Why context is an important part of the budget process
Klipfolio, like many companies right now, is deep into the process of planning the budget for the coming fiscal year.
Budget planning is never a straightforward process, but the learning for me this year is that I’ve come to realize that I have to change the way I approach the numbers.
That change has to do with the fact we’ve achieved a good measure of success in the past year. And I think there’s an important lesson here for any company in the throes of growth.
Let me explain.
There are several ways to put together a budget.
You can focus it on growth, by setting high benchmarks for increases in sales and revenues.
You can focus it on accuracy, so that at the end of the year everyone goes, ‘Wow, you were right on target!’
Or you can be conservative by underestimating your numbers.
There are advantages and disadvantages to each approach.
Set high benchmarks for growth and you look like a hungry, aggressive comer. Meet those targets and you’re golden.
But failing to achieve them will create problems.
Suppose you anticipate in your budget that you are going to triple your sales over the coming year. If you’re starting from a low number, that may not be hard to achieve.
But suppose instead of tripling, you ‘merely’ double your sales.
That’s still impressive growth.
But because you haven’t met your target, it makes you look bad. Investors might start losing faith. Employees can lose motivation.
Being accurate in your budgeting is not exciting, but it may impress investors.
And exceeding your budget targets may generate excitement.
The question is: What’s more important?
Is it more important to push towards growth numbers in our budget, even if we don’t attain them, to put some spice into our projections?
Should our budget aim for absolute accuracy? This would reduce fear and anxiety about the future.
Or is it even more important to show that we are exceeding our goals - at the risk of being called sandbaggers for being overly cautious?
Investors like aspirational goals. But they also like low-risk situations. And those two things are sometimes very much at odds with each other.
Given those contradictory facts, would our investors prefer it if our 2016 budget is bang-on accurate? Or would they rather see us exceeding our targets? How will they react if we fail to meet our benchmarks?
I believe that the answers to those questions depends on what stage a company is at.
Last year, we prepared our budget at a time when we were about to embark on a major round of financing. We focused on aspirational goals.
But this year, I don’t have the same perspective.
We’re a bigger company this year, with more employees and more revenues. We’re still growing very quickly, but are now more established.
I’ve come to see that as our revenues increase, predictability becomes more important. That is why in 2016 we’re going to focus on accuracy. The experience we’ve gained in the past year will allow us to set strong growth targets we can hit - as opposed to shooting for the moon.
Now, I can hear you saying, ‘Why can’t you have both predictability and high growth targets?’ The reality is, few companies do. If your budgeting process reveals your growth will triple and it is based on evidence - evidence you would bet your salary on - then you’ve got both. But few do. And as a company grows, accuracy starts outweighing the exciting growth multiples.
There is also the reality that startup investors are less risk-averse. They know that younger companies shoot for the moon and simply don’t have the evidence to model an accurate projection. Later stage investors are less risk averse, preferring to work with companies that will perform within a tighter set of expectations.
I’m convinced that if we can show good growth and hit or exceed targets in every quarter, it will carry more weight among employees and investors than simply aiming for big growth numbers.
I’ve also learned a few things that will help us set more accurate budget numbers.
For example, I’ve learned there can be a lag between making an investment and having that investment pay off. (In hindsight, this seems quite obvious.)
We hired 14 new people in the second quarter of this year. But we didn’t see the effect of that hiring in terms of efficiencies until the third quarter. So a company that is growing needs to build any anticipated lags into its budget.
We haven’t put the notion of aspirational goals aside altogether: Alongside our main budget, we intend to present to our board a secondary ‘upside’ budget that offers projections on what might happen under different growth circumstances. Doing this is kind of like having your cake and eating it too.
But the big lesson really is that context is everything.
Allan Wille is a Co-Founder and Chief Innovation Officer of Klipfolio. He’s also a designer, a cyclist, a father and a resolute optimist.
Originally published November 13, 2015, updated Jun, 17 2019