Finance Software

Creating Budget-Ready Action Plans

Published by in Budgeting

It’s not too early to start thinking about year-end planning and 2012 budgeting tasks, especially if you are considering business system upgrades or software purchases, which will require some research and advance planning. Convincing the IT Department and CFO to support your request is going to take some fact-based persuasion. This article provides a step-by-step approach to help you translate your departmental needs into a budget-ready action plan you can take to the financial team.Creating budget ready action plan

Define Needs

Customer service and productivity issues need to be itemized and translated into financial terms. In order to persuade top decision makers to invest in a solution, you will need to define your pains in terms of dollars, impact and profit margin. This allows you to estimate Total Cost of Ownership (TCO) and Return on Investment (ROI).

These terms may seem foreign and far removed from the vague “We need a better way to do this!” realization that got you started thinking about a software purchase. Don’t worry; some advance planning and background research will help you move into the budget prep stage with confidence.

You’ve probably been operating with a subtle gnawing concern somewhere in the back of your mind that the inefficiencies you were battling were actually becoming dangerous. Perhaps the frustration over delays, errors and gaps in communications is starting to become overwhelming. Perhaps, you’re still at that “wondering and worrying” stage.

It’s not always crystal clear when a new solution is going to be cost effective or offer a ROI that is acceptable to top decision-makers. Several hard-to-define factors, such as frustration level of employees and risk of losing valuable customers, make it difficult to plug non-disputable numbers into a projected profit return analysis. Some terms may need to be defined or added to the corporate vocabulary. What exactly constitutes on-time delivery? Just how much is each satisfied customer worth to the company?

For meaningful action to take place, it is important to move past anecdotal examples of errors and frustrations and time to take a serious look at the hard financial data.

Budget planning requires translating your headaches and potential solutions into accepted accounting principles. Not only will this help you cost-justify your ideas to the managerial team, but it will also help you refine your strategies and prioritize which areas offer the most likelihood of early pay-back and momentum-building success.

Set Realistic Expectations

Several factors will influence the payback cycle. Your company’s previous experience with implementation projects will certainly be a factor, as will your team’s ability (and willingness!) to embrace new processes, commit time to training and firmly establish this as a company-wide priority. Understanding that there is likely going to be incremental improvements and gradual gains is important.

Once you have set expectations, you can move on to choosing the specific performance issues you want to study and build your ROI projections around those areas of improvement.

Identify issues

Although it is likely that several trouble spots can be improved by a new software initiative, most analysts agree that narrowing the focus helps the company stay on task and keeps the implementation team from taking on more than it can effectively project-manage.

Start with the issues that are causing the most visible pains – the ones that are causing daily headaches and making important customers unhappy. Also, take advantage of existing data. If your company already collects extensive metrics around certain issues, it will be relatively easy to compare it to national industry benchmark data that will be helpful in calculating potential improvements.

Use Benchmark Data to Identify Opportunities

Comparing your data to industry benchmark standards will help you identify statistical gaps and focus on major opportunities for improvement. Areas where your performance falls far from Best-in-Class status can be your first targets of improvement. National averages will also help you estimate realistic goals for results, knowing that it is not likely to move from Laggard status to Best-in-Class overnight.

Define cost of the problem

In order to calculate the return on investment of your software purchase you need to understand the current costs associated with the tasks being affected. This is an incredibly important step in the process and, unfortunately, one that many companies bypass, leaving their entire evaluation process based on speculation and guesses.

Although the principles of activity-based accounting may seem daunting, the goal is actually simple: To determine the direct expense associated with a particular activity. For example, what does it cost the company to manage the contact center and take customer service requests? If four people are currently required to manage the call volume, the salary/benefits of those four people certainly would be factors, as would any costs associated with the phone system, equipment and outside services. The expense is usually calculated based on a time frame (such as the annual cost of running the contact center), but can also be stated in terms of volume (such as the cost of providing customer service for each account).

Even if availability of accurate detailed data is limited, you can still make generalized estimates of overhead costs that will help you determine a basic range of financial impact. If you are embarking on this planning project with limited accounting experience, at least start with some rough estimates of costs. You can paint a picture of ROI potential with very broad strokes until you obtain top management support and then fill in details as you get approval to commit more time and resources to conduct thorough research.

Define Cost of the Solution

As you head into your budget planning phase, you need to have at least a rough estimate of how much investment is going to be required to resolve the issues you identified during your needs analysis. This rough estimate is needed in order to calculate the estimated time it will take to achieve a return on your investment.

Beginning with a realistic estimated cost of the solution is critical to setting expectations of top management and establishing the scope of the project. Is this going to be a major initiative that requires a serious long-term commitment and top-level support or a modest undertaking that department heads can achieve within a fiscal year? Price ranges of solutions – and their implementation – vary drastically depending on how complex the functionality is and how specialized the applications are. Number of users, extent of customization required and complexity of the product or industry are other issues that can make a major impact on price range.

A few Google searches may be all that a hurried manager takes time to conduct in order to plug a rough estimate into his budget request. Although this is a common tactic, it is one that involves considerable risk. It’s quite possible that taking a short cut in research at the early stages of the project will cause a distorted, narrow-sighted perspective that totally derails the likelihood of a successful implementation. For example, forgetting to allow for necessary hardware updates may cause the implementation process to become stalled for months as the implementation team struggles to try to enhance old equipment.

Remember to allow for these considerations:

  • Hardware
  • Customization
  • Implementation
  • Training
  • Maintenance/support

Will the gains pay for the solution in an acceptable amount of time?

How long will it take for you to recover your investment and begin achieving additional savings? For many companies, recovering their investment in the solution within three years is acceptable. Some companies take a more aggressive approach and aim to recover their investment within 18 months.

When calculating the potential return on investment, it is important to keep in mind that in addition to the savings potential continues past the break-even point. You will continue to see savings for the lifetime of the software – typically 7-11 years. Gains can also be nonfinancial – such as improving the work environment to aid in employee retention. Of course, being able to meet customer expectations and build customer loyalty is always a goal. Well-planned software initiatives can certainly help with each of these goals.

By beginning your research and analysis steps now, you will have a sound foundation for next year’s successful projects.

About the Author

Tony Petrucciani

Tony Petrucciani

Tony Petrucciani is founder and CEO of Single Source Systems, Inc, a developer of software solutions. With over 600 customers globally, Single Source Systems, Inc. is respected world-wide for providing leading-edge enterprise and service lifecycle management solutions to improve efficiencies for mid-market manufacturing, sales and service organizations.


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