The SaaS business model requires the integration and coordination of far more operations than traditional software models. R&D, Sales, Marketing, Customer Success, Finance, and Operations all need to work together to produce profitable unit economics which are the basis of a successful SaaS company.
The annual budget process is a methodical way of allocating resources (cash, headcount, etc.) to all departments. The budget process should set achievable targets with well allocated resources where all players know the goals and buy into the plan. Sounds clear and straightforward, but often the corporate budget process can be more of a convoluted mess like this.
No one likes spending months of wrangling about the budget. If senior executives don’t buy into the plan, they certainly will be less effective achieving company goals.
Here’s a set of best practices from leading companies to run an effective and efficient budget process at your company this year and every year.
Build Cross Departmental Transparency and Collaboration
Too often, the budget process is run by Finance working with each department with very little cross-departmental collaboration. This keeps everyone in the dark until the final big roll-up moment. It encourages poker-player like behavior – “I’ll give up enough now to look like I’m a team member, but not too much because I know they will come back and get more later.”
In the department by department process, there’s no shared understanding of the challenges or opportunities. It is very difficult for someone from Marketing to question what is going on in R&D and vice versa, even though an understanding of how Marketing activities and R&D activities jointly drive customer acquisition and customer retention is critical in SaaS companies.
Instead, Finance can take the lead on asking department heads to collaborate on synchronizing their programming: sales and marketing, services and sales, marketing and services, engineering and marketing, etc. By sharing clear budget and benchmark data with each department up front, department heads can more easily ask informed decisions of other departments. Encourage departments to work with other departments before rolling up the budget. With a highly collaborative process and one source of truth on corporate goals and how they compare to peer companies, the team has the data to ask the right questions and build consensus on an efficient operating plan.
Competition for resources is normal and can be healthy when the competition is conducted in the open, and with data. If the budget process is transparent, collaborative and data-driven, with comparisons to peer benchmarks, then the budget process will drive management team ownership of the plan as a whole. This in turn will drive the plan’s credibility with the board.
Use Benchmarks to Provide Context for Company Metrics
It is critical to incorporate benchmarks into the budget process and review progress against benchmarks throughout the year. With operational benchmarks, the management team can work off a common knowledge of the business, and how your key metrics compare to similar companies. By providing benchmarks at the start of the budget process for each department, you’ll have a better companywide understanding of how all the pieces fit together.
Benchmarks help ensure that managers don’t feel that they are being pressured to do work with less resources than other departments or to achieve performance levels that somehow aren’t fair or impossible to achieve.
Comprehensive benchmarks help individual managers see how all the pieces of the business puzzle fit together – peer companies also need to spend appropriate resources in each area which makes the company as a whole successful. Without outside benchmarks to provide context, managers sometimes lose perspective on how much other parts of the organization need to make the whole SaaS operation successful.
An effective budget process links benchmarks and budget to company’s strategic goals to validate and provide context for the comprehensive plan. Like strategic goals, benchmarks don’t change during the course of the year but provide consistent guidance to evaluate weekly and monthly performance towards the annual goals.
Build Flexible Budgets and Scenarios Tied to Company Goals
High performance companies review budgets, actuals against budget and benchmarks to plan regularly throughout the year. With regular review, the budget plan can be iterated on during the year based on actual performance, but the company’s annual strategic goals don’t change.
Best practice is to tie the budget to targets that support the company’s strategic goals. Efficient companies constantly evaluate whether the current budget is supporting achievement of those goals all along the way. This practice allows companies to quickly and efficiently shift allocation of resources if conditions allow.
High performance companies often use scenario planning to create additional plans for major initiatives or major changes in the original assumptions upon which the budget was built. Using technologies that allow for “what if” planning around changing conditions or new initiatives allows agile companies to quickly iterate on budgets without losing sight of corporate goals.
Many companies also set aside funds in the original budget for new or riskier initiatives that are developed during the year which can be shown to meet or exceed corporate targets. If the rest of the operating plan is unfolding as expected, these additional funds can be applied to new projects where the risk is higher as the assumptions are not yet tested.