When Budgeting is Just Plain Stupid

This is heresy for someone like me, a University of Chicago MBA grad to say, but when you scale or try to grow a new business, certain budgeting rules can be pretty ***** useless.

Especially the budget for marketing and picking up new customers.

Now don’t get me wrong.

I think it’s important to measure performance, look at KPIs, ROI, and base investment decisions off of that.

What I think is simply stupid is being forced to operate under a budget which makes no distinction between where the company is currently and the opportunities to expand.

Why prioritise budget rules over making money?

Let me give you a couple of real-life examples.

A sales business unit had launched and was several months into its existence. It was in a high-ticket, high-net-worth environment, where the client universe was limited and the competition for their attention was fierce.

This company had a mandate for their units to spend on client entertainment and marketing, but only within 6% of the last month’s gross revenues.

The sales unit though saw an opportunity. The competition had been around for ages and had gone fat and lazy on seeing and spending money on the clients.

So the sales unit jumped in and organised a huge social event and flew in key clients from all around to attend a weekend of festivities.

When all was said and done, the sales unit spent a bit over $15,000 for the whole event.

The CEO, who had attended with family and friends was livid when he saw the total bill, because the sales unit had not technically earned $250,000 the previous month.

But here’s the thing.

That sales unit generated $62,000 in revenues in four days from the clients who attended. It was an ROI of 4x the investment in less than a week.

Who wouldn’t take that all day…?

Well the CEO.. who held to the 6% target and docked pay from all the members of the Unit because of the “overspend” on the event.

The Unit broke up shortly thereafter as a struggling competitor saw the opportunity to poach a disgruntled and hungry team.

The second example was a client of mine who was struggling with getting new customers once the current word of mouth network maxed out.

They were going in circles trying to “budget” on previous gross sales (very popular).

We sat down and instead of looking at a percentage of previous sales, we look at the customer’s lifetime value, in particular how much their customers spend, how often and how long they stick around.

Once we figured out how much they spend and when, we invested in breaking even on that first purchase.

In short we acquired customers for “free.”

And then the client focused on taking care of them and making the profit from the second and subsequent sales.

So don’t be dumb and spend money you don’t have… but also don’t let stupid budgeting hacks or rules of an excel spreadsheet keep your business stuck in the mud.

After all, what’s more valuable… the fancy budget or the business that is able to grow and generate the profits that make the budget relevant?

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