Is value proposition budgeting right for your business?
It could be, especially if you want to avoid unnecessary spending and ensure every penny delivers value.
But before you jump in headfirst and shake up your entire budgeting process, let’s take a moment to understand how this form of budgeting impacts the bottom line.
In this article:
- What is value proposition budgeting?
- Who’s responsible?
- How it works
- Important questions to ask during budget plan meetings
- How value proposition budgeting increases profits
- Key advantages and disadvantages
What is value proposition budgeting?
In today's fast-paced business world, you've got to make the most of every dollar in your company’s budget. And that's where value proposition budgeting comes in.
Value proposition budgeting prioritizes initiatives based on how much monetary value they'll bring to the company. It’s a strategic process that forces finance teams to scrutinize spending and make decisions based on value above all else.
By focusing on the value each endeavor provides, companies ensure their budget is used in a way that drives revenue and growth.
In most companies, the finance team controls the budget in partnership with other departments such as marketing, sales, and product development.
They'll also track the performance of the chosen initiatives to make sure that they’re delivering the value promised.
However, it’s important to note that this form of budgeting is a cross-functional effort. It requires collaboration among different departments to be successful – including key members of the C-Suite like the CEO, CMO, and CFO.
How it works
The process starts by identifying your company's value proposition, which is the unique combination of products, services, and experiences that the business offers to its customers.
Next, you’ll look at different projects and evaluate how well they align with that value proposition. This can help you determine which projects are most likely to drive revenue and growth for the business.
Think of it like holding up a magnifying glass to every item on the company’s expenditure list to evaluate its real value. Once you’re clear on that, it’s time to decide where the budget should be spent for a positive return on investment.
The entire process boils down to these three steps:
1. Clarify the company’s overall goals, vision, and desired results.
2. Identify what products, services, programs, software, etc. the company spends capital on.
3. Allocate the budget and resources to the initiatives that drive the highest value.
Important questions to ask during budget plan meetings
Now that you understand the basic steps of the value proposition budgeting process, it’s time to finalize where to allocate company resources.
Sounds fairly simple until you realize that determining the value of each expense is more challenging than you thought.
To help you make those tough decisions, try asking these important questions during your next budget plan meeting:
1. Why is this expense included in our budget plan?
2. What value, if any, does this expense provide?
3. Does the value of this expense exceed its initial price?
4. How will this expense impact our operating profit?
5. What metrics will we use to track performance and determine if this expense is delivering the value promised?
By asking these questions and evaluating the answers, you can make sure that the company’s budget is being used in a way that’ll help drive revenue and growth for the business.
How value proposition budgeting increases profits
Value proposition budgeting helps increase profits by:
1. Aligning budget and resources with the value proposition.
2. Prioritizing investments and initiatives that drive the most revenue and growth.
3. Tracking the performance of different initiatives to ensure that they’re delivering the value promised.
Advantages and disadvantages
Although value proposition budgeting is an excellent tool to allocate budgets in a way that helps generate more income, it’s not always smooth sailing.
Here are some of the main pros and cons of using this budgeting method:
- Better alignment of resources as you can focus spending on areas that’ll deliver the most value.
- Improved performance tracking as you’ll see exactly where the cash is going.
- Makes it easier to prioritize future expenses and increases the potential to save money and boost revenue.
- It’s hard to measure value, which can be considered to be an abstract concept.
- The budget and the value of an expense need to be reassessed regularly alongside changing market conditions.
- You can miss out on valuable opportunities as your attention is always on existing expenses.
Value proposition budgeting is an effective approach to budgeting that can help businesses achieve their goals by focusing on creating and delivering value to customers.
However, it requires more time and resources, cross-functional collaboration, and a clear understanding of the value proposition. It's important to weigh the advantages and disadvantages and decide if it's the right approach for your business.
Would you like to stay up-to-date with everything happening at Finance Alliance?
Be the first to know about our latest content, upcoming events, reports, and industry news!
Subscribe to The Monthly Balance newsletter below: