The Briefing: How to build a budget that will grow, not constrict, your business
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If you’re trying to implement a budget at your organization for the first time, you might be surprised to find yourself fighting an uphill battle. Some leaders see budgets as restrictive, constraining, or limiting—a necessary evil that will slow down operations or add administrative burden.
However, at Ramp, we view the budget as a powerful tool that facilitates and drives growth by:
- Providing a roadmap for teams to action
- Ensuring efficient allocation of capital across the business
The budget is our opportunity to outline how we want Ramp’s financial statements to look in the future and how we can maximize the company’s potential.
Not only can a strategic budget put your company on a path toward sustainable growth, but it can also prevent cash flow surprises that can create stress and, in a more extreme scenario, derail your finances. Here are the guiding principles we used to help our team create a successful first budget, along with advice for other early-stage companies looking to do the same.
Step #1. Perform a complete inventory
Our first step at Ramp was to conduct a complete inventory of our current spending. We assessed all of our vendors, determined what we were paying, and mapped out who was making each budget decision. It sounds simple, and you might be thinking, "I already have an idea of what my company spends – we close our financials every month."
However, without doing the requisite deep-dive, there could still be some unwelcome spending surprises. Completing an inventory provides the visibility necessary to guide the budget forward.
Pro tip: Be discerning during this process. It’s easy to want to continue certain spending patterns because that’s the way things have always been done. But it’s best to take time to truly re-evaluate your spending and investments to make the best use of the company’s resources.
Step #2. Determine your budgetary approach
Once we had a complete understanding of our current spending, the next step was to determine how we wanted to budget for future expenses. To start, we designed an approach that borrows heavily from zero-based budgeting, opting to rebuild the budget from scratch. We chose this approach for three reasons:
- First, we believe that budgets should be ROI and data-driven. At all times, we challenge our employees to make the highest ROI decisions possible, and we wanted to structure our budget to reflect this framework.
- Second, we strongly believed that the budget in a prior period should not inform a budget in a future period, one of the core tenets of the zero-based approach. As a finance admin, I wanted to avoid scenarios where team leads feel incentivized to arbitrarily spend out of concern that not doing so will penalize their team going forward.
- Perhaps more importantly, we wanted to evaluate all spend based on a) the value that it returns to the company at that point in time and b) the opportunity cost of investing in one area as opposed to another. The zero-based approach requires that you challenge the status quo.
While we view zero-based as the best approach for creating your first budget, it is time-consuming and thus is not the right decision for all companies or for every budgeting cycle.
Pro tip: Think about what’s most important to you and your business. Are you trying to optimize for simplicity? If so, incremental budgeting may be a better approach. Are you trying to tie budgets to certain activities or pods? If so, activity-based budgeting may be a better fit. Are you trying to control costs or build an ROI-forward P&L culture? If so, zero-based might be for you.
Step #3. Align on your priorities
The goal for each company’s budget will be different, but it’s critical that you align on the financial priorities that you use as a north star metric. As noted above, budgeting is your opportunity to outline how you want your financial statements and business performance to look three, six, twelve months down the road, so it’s only natural that you first need to identify what success looks like.
At Ramp, we are focused on both growth and efficiency. To this end, we identified a few core ROI targets that we aimed to achieve in various areas of the business and then designed our budget around these metrics.
Having a consensus view of what you're aiming to achieve can also be helpful in conversations with budget owners, particularly in situations where you are forced to make budgetary trade-offs. This allows you to root decisions in data and provides increased transparency for department heads.
When we set up different departmental budgets, we worked with the teams to understand their goals and talk through the resources that they needed to achieve them. However, we also made it clear that we had some corporate-level financial objectives that we also needed to consider when evaluating the ROI and payback timeline of an investment.
Pro tip: Be realistic, but ambitious, with your goals, and work across leadership to ensure that you have consensus. Once you have a consensus north star metric, be transparent and communicate that throughout the budgeting process. Setting a clear company-wide principle—e.g. CAC payback of <18 months—can help guarantee a smoother budgeting process.
Step #4. Create a strong reporting processes
Your first budget will only be successful if you also have a strong process for reporting and management. You need to be able to track expenses in real-time and compare actuals to budget in a timely manner. A strong budgeting reporting process will help implement a sense of responsibility / accountability across the various budget owners, will help with budget decisions in the future, and will also help improve your operating teams’ performance. Most people think only of creating the budget and forget about the work after-the-fact that will ensure your budget’s success and longevity.
At Ramp, we set up a monthly process to review each team’s actual spend, which we pull from our Ramp portal, in the context of the budget. If there is significant variance, we then touch base live to fill the gaps and figure out if any changes are needed in the future.
Pro tip: If budgeting at the department level, be sure that all of your systems are set up in a consistent and uniform way, so that you can take advantage of automation. For example, make sure that the marketing department in your HRIS is the same as the marketing department in Ramp and the marketing department in your ERP.
Implementing the budget
A budget may initially seem like a blocker to both flexibility and growth, but in reality, it is the opposite. By implementing the steps above and creating a budget that’s the right fit for your company, you’ll prevent cash flow leakage and help to maximize your company’s short- and long-term potential.