The Bottom Line on Budgets

Having already singled out salespeople, many companies steer their salespeople toward finding opportunities where buyers already have active evaluations underway. They do that by making budget an early qualification question that sales managers ask.

Is that smart? Let's examine why companies have budgets, and what salespeople can learn from the budgeting process.

Let's first agree why budgets are a way of life for buyers and sellers: Senior executives must predict and deliver a bottom line to investors. The two major variables are top-line revenue, which is speculative, and spending, which is more controllable.

Going into a fiscal year, would it be prudent for a chief financial officer to give, say, the top 20 executives in the company permission to spend whatever they felt was necessary to run their functions within the business? If he or she did so, it is possible that toward the end of the first quarter, it would turn out that each manager had spent $1 million more than what was expected. The CFO would then have the unpleasant task of informing the chief executive officer that the company was $20 million over on the spending side—which would in turn mean that the CEO would have to alert investors that earnings projections were not likely to be achieved. So budgets are established to control the expenditures of people within the organization, and to allow the CEO and CFO to sleep at night.

If given the choice between reporting missed earnings due to a revenue shortfall or due to a budget overage, most CEOs would opt for the former (and in a heartbeat). Even the most hard-nosed analysts and investors recognize that the CEO exerts only a tenuous control over revenue generation. These same people, however, would view the failure to control spending as a sign of gross executive incompetence.

That's the theory: Budgets are set at the beginning of the year and are cast in stone, and everybody sleeps well. The reality, though, is very different. In real life, companies retain a great deal of control over how they will spend their money, month-to-month or week-to-week. If a compelling case can be made that expending unbudgeted funds will (1) increase top-line revenues by (significantly) more than the cost of the outlay or (2) cut costs to a similar degree, most companies can find the necessary funds.

So—to bring this back to the perspective of the salesperson—if a buyer claims not to have budget, so long as the target organization doesn't have insurmountable financial or other constraints, the salesperson and manager should conclude that he or she is not calling high enough within the prospect organization.

Here's a real-life example from our own experience of how funds can be freed up for unbudgeted expenditures: A vice president (VP) of Sales who had attended one of our workshops told us after the session that he wanted to conduct an internal workshop for his staff, but he couldn't authorize the funds. He asked us to do an executive overview of our methodology for his VP of Marketing, his CFO, and his CEO. This entailed a flight to Utah, so we agreed to do the overview if he would defray our travel expenses, which he agreed to do. (Quid pro quo in action.)

Near the end of our discussion, the CEO asked how much it would cost to implement a sales process in his company. Because he already had a vision of how the process could be used and the accompanying value, we reviewed pricing with him.

After discussing costs, the CEO turned to his CFO, Ed, and asked how the company's cash flow looked. Ed gave the answer that all good CFOs give when asked that question in front of a salesperson: "Things are a bit tight." The CEO turned to the VP of Marketing. "Caroline," he asked, "of the three trade shows we plan to participate in this year, which one provides us the least value?" She quickly identified the laggard. On the spot, with the concurrence of his colleagues, the CEO decided to skip that trade show, thereby freeing up funds for the sales-training program. The CEO told us to work out the details and contact him with any questions, and then left the meeting.

In other words, when you call on decision makers, budget alone does not prevent buyers from going forward. Having said that, of course, even the most senior decision makers can't print money, so if they set a new priority, it is likely that some other project may have to be deferred or cancelled. This is part of the reason so many buying cycles wind up with no decision.

So salespeople not only compete with other vendors, they also compete for "mindshare" of business executives who have to decide how best to invest their company's limited capital, and how to adjust allocations that have—in most cases—already been fought for through the previous budgeting cycle.