Post 5 June

Building a Data-Driven Budget Pitch the C-Suite Can’t Refuse

In essence:
Leaders must understand when a project requires a cost/benefit analysis versus a ROI assessment.

The CFO is typically consulted before making a financial request, although business owners occasionally receive direct pitches. Here’s how you convince both leaders of anything.

CFOs: Why are my pitches so bad? Provide these instructions to your coworkers at work.

500 people took part in Brainyard’s most recent Outlook study, and 88% of financial professionals predicted positive results for the economy over the next 12 months, with only 4% anticipating negative outcomes.

The flow of budget requests increases when business picks up. A platform for campaign automation is what the marketing team wants. Modern ERP is desired by operations. A dedicated social seller is wanted by sales. All of these development drivers are expensive, but after all, money must be spent in order to create money.

Indeed, but even spending CFOs are aware that they can’t approve every request, thus setting priorities is necessary. The project proponent then needs to explain the “why” – will this initiative boost sales or profit margins? remove risk from the enterprise? assist with KPI targets? the supply chain stronger?

There is probably competition for that financing if you are a line-of-business lead getting ready to propose a new project, software buy, or hire. Prepare a compelling argument that is suited to your audience.

To find out where department heads go wrong or right when asking for increased funding, we spoke with finance directors. For situations when the CEO makes budget decisions, we also consulted an expert.

We concentrated on revenue-enhancing projects for this post because they may be evaluated using the same methods as other projects. Be aware that quantifying risk-management projects is substantially more difficult: Cost-benefit analyses are necessary to compare the explicit and hidden costs of taking different actions as well as the costs of keeping the status quo. For example, efforts like increasing security spending or deploying ERP may require more of a cost-benefit analysis.

A CBA compares the opportunity cost of doing nothing vs spending money and achieving desired results. Then comes the even difficult task of comparing projects with high benefit scores but a murky ROI with those with a more certain ROI.

So let’s evaluate the latter group. Use this equation to calculate a ROI estimate:

ROI is calculated as Net Return on Investment / Investment Cost x 100.

This is one instance. Suppose you spent $42,000 to hire a part-time inbound salesperson who increased your gross profit by $95,000 in a year. Gross profit is calculated as net sales less cost of goods sold. The sales professional’s annual return on investment would be: “””= $95,000 – $42,000 / $42,000 = 1.26 x 100 = 126%”””

Creating a Budget Pitch: Priorities

Here are some fundamental details to remember.

Does the department’s current budget cover this increased expense, or will additional cash be needed?

What is being cut if this is a reallocation?
Does the department accomplish current goals if it means spending extra money? The discourse will be very different from if you have 30 new accounts if sales was expecting to add 25 new logos this quarter but only signed 18.

How long is the ROI? Is this a three-year or a six-month payback? Both may make sense, but the employers must be aware of the schedule and the underlying presumptions.

It’s all about the ROI for CFOs.

CFOs and other senior decision-makers demand verifiable justifications and tangible proof to support their recommendations.

Companies frequently evaluate predicted expenses and profits to determine the return on investment. But, according to Rob Lancuba, CFO of CFO on Call, ROI merely forecasts what will occur if everything proceeds as planned; the statistic by itself reveals nothing about the likelihood of realising those returns, what it takes to succeed, or any potential hazards.

Hence, a positive ROI estimate may not be enough to get the “yes” you seek. Instead, CFOs of today are seeking a quick Return and a business case that:

1. Offers tangible value with thorough information that allows decision-makers the assurance to take action.

2. Has a good credibility rating. The situation is plausible. Some risk management projects encounter difficulties here. For example, because cybersecurity investment is all about preventing a cost that might not actually exist, determining its value is all but impossible.

3. Offers a variety of potential outcomes, both favourable and unfavourable. This makes it easier for everyone to comprehend and concur on the project’s risk concerns. For instance, if you don’t already have any sales coming from social selling, it would be dangerous to hire a new salesman with that focus. The management may request that the current team attempt social selling as a lower-cost proof of concept, perhaps with the assistance of a consultant.

He suggests focusing on the seven areas listed below to reach these objectives.
According to Lancuba, “Failure on any point can torpedo the case.” “Case credibility, practical utility, and accuracy diminish when your plan fails to meet one or more of these criteria,” the report said.

1. Consider essential corporate goals.

Count the more significant advantages of your solution. Ideally, your presentation will cover business goals that go far beyond a great ROI. Benefits from the business case should contribute directly to the achievement of corporate goals.

2. Evaluate your proposal in light of various possible course of action.

A convincing scenario comparison serves as the foundation for the argument that your plan is a sound business decision. Each scenario forecasts the financial costs and gains that can be expected to result from a certain course of action. A plan for carrying out your suggestion should compare favourably to alternative plans, such as the status quo or “business as usual.”

Using a consistent scenario analysis framework can help decision-makers in businesses compare various offers more easily.

3. Give non-financial benefits a concrete form and a monetary value.

Your plan should fulfil crucial non-financial company goals like:

improving product quality and/or customer satisfaction; decreasing risk, such as via increased supply chain diversification or multichannel selling; or raising brand value. To persuade the CFO that your idea adds intangible value, provide benchmark studies, analyst reports, industry statistics, or other third-party data.

4. Give comprehensive financial indicators for the results of each scenario. Financial KPIs include the following:

ROI: This indicates that returns will outweigh costs and should be positive and larger than, say, 10%. But that is only the starting point. Once more, it can be challenging to determine the ROI or net present value of actions like putting in place an ERP system, bringing on new suppliers, or buying cybersecurity insurance. Go beyond pure ROI when a project is more about lowering risk, enhancing resilience, or positioning other projects for success. Provide a narrative outlining the benefits of such a strong fundamental effort for the company.

NPV: Net present value Realistic expectations for future returns are reflected in NPV. A query like “What is the worth today of a $1,000 cash inflow to be received seven years from now?” can be answered using this discounted cash flow metric. In that case, the PV calculation is as follows with a 5% discount rate interest rate: $1,000 / 1.0 + 0.057 = $711

IRR: Internal Rate of Return This is the minimal % return that entering projects must achieve or surpass in order to be approved and funded. It is set at, say, 10% above the borrowing rate.

How many days, months, or years will it take us to recoup the necessary investment?
According to Lancuba, depending on their background in the organisation and the sector, CFOs frequently have specific preferences for one or more of these measures. So, before making your proposal, it pays to learn about their unique perspectives and preferences on financial indicators.

5. Create estimates using a reliable cost model for the situation.

All alternative scenarios must be included in the cost estimates for your proposal, which must use a single cost model. This is due to the fact that CFOs and decision-makers must confirm to themselves:

All relevant expenses are mentioned, all options were reasonably compared to one another, and no unpleasant cost shocks are expected as proposal execution gets under way.

Be aware that the internal data you need to support your project might not be available. You can increase your credibility in that case by citing examples from similar businesses.

Sales representatives for technology companies typically have client references and industry insights. You can ask your consultant and service provider partners, as well as analyst firms, for information about their initiatives. Peers at other companies may also be eager to talk about their own. Simply don’t enter without any data.

6. Provide a comprehensive, reliable risk and sensitivity analysis.

Finance expects you to take into account a reasonable range of risks, even if CFOs are aware that actual results will always deviate somewhat from projections stated in your presentation and that you cannot eliminate all uncertainty from your predictions, according to Lancuba.

He counsels, “Your role is to convey an accurate and realistic perspective; your purpose is not to provide a perfect picture.” “Be honest about any potential negative effects or costs associated with using your remedy. You will undoubtedly lose credibility if the CFO suspects you are hiding something.

7. You must tie your conclusions and suggestions back to the company’s goals.

Why should the organisation as a whole, not just your department, benefit from your solution? If implementing your plan results in outcomes that are truly valuable to the organisation and help it achieve its goals, people will be more receptive to it.

Only if you specify and quantify these contributions will your idea have true value. CFOs will constantly look for concrete data and proof that the business should support your idea. This means that your proof of value needs to be objective, well-presented, and convincing.

Budget requests that are incorrect
Lancuba’s coworker at CFO On Call, Andrew Free, formerly served as CFO at an inbound call centre that conducted a variety of healthcare services over the phone. The Australian company’s sales were increasing significantly, and it currently had a turnover of AUD $38 million. In spite of this, throughout its five years of business, it had never made a profit.

Free was tasked with ensuring sure the business made the transition to a profitable state, with earnings before interest and taxes of at least 10%. Here, he provides an example of a period when he refused a budget request, his justifications, and suggestions for how the leader might have improved the argument.

Presenting a budget proposal to the CEO? That is somewhat different.
If your company lacks a CFO or an equivalent, you’ll probably be pitching your CEO, who may also be the business owner. However, the majority of important expenditures require that approval even in companies with finance heads.

Keep in mind that CFOs work under predetermined budgets and ROI goals. In contrast, the CEO frequently acts on instinct, according to Janet Schijns, CEO of JS Group.

No matter what accounting concept we employ, most CEOs, according to Schijns, “think like people with zero-based budgets.” In contrast to standard accounting budgets, where there is space for adjustment, “we say, basically, that you have zero budget and then you work up from there to get at what exactly you need to spend or invest to be successful. This makes it necessary for your ROI metrics to be more precise for the CEO than the CFO, which is nearly against logic.

This doesn’t imply that you enter the room carrying a 27-page spreadsheet, but you do need to demonstrate three very distinct things.

1. How does this fit into our overall plan?

How does this particular investment fit with the departmental or general business goals, similar to a CFO? Where does it address a risk the company is having in getting to that Point B, or how does it help us get to our Point B faster?

2. Are our rivals spending the same amount?

If you’re thinking about buying a product, the representative you’re working with should be able to provide you with something akin to a use case.

3. What narrative can the CEO share on this investment?

You need to make it simple for them to justify this expenditure, whether to other department heads, investors, or the industry at large.

Schijns offers an illustration of a winning pitch, one that might not have even reached Lancuba’s desk.

The Verdict CEOs and CFOs are constantly harassed for money. You can’t just throw together a few PowerPoint presentations and declare victory if you want to make your point stand out. You require a thorough financial analysis, a convincing business case, an unbiased viewpoint, and an engaging narrative.

How will this investment assist the business achieve its objectives? CFOs require a metric-based justification for funding new initiatives, not because they don’t want to do so.