Budgets: we all have one and in business, the purpose of a budget is to ensure our organizations have enough resources to meet its objectives.

The use of sub-accounts is the most common approach to budgeting and is used to separate funds for different expenses. But this approach has a number of drawbacks, which is why we recommend outcome-based budgeting and planning. Let’s explore why. The best place to start is to understand the purpose of a budget.

In business, we budget and allocate resources for what is important to the success of the organization. Financial targets and priorities serve as the framework for deciding how much money will be allocated to the various functions. Ideally, these funds are used to support the implementation of the strategies and plans necessary to achieve the expected business results. Each function then distributes its “piece of the pie” among the various programs it will execute in support of the strategies, priorities, and targets.

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Let’s compare and contrast sub-account budgeting versus outcome-based budgeting, and in particular, how outcome-based budgeting enables businesses to make the best choices when cost cuts are required.

The Problem with Sub Accounts is in the Deep Dive

Most of us use this same approach in our personal budget. We allocate a specific amount of money to utilities, groceries, vehicle maintenance, entertainment, charity, savings, etc. Our personal first-level subaccounts.

Some of us take our personal budget a level deeper, perhaps we have vacations, eating out, etc. under entertainment, or water, gas, and electricity under utilities, resulting in a second subaccount level.

Also, in our personal lives, when we experience a cash crunch or boon, we adjust our budgets – when we have fewer funds we reduce expenses, or when we have more than anticipated we increase funds in some or all subaccounts.

budgeting, business, business outcomes, business planning, CFO, CMO, growth, Marketing, outcome-based budget, performance targets, planning, Strategic Planning, strategy, sub-accountingIn business, budgets are allocated to functions or departments, such as Sales, Support, Marketing, Talent Management, etc. the first level of subaccounts.

Marketing, for example, might have Advertising, Events, PR, Content, etc. as subaccounts, a second level. Perhaps even a third level, such as webinars, tradeshows, etc. under events, the third level of subaccounts. It is assumed but not clear how each of these is connected to a program, strategy, and business priority.

This all seems very simple. But, when it comes to cutting or adding funds in a business, sub accounts become problematic, especially when it comes to budget reductions.

Why Sub-Account-Based Cost Cutting Isn’t the Best Approach

Let’s use a personal and business example to illustrate why this is true. Imagine in your personal life the family budget keeper says, “price increases are making it tough to make ends meet, we need to tighten our belts.” The family budget keeper reviews the budget and recommends redistributing the funds from what was allocated for a 2-week overseas vacation to general living expenses and aim for, and fund, a shorter more economical vacation closer to home.

In business, the budget keeper, often the CFO, would inform the various leaders of the organization’s departments that there is a revenue shortfall and as a result, we need to reduce expenses, that is cut the budget. The CFO might suggest every department cut their budget by X% or in some cases, the CFO might even go into specific recommendations on where to cut the budget, such as eliminating travel or training or halting conference and industry event participation.

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Why? Because the implications of the budget reductions are unclear. What affect will an across-the-board budget cut have on;

• Serving customers?
• Retaining key employees?
• Connecting with critical prospects?
• Achieving business results?

It’s impossible to know the ripple effect of sub-account budgeting. What’s the solution? Outcome-based budgets.

What is Outcome-based Budgeting and How to Employ It

An outcome is a result. A business outcome is a specific, quantifiable customer-centric result your organization must achieve in some time period in order to declare success. When these outcomes are achieved, the organization’s financial targets are met. Business outcomes reflect the organization’s priorities and require at least two, if not more, functions or departments within an organization to achieve them. Each function’s objectives should be linked to the outcomes it will directly impact. This is the essence of outcome-based planning.

Outcome-based plans create a direct line-of-sight from activities and investments to revenue. Outcome-based plans enable a function to create an outcome-based budget.

With this approach, every dollar is associated with an activity or tactic and every tactic and activity can be traced to an outcome. This means you can ascertain the level of investment needed to achieve every outcome. It also means it will be much easier to determine the return on each investment because all dollars are connected to an outcome that is tied to a financial target.

If you implement outcome-based plans and budgets, the budget conversation changes. Rather than talking about the cost of activities and tactics, such as content writers and webinars, the conversation is about the investment the function needs to implement the activities, tactics, and programs that bring the strategies to fruition. Here’s how this affects the budget conversation.

Imagine the CFO needs your function to reduce its budget. The conversation is no longer about sub accounts, the conversation is about the impact on results. Here’s what it might sound like – let’s use the Marketing function, since it is the organization’s engine for growth, to illustrate the differences in the conversation.

Here’s a common set up.

CFO: “We are not making our numbers. We need to reduce our expenses.”

What Happens Next Depends on Your Approach to Budgeting

The “reduced revenue requires reduced expenses” conversation can go one of two ways. The result depends on whether you have done outcome based planning and budgeting – or not

The Sub-account Approach Conversation

The CFO reviews the budget sub accounts and notices that a significant portion of the Marketing budget is for trade shows. This seems like a logical place to cut.

CFO: “It’s nice to attend these events, but we don’t understand why we go to so many. I suggest you eliminate as many trade shows as you can to reach the revised budget number.”

If the Marketing leader doesn’t know how each trade show contributes to the achievement of a performance target, such as X# of conversations with new prospects, perhaps in different verticals or markets, hence the various events, the leader is out of luck; stuck with making the cut. Stuck with meeting the original expectations, MBOs, etc.

The Outcome-based Approach Conversation

Now imagine that the Marketing leader, and every other functional leader, has an outcome-based budget. Using the same example, that would mean every trade show would have a budget to produce a specific performance target that rolls up to tactics and activities, in support of a specific Marketing strategy that is, in turn, linked to an objective and ultimately directly related to a business outcome.

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When the CFO suggests cutting trade shows, the Marketing leader can say, “We can do that. Here’s what it will mean to the business. Given that it will impact the performance target at the event, we will not achieve the program target the event supports. In fact, the program is critical to the success of the strategy and achieving the objective. Let’s have a look at how we adjust the objective and potentially the strategy if we eliminate this event or explore some other ways we can reduce costs that will have less impact on our ability to achieve our objectives.”

The conversation is now about the impact this reduction will have on the performance target for that event and the ripples this change in the performance target will have on achieving the objectives and ultimately the outcome.

The decision may still be to cut events. But the conversation won’t end there. Rather it will lead to a more meaningful business conversation about strategies, objectives, and performance targets, which in turn may require the organization to modify the target for the outcome.

When you can change the conversation to talk about business implications, you demonstrate business acumen, a critical skill for anyone who wants a seat at the leadership table.

Laura Patterson is president and co-founder of VisionEdge Marketing, Inc., a recognized leader in enabling organizations to leverage data and analytics to facilitate marketing accountability.

Laura’s newest book, Marketing Metrics in Action: Creating a Performance-Driven Marketing Organization (Racom: www.racombooks.com ), is a useful primer for improving marketing measurement and performance. Visit: www.visionedgemarketing.com

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