Treat Expenses as Investments
by Mark MacLeod

How much should you be spending on Sales, Marketing, Product Development, Administration, and so on? There are certainly benchmarks by industry and company size, but what is more important is the return you generate on your investment in these areas. To measure that, your entire company needs to be oriented towards results and objectives.

If you approach each expense decision from the perspective of an investment, one where the return is measured, you will automatically filter out low value (low return) expenses and will drive overall performance (by focusing on high return expenses).

People

For most businesses in today's knowledge-based economy, salaries are their single largest expense. This makes sense. People are the business. So, the first place to look in generating return on expenses is your salaries.

Output, Not Input: Look at the goals and milestones you have set for the business. Can you assign these goals to each staff member?

So often, we design job descriptions that focus on tasks and duties. These are inputs. A better way to design jobs is to focus instead on results or outputs. What results is this individual responsible for? What value or return is the business getting from this particular salary investment?

If you examine each person's role in this fashion you will quickly determine which salaries are necessary (i.e. generating a return) and which are not. If you cannot attribute a specific set of results, ones that are part of your business plan, to an individual, then you should seriously question whether that individual belongs in your company.

This approach to your people strategy will drive the performance of your company as the focus on outputs will clarify for each member of your team the role they play in the company's success.

Differentiation: Every company has its share of star, solid and weak performers. Yet, all too often, a uniform salary structure is applied uniformly with ranges based on the position and seniority. This practice acts as a disincentive to your best performers. Instead of this, you should proactively seek to differentiate your star performers from the rest.

10 / 70 / 30: Each year, consider the lion's share of the promotions, salary and bonus increases going to the top 10% of the staff. The middle 70% are also rewarded, though nowhere near as much. The bottom 30% are given no raises at all. Instead, they have a limited time to shape up or ship out.

This practice may seem harsh but it builds great organizations and kills bureaucracy. Make your company a winner through differentiation of salaries and rewards and by measuring the contribution of every member of the team.

Everything Else

This same discipline of measurement and return can be applied to every other expenditure in your company.

Because each member of your team has ownership for a particular set of results, that person will also have accountability for the expenses that are required to achieve those results. This in itself will do much to drive return on those non-salary expenditures. Still, supplementing this control with some other return-enhancing practices is recommended:

Start From Zero: Often when we create budgets for a department or company, we look at last year's actual numbers or last year's budget and then extrapolate from there. Instead, consider starting from zero.

The zero-based budget is a method of budgeting where all expenditures must be justified each period, as opposed to only explaining the amounts requested in excess of the previous period's funding.

This can be a rigorous and time-consuming exercise, so I recommend using it for only one or two departments in any given budget period. Still, starting from zero forces justification for each expenditure in the context of generating returns on that money. If you feel a particular part of your business needs some shaking up, give this technique a try.

The Living Budget: If you prepare a budget at the beginning of the year and then stick it on a shelf till the year-end, chances are you will not achieve your budget. You will also send a clear message to staff that the budget is not important.

Instead of this, make the budget a focal point for how you run the business through the use of:

Budget vs. Actual: Each month, make a point of measuring budgeted vs. actual performance. Make sure all key team members participate in this exercise.

Purchase orders: Too many growth companies fail to use proper purchasing discipline. Don't wait until month end to find out an expense was not budgeted for. Use your budget as the basis for approving expenses.

Debrief: Armed forces and professional sports teams live by the same discipline: plan -> execute -> debrief. Your company should do the same. For each week, month, project, etc. plan it, execute it and then debrief to see if it went to according to plan. Use this debriefing session to learn and to set the stage for improved performance next time.

Support your people with budgeting, expense and execution discipline and you will have a winning company.


Mark MacLeod is a Venture Strategist and the founder of SurePath Strategic Advisors. Mark works with CEOs of growth companies to achieve maximum value by improving strategic vision and implementation, increasing company performance and profitability; and enhancing people development. Mark has advised over 200 businesses on the development of comprehensive financial and business strategies and has been raising debt and equity financing at the seed, angel and venture levels since 1996. Mark is a Chartered Accountant and holds an MBA in Corporate Strategy & Organizational Behavior from McGill University. Visit www.surepath.ca for additional information.

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Copyright 2004 by Mark MacLeod . All rights reserved.

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