and forecasting process silo-ed or holistic?

A holistic picture of a company’s health treats the whole body of financial information as one fabric. Mindful correlations across key business drivers integrate key information visible on income statements, balance sheets and cash flow statements. Stress on a single thread can alter the contour of current and future financial risk with significant implications for every business unit. As soon as companies begin to mature, growth depends on seeing how, why and where financial stress and growth opportunities emerge and predicting outcomes. A holistic approach to budgeting, planning and forecasting expresses end-to-end, organic views of financial risk at the core of every business in a complex environment.

Do you rely on spreadsheets that require significant manual intervention to generate results?

In astonishingly short time, growing companies armed with excel or point solutions find themselves ill prepared to handle new complexities resulting from company growth and dynamic market conditions. Off-the-shelf spreadsheets can launch companies and effectively maintain books in a company’s earliest stages. So long as general ledgers report income from a handful of sources and routine expenses, manual entries might keep up. When expanding supply chains, product development and funding sources still depend on manual processes, never mind greater potential for error. Manual solutions won’t capture dynamic operational and financial complexities in a timely fashion. Delays hinder action when urgency is paramount. Sluggish forecasts miss competitive threats. Just when companies should prepare to challenge a rival, those that still depend on manual intervention cannot make pivotal decisions that require current information.

Are you satisfied with the predictive value of your forecasting process?

No one sees the future with absolute clarity, least of all companies that build forecasts with rigid spreadsheets designed as rear view mirrors. Yet every nimble manager knows that expecting change is imperative. Flawed decisions use stale data or wait too long for fresh data as rivals sprint ahead. Too long can mean years, months or, in some cases, days or even hours. Anticipating cash flow that keeps the lights on frustrates companies whose spreadsheets lack the muscle for multiple ‘what-if’ scenarios. Robust forecasts balance qualitative models that rely on lots of human judgment with quantitative models that scour petabytes of data for embryonic trends.

Is BP&F high on the list of management priorities?

Modern companies juggle dozens of urgent priorities, from research and development to investor relations. When we ask business owners and leaders their replies leave no doubt. Planning, budgeting and forecasting was number two, after growing the business — and make no mistake, growth hinges on effective planning, budgeting and forecasting. Allowing PB&F to slip to fourth or fifth place sacrifices the ability to see the twists ahead in a company’s dynamic competitive landscape, and this often governs success or failure

Is there clear accountability or “ownership” for accurate inputs into plans, budgets and forecasts?

Budgeting, Planning & Forecasting Process Improvement Best Practices

Accountability is like quality. Both are glaringly visible when absent. Without clearly defining which business units and individuals will own results, the outlook is cloudy at best and doomed at worst. Failure is an orphan; success confers credit on the un-involved. On the other hand, a diligent approach to budgeting, planning and forecasting bakes accountability into the process at the outset. An eye to potential outcomes elevates accountability to the level where ownership must reside if the outcome matters. And when wouldn’t they?

Do you contend with multiple versions of the truth?

Sound budgeting, planning and forecasting foster debate over strategy, not friction over competing notions of the truth. Unfortunately, multiple versions of the truth crop up too easily in many companies. A single set of facts can support more than one logical opinion. Truth rests on shared assumptions and expectations about a company’s mission and goals. Where business objectives should converge, multiple views of “the truth” govern each business unit’s urgent and sometimes clashing financial priorities. When units go in too many directions, overarching strategies lose traction. Variances proliferate at every stage of the reporting process, leading to friction instead of accord where growth is concerned, and strategic decisions become shots in the dark.

Is there universal agreement on core data definitions, a common business language, key metrics and standard processes for establishing budgets?

Strategies can maximize performance only where solid foundations rest on core data definitions. More granular than mission and goals, a common business vocabulary supplies the framework that gives context to data. No terms are so basic they can be left to assumption, from sales, costs, revenue and net profits to a roster of performance metrics. Slight departures can compromise results if, for instance, commission targets leave a key metric open to more than one calculation. Shifting markets and business combinations impose a constant need to review and instil a common business language. Failure to police agreements on core definitions compounds the business risks that companies face every day.

Is your BP&F process linked to your company’s overarching vision and strategy?

Meaningful strategy and vision are rooted in robust budgeting, planning and forecasting. A strategic loop starts with a plan, shapes a budget, anticipates resources companies will have to deploy to compete effectively, all culminating in a strategy. As strategies evolve, the loop informs budgeting, planning and forecasting attuned to the next annual, quarterly, weekly cycle, as competition and market condition demand. Reliable budgeting, planning and forecasting bestow credibility on management’s use of resources and affirms — or challenges — the governance framework that sets overarching priorities.

Does your scenario analysis generate multiple what-if budget models?

The future is uncertain and as such robust planning, budgeting and forecasting tools enable companies to test alternative scenarios. Off-the-shelf general ledgers with limited forecasting capabilities restrict what-if scenarios which allow more informed strategic decisions. Companies need to test line items that can get them to a goal of, say, boosting revenues by 6 percent and margins by 20 percent — or any growth configuration.

Are rolling forecasts feasible, credible and distinct from annual plan detail and duration?

Other than birthdays and retirement parties, surprises are not welcome — even when the news is good. The last thing a CFO wants to see is evidence that she or he was out of touch with a company’s pulse. Rolling forecasts monitor the pulse without missing a crucial beat. Routine contact with business units supports and updates a holistic picture of risks and opportunities amid fluid market conditions. Routine planning discussions, open communication and forecast updates as needed capture real business cycles, instead of cycles that calendars dictate. True rolling forecasts separate reactive finance departments from pro-active finance departments, a distinction that gains significance as urgency and stakes increase.

Summary: It is nearly impossible to predict annual revenues precisely, particularly for new products or businesses, but it is critically important for companies to create high-quality revenue budgets. To maximize the odds of being in the right ballpark relative to actual results, stick to a few key fundamentals.

Executives, managers and financial analysts throughout the country will soon turn their attention to the critical but extremely challenging process to develop revenue budgets for the 2017 fiscal year. Managers with revenue responsibility will spend weeks (and in some cases months) assessing market conditions, conducting analyses and negotiating with peers and superiors to set revenue expectations for next year. Executives will push their managers to set aggressive targets; managers will lobby executives for more achievable targets and greater resources; and sales teams will advocate targets that offer the best opportunity for maximum compensation.

We have learned from our years of experience developing and managing revenue budgets that it is almost impossible to predict revenues precisely, unless your customers are government entities. This is due to the fact that the dynamics of the economy, the marketplace and company decision making can never be captured fully beforehand. It is doubly difficult to predict revenues when new products or emerging markets are involved, due partly to the absence of historical data to which managers and analysts can point to substantiate expectations. Large corporations cope with these realities partly by installing quarterly forecast cycles that capture new information as each fiscal year progresses. This approach improves the accuracy of forecasts but is cost prohibitive for small or medium size companies to employ.

Getting revenue projections right—or, more specifically, being in the right ballpark relative to actual results—is vitally important for both small and large companies. Stock prices plunge after public companies miss their own revenue predictions. Managerial reputations rise and fall based on the ability to forecast and hit revenue targets effectively. Sales teams flounder under the weight of unrealistic expectations. These kinds of outcomes occur not only in public companies, in which executive firings are triggered by disappointing quarterly results, but in private and closely held companies that do not receive constant external scrutiny.

Our goal in writing this article is to help managers boost the odds that revenue projections for their businesses will be in the right ballpark relative to actual results. To this end, we have identified three fundamental practices that enhance the quality of projections significantly. We offer guidance primarily with businesses selling to other businesses in mind, but much of what we will discuss can also be applied within businesses selling to consumers. Specifically, we recommend that managers and analysts responsible for developing revenue budgets adhere to the following basics:

Understand thoroughly how sales channels work and how prospects become customers:

Ground revenue projections in market facts.

Be extremely disciplined in applying and evaluating key revenue assumptions.

Rigorous adherence to these basics will make the difference between budgets that give everyone the best chance to succeed and budgets that reflect little beyond wishful thinking masquerading as sound planning. Please note that this article only addresses the development of “top line” expectations. The development of expense budgets is a topic worthy of an article unto itself

The Fundamentals of Revenue Forecasting

Understand thoroughly how sales channels work and how prospects become customers. On a high level, many companies develop sales forecasts by applying an expected or desired market growth rate to current year revenues. These forecasts are then substantiated using a bottom-up forecasting approach that takes into account inputs such as projected product units sold, price, sales productivity and seasonality, to name a few. Most of the time, the second approach ends up using assumptions designed to meet the end result of the first method

We recommend a more rigorous approach, relying more heavily on analysis of sales channel productivity and customer purchasing behaviour. Here’s why: from an execution standpoint, the effectiveness of sales channels and the purchasing behaviour of customers are the two most important drivers of revenue growth. This is a critical point to note for managers of businesses relying on sales teams. Managers must understand how much typical inside or outside sales reps can be expected to accomplish, and what they will actually spend time doing, to develop realistic revenue targets. Even the best sales reps have limits to what they can accomplish over a given time period, and all sales reps spend some percentage of their time on non-selling activities. It is even more important to understand how customers make purchase decisions and to determine the amount of time and effort needed to convert prospects to buyers based on the customer decision-making process.

With these things in mind, we recommend that projections take into account the following:

The total number of potential customers with which a company can realistically do business, described sometimes as the “addressable market.”

Sales team productivity variables: the number of productive sales reps in the market, the number of calls each can make, the number of calls and average length of time expected to close a sale, average close rate(s) per rep and per product and any ramp-up time required for new products or reps.

The incentive structure of the sales team and its potential impact on product sales. For example, if sales reps are rewarded based on gross monthly sales, then one should not be surprised if they spend their time selling products with the highest price tags.

Online sales channel productivity variables: the number of products that customers will be comfortable purchasing online, the speed and effectiveness of the fulfillment process, the type of marketing investment required to drive the level of transaction activity sought.  Any seasonality associated with buyer behaviour.  The value of this work extends beyond the budgeting process. Once a company masters the drivers of sales productivity, it can then track these drivers over time and use this information to assess when corrective action needs to be taken.

Ground revenue projections in market facts. This might seem obvious, but our experience has shown that this is easier said than done. Budget discussions often involve significant negotiation, and someone once wrote that business negotiations are driven as much by emotion as by economics. This often proves to be the case with revenue budgets. The numbers that receive final executive approval often differ materially from the numbers generated by knowledgeable revenue budget owners and financial analysts. This happens for many reasons, some of which have little to do with the level of analytical rigour applied to initial forecasts.

Because of this, managers and analysts must make sure that the portion of budget negotiations driven by economic analysis is as strong and factual as possible. This means that managers must gather credible industry information and customer feedback to answer questions such as:

How much money are customers spending or willing to spend to solve a particular problem? How fast is customer spending growing?

How strong are competitor products and/or other alternatives relative to the product(s) your company offers?

How strong are competitors’ capabilities in areas such as sales, marketing, operating processes and customer service?

Will the expected level of growth support all current competitors, or must the company take market share from others in order to grow?

With solid market facts and reliable trend information as backup, managers must help their executives understand what is possible based on current market and company realities and offer sound recommendations regarding the additional investment needed to hit desired targets.

Finding credible market information can prove quite difficult, and managers should proceed with caution when using third-party market research to develop revenue assumptions. A couple of years ago, this article’s authors reviewed a set of market size estimates developed by a national market research firm. These figures included estimates of revenues for several companies, including two with executives we knew. We later learned that the estimates exceeded actual revenues of both companies by well over 100 percent! Third party research data can be very helpful, but should generally be viewed as points of reference, not as “facts.” Consequently, managers should review market size and growth numbers with a critical eye and obtain multiple sources of market information when available. Many times, in-market customers and prospects prove to be the most relevant and useful sources of information about buyer behaviour and spending, competitor product offerings and growth trends.

Be extremely disciplined in applying and evaluating key revenue assumptions. Experienced managers will be familiar with the idea that projections are only as good as the assumptions on which they are built. However, even the best executives, managers and analysts make mistakes with assumptions. Two common ones follow:

Overlooking implicit assumptions. We have seen people with great analytical discipline make assumptions without realizing it. For example, we know of a business that planned to double the size of its sales force to take full advantage of the market’s potential. It did not occur to anyone that the business might have difficulty staffing up. The managers of the business made the implicit assumption that the business would be able to add qualified staff on a timetable of its choosing. As it turned out, qualified employees were few and far between, and most needed substantial training before they could bring in any business. This became a contributing factor to a year-long negative variance to budget. We have seen this kind of issue arise more than once, in different businesses, and we have watched budget variances occur as a direct result.

Mistaking assumptions for facts. Any manager that has ever been thrown out of an executive’s office after presenting a draft of projections deemed totally insufficient has probably heard statements like “close rates will never go lower than X,” or “the product will never launch later than Y.” Anytime someone uses a “never” phrase, one can be sure that he or she is confusing “likelihood” with “certainty.” Remember, nothing is certain beyond death and taxes. Like the managers of famed Netscape or Bear Stearns (insert your choice here) many talented people have bet heavily and lost big on events they felt were certain to happen.

Managers can do several things to guard against these kinds of mistakes. First, managers should never lose sight of the distinction between likelihood and certainty. Second, managers should be disciplined about building risk analysis, sensitivity analysis and probability analysis into their work. Third, managers should make sure to create multiple revenue budget scenarios, including a best case and a worst case, and make sure that the worst-case scenario really is in fact a worst case scenario. Fourth, managers should share assumptions with as many stakeholders as possible. In fact, budget stakeholders should be encouraged to review, comprehend and challenge assumptions. The ensuing conversation will enhance the quality of the final projections, and we have observed that budget discussions proceed far more smoothly when assumptions are made transparent.

Everyone Wins When the Fundamentals Are Followed

Just as it can be painful to see actual results vary significantly from budget, it can be incredibly satisfying to develop revenue projections that stand the test of the market. We believe strongly that managers can increase the odds of being in the right neighbourhood relative to actual results by following the guidance that we have provided.

It is important here to note that relative to other industries there have been some very significant and very meaningful changes to the advertising industry sine Tim Berners Lee invented the internet and then Marc Andreessen and Jim Clark developed Netscape to make the internet browsable.

In order for most internet advertisers to get customers they had to guarantee results!  Not surprisingly this became the norm in the online ad world and is now know as performance marketing or performance advertising,  it is and environment where you can choose to pay for results.  It is vastly different than a world where you give an ad exec a few million dollars for him or her to give to her friend at TV or radio station x or y and then you get inundated with  a bunch of dance brochures with predictive guides to how many people may or may not be watching or listening to the shows that you may or may not be featured on or in.

Marshall Capital Corporation and MCC Partners have worked with SME’s (Small and Medium Business) for 18 years in multiple industries, helping managers and owners create value, grow sales and importantly profit. A MCC we often focus on developing a clear understanding of the difference between what is the current ‘message’ being delivered to both employees and customers and what is the ‘intended message’, we then work to cost effectively bridge the gap and free up resources.  We recently had a 30 year old company who was maintaining more than $20,000,000 in inventory consuming a disproportionate amount of their working capital, the owners were doing this because they prided themselves on being able to provide next day delivery of 95% of their products to their customers and said this was a component of what they were known for in the industry.  It turned out they were in fact not know for next day deliver and it did little to add any value to their brand, they already had great customer service and their clients trusted them.  After a quick review we were able to get their working capital in line, we brought their inventory down to under $6,000,000 (more than 70% reduction) by determining which products their customers needed within a day.  In addition to freeing up capital this almost immediately increased their EBITDA by nearly $2 Million and the process helped them better understand where and how to invest marketing and advertising dollars to drive sales growth.

Though our companies Webland, Webland Media and ASIC Engineering Corporation (technology focused on digital phase insertion) we have worked with hundreds of companies developing and building community created content sites, driving and developing SEO and SMO based programs to generate online sales and worked with companies to train them to better take advantage of various online marketing and advertising tools including, Overture (bought by Yahoo in 2003 for $1.6B) Google Ad Words, Youtube, Amazon Advertising Platform and dozes of other niche players including Kazaa we worked diligently with our developers and programs to design and develop a best practices tool kit to better help our clients and partners unravel the mysteries and secrets of effective performance advertising marketing and customer acquisition.