Understanding Downstream Impacts of Budgeting Decisions

Written by: Ben Gawiser on 12/11/15 3:26 PM


The financial planning process is intended to help management plan investments and budgets that are hopefully consistent with corporate strategy. These investments define a company’s future performance.

Each line of business plays a key role in the company’s success and must agree on a budget that is as accurate as possible. Unfortunately, many marketing departments give up their investment planning to ad-hoc, labor-intensive and inaccurate processes. Budget numbers therefore are more guesses than based on fact. Any changes that happen along the way, and change is always happening, throw the entire budget off kilter.

The Butterfly Effect

The butterfly effect is defined as the phenomenon whereby a minute localized change in a complex system can have large effects elsewhere. We know that a small change now can make a big difference later, but do we always understand the downstream impacts of our budgeting decisions on revenue and profits?  

Given the length of sales cycles in many enterprises, the effects of both good and bad budgeting decisions may not be felt for several quarters. This can lead to a temptation to play with the numbers to make one single quarter look good at the expense of future opportunities.  Understanding the downstream impact of your decisions is critical in today’s complex business environment.

Four Triggers for Cost Overruns and Schedule Delays

While project changes may alter the original budget, with the appropriate change management processes in place, they shouldn’t cause future problems. The real factors to busted budgets and schedules have to do less with change and more with the following triggers:

Inaccurate Estimates

It’s easy to be overly optimistic or unrealistic with estimates, especially if they are made ad hoc and rely more on gut feel than actual facts. Small budget changes early on can cause numbers to be missed downstream, even many quarters later.

Lack of Real-time Visibility and Control

Too many marketers are flying blind when it comes to project tracking. If you can’t see what’s happening before, during and after a project, you can’t control the variables and outcomes. Dashboards are the best way to get a real-time snapshot of the health of each project so marketers can intervene early if any issues arise.

Poor Methods to Assess Project Progress

It’s not enough to launch a marketing campaign you think is going to hit it out of the park. You must also track it along the way, using metrics that align with the business. Many marketers rely on static spreadsheets and emails but this process should be automated and in real-time, so you can react quickly if needed.

Insufficient Data

In order to make accurate budget forecasts, you must have current information. If your data is siloed in different systems and not integrated, or if you aren’t considering every factor that contributes to a project’s success, you’re missing the data you need to effectively budget.

Tools to Set Your Marketing Budget with Confidence

Now that we understand some of the ways marketers go wrong when it comes to setting their budgets, let’s look at ways to ensure those budgets don’t cause problems later on.

Sensitivity Analysis

Using sensitivity analysis, marketers can set their budgets to correspond to the highest profitability. How much your project is costing can inversely affect its profitability. Sensitivity analyses allows you to set up “what if” scenarios by altering variables to see which ones create the most impact, either positive or negative.

Predictive Models

Just as it sounds, predictive models use algorithms to predict which actions will generate the best return. It looks for patterns in your existing historical data to describe what is happening now and forecast what will happen in the future.

Both of these models and others will help a marketer determine which budget cuts can be cut with the least amount of negative impact. It’s worth talking to an expert to determine which model works best for your organization so you can prevent surprises and poor performance down the road.

Icon made by Freepik from www.flaticon.com is licensed under CC BY 3.0

Topics: Financial Planning, Budgeting, Hive9