Last week the WSJ highlighted an old technique called zero-based budgeting, first pioneered by Peter Pyhrr, a 35 year old Texas Instruments accountant, around the mid 70s. It’s back in the spotlight again because of 3G Capital Partners’ acquisition of Kraft Foods. 3G own H.J. Heinz and they’ve agreed to buy Kraft continuing the consolidation of the food industry. 3G’s mantra – zero-based budgeting!
I’ve always loved this approach and for those 99.6% of companies employing less than 100 people, here is my translated version of a zero-based budgeting approach to entrepreneurship!
Zero Based Budgeting Approach
Costs creep on over time and before you know it, your business is totally misaligned. Costs and sales are out of step. This is a moment in time where you have to stand back and say I’m changing our approach. I’m making this a 5% or a 10% or a 15% net profit to sales business. I know I can sell say $10m this year. I know I can make 60% gross margin or $6m on that sales figure and I know I can make 10% net or $1m. The catch? I can only AFFORD $5m of overheads. That moment of conviction changes everything. It drives you to find cost savings everywhere. It acts like a catalyst to drive a root and branch review of all costs. It demands you ask the question, if I was starting this business tomorrow from scratch what could I do without? This does not necessarily mean cutting heads but it will definitely mean cutting costs that do very little to facilitate sales.
Scaling an Operational Cell
Are you building a marketing and sales cell that can be replicated anywhere in the globe? A lead generation machine and sales closing team that is so slick and effective, working to a set of protocols that it could operate anywhere. This is your operational blueprint capable of delivering repeatable success. Details are everything. The operational blueprint will need to be tweaked from territory to territory. Clearly exporting a protocol from Boston to Tokyo is more challenging than exporting it to say London, or is it? You still need to set out a lead generation plan, a recruitment strategy, an onboarding strategy, teach your sales process, delivery translated collateral (even phrases that work in the States may need tweaking for the European market eg an RFP in the US would often be called an ITT in Europe, Request for Proposal v Invitation to Tender). Once you have a working cell, there is usually an attractive opportunity to replicate that somewhere else. Different selling territories exhibit surprisingly similar behavior if you are brave enough to try.
Volume & Yield Tactics
By understanding the volume and yield drivers behind your sales figures and those of your competitors you may spot a better way to come to market. Think of the battle between Nokia and Apple. Nokia dominated the volume argument but only made $10 on every phone. Apple made more money selling a small percentage of Nokia’s volume but made $180 profit on every phone! Now when was the last time you looked at your pricing model compared with your volume model. Could you make changes to your model to make more money?
Acquisition Costs of Sales Leads and Customers
Measuring the ROI on all lead generation activity is essential. Was that trade show really worth the investment? Did that workshop generate any real business? Did the production of that white paper bring us real business? These are all key questions. However just as important is the tracking of lead acquisition costs month in month out. An upward trend is not a scaleable business. AS highlighted by the WSJ several years ago, referring to Groupon, the daily offers company, “ Critics pointed out that Groupon was unprofitable and was spending heavily to acquire new subscribers amid a flood of competition from daily-deal clones.” If you are a growing private company with rising lead generation costs per lead you are building trouble for tomorrow and indeed many early stage VC businesses run out of runway to turn that trend around.
Entrepreneurs should always be worrying about aligning costs with sales. Zero-based budgeting demands you justify costs in relation to your big objectives. As managers, remember your role is not to spend the budget. It is to allocate capital the most efficient way possible.