Annual budgeting is the yearly process in which every business unit submits its needs and desires in numerical format to the CFO, who decides which of them get funded.
Successful organizations recognize spend management as an active part of the budget process, because the current needs and future plans of the organization are what drive their spend management objectives. It seems obvious, but often there is a disconnect. Too often “spend management” equates to cost-cutting and slashing expenses, usually in desperate, after-the-fact reactionary mode.
The CCM philosophy is that spend management is a holistic, ongoing process. As such, organizations should turn to it with greater purpose and foresight.
While sales and revenue are the cornerstones of any financial budget, variables and unforeseen circumstances can throw a wrench into any sales estimate. Variables and unforeseen circumstances can interfere on the spending side of the equation as well, but spend management techniques and programs bring greater stability to the process, mitigating unwanted surprises on the one hand while uncovering new opportunities for growing profit on the other.
How budget goals drive spend management requirements
Law firms and corporations undergo an annual budgeting process for a variety of reasons, and spend management strategies contribute to all of them.
Fund current operations and financial commitments
Being able to pay for the products and services needed to operate the business are job one of any budget. Those costs are where most spend management programs are associated:
- Fixed costs that remain the same regardless of your sales performance, such as rent, leases and insurance.
- Variable costs that correlate with sales. While of greatest consequence in the manufacturing sector, which must plan for raw materials and other production costs, they also apply to the service sector. Additional staff needed to handle fluctuating workloads are a variable as are expenses incurred to meet client requirements, such as travel or research.
Fund business goals and plans
Funding next year’s goals, as well as your five-year plan and beyond, are other important considerations of the budgeting process. Business expansion requires financial resources to develop new products and services, increase your marketing presence, enter new markets and more.
While loans and other external financial instruments are often the primary funding sources, organizations need to internally fund at least some of the investment costs from their own profits.
Improve and optimize cash flow
Sometimes an organization finds itself with growing expense lines, flat revenue lines or the worst-case scenario of some combination. The best-run companies and law firms don’t let boom and bust cycles derail their operations. Yet we often find situations in which profits go up, and expenses go up in synch. If the money is there, why not spend it?
Unfortunately, it takes longer to re-normalize spending and bring costs back down, so when the bust or downturn occurs, there is a lag effect. This puts the business into a reactionary mode that can be destructive if the circumstances become dire enough. Often it’s in this mode when spend management consultants like CCM are brought in. While we can step to the challenge, we are much more effective, and your results are much greater, when we become part of an ongoing process, working proactively and continuously to make sure you avoid unnecessary expenses, whether or not your sales rise or fall.
You’re in business to make a profit – unless of course you’re a government agency or non-profit charity – profit to return to shareholders and partners, profit to reward employees. Profitability is a sign of operational acumen and business success that builds and strengthens your market position and gives you one more advantage over less capable competitors.
Everyone knows the formula to increase profitability: grow revenue or bring down costs.
The best companies are always growing revenue, and always managing expenses to reasonable standards and benchmarks. The least effective businesses find themselves in reactionary mode, making rash decisions and taking actions that put a band-aid on one area while creating a new wound in others.
And that brings us to the final reason it’s important to identify and understand the business drivers behind your spend management objectives: sound spend management practices can help your organization attain its plans and objectives.
Spending is far more predictable and controllable than revenue. Firms and corporations that give spend management the same status and priority they give to organization-wide budgeting and revenue forecasting are the businesses that succeed.
About CCM’s 99 Questions
The question posed in this article is one of the 99 Questions to Stop Spending More Than Your Competitors – A Law Firm’s Guide to Smartly Shrinking Vendor Spend.