A Guide to the Strategic Budgeting Process in SaaS

If finance teams are to provide the data for business leaders to make more proactive and strategic decisions, you need to optimize workflows to focus on agility and flexibility — which is where third-gen FP&A tools come into play.

Business budgeting software has paved the path for companies to embrace more strategic budgeting processes. Strategic budgeting methods not only support agile budget allocation decisions by cutting through the time-suck of data reconciliation but also offer a chance to dive deeper into scenario planning and budget forecasts with ease and flexibility — which is exactly what you need with changing market conditions.

By embracing a strategic budgeting strategy, SaaS businesses can map out long-term financial plans with more confidence, adaptability, and accuracy while making immediate improvements across the company.

What Is Strategic Budgeting?

Strategic budgeting is the process of planning and allocating financial resources in order to achieve long-term goals and objectives. Strategic budgeting integrates an organization’s vision into financial decisions, ensuring that funds are used effectively to prioritize initiatives, support growth, and yield maximum returns. Unlike traditional budgeting, which may focus on a single fiscal year, strategic budgeting encompasses a broader timeline, often considering multiple years, and emphasizes aligning financial plans with overall strategic goals.

Strategic budgeting strikes a perfect balance between long-term, big-picture thinking about the business and granular forecasting of the most critical line items. Strategic budgeting managers (typically the finance team and department leaders) begin with a top-down forecast.

The top-down revenue forecast outlines how the business intends to grow over the next year (or more). From there, department leaders can work backwards to map out budget allocation needs and collaborate with finance to refine line items for headcount and channel-specific costs based on historical data.

The aim of strategic budgets is to enhance spend management by laying out a long-term plan for the next 12 months. This foresight into the coming year helps SaaS companies improve risk management, boost productivity, streamline overall financial management, and guide business growth as they seek to scale up.

Strategic Budgeting Example

In practice, there are certain aspects of the budget where a long-term, strategic planning process makes the most sense. Planning your sales and marketing expenses is a good example. Say your company’s top-line plan includes a goal to hit $10 million in revenue next year. With the end goal in mind, you can start planning backwards for how to achieve that outcome.

For example, $10 million in revenue over the course of the year shakes out to ~$2 million per quarter. If the company has closed-won rate of 20%,  marketing and sales would need to create a pipeline of $10 million per quarter to hit that target.

From there, look at your cost per lead (plus sales funnel conversion rate) to determine how much you have to spend to generate that $10 million in the pipeline.

Compared to an incremental budgeting approach where you say, “we spent X amount on marketing last year, let’s raise it by 15% this year,” this kind of approach focuses more on specific revenue targets and maps out the path to get there.

The same principles can be applied to sales goals as well. You can use metrics like quota attainment, sales ramp rate, and customer attrition to create a sales capacity plan that aligns with the revenue forecast. which will also directly impact any current or forecasted sales capacity plan.

Benefits of Strategic Budgeting

The benefits of strategic budgeting include clearly defined priorities, more precise forecasts, greater flexibility, and improved cost control.

Clearly Defined Priorities

Strategic budgeting helps SaaS businesses set clear priorities for their spending. For example, in a driver-based planning model, priority is placed on a series of key value drivers that underlie your financial modeling. With strategic priorities and initiatives in place, SaaS companies have an easier time allocating funds to the most important areas of the business — whether that’s product development, customer acquisition, or other line items altogether.

More Precise Forecasts

Strategic budgets leverage historical data like previous performance and past expenditures, which empowers finance teams to make more precise forecasts. It’s easier to make predictions about future spending patterns when you know the historical basis for that spending. The strategic budgeting process sheds light on where you’ve been, so you can accurately forecast expenses and revenue for the upcoming period (and budget more effectively).

Greater Flexibility

A strategic budget opens up for more flexibility with SaaS spending, since you can run different “what if” scenarios before solidifying any financial decisions. This gives you space to explore alternative options and resource allocations to figure out what works best for your unique business needs. If you need to adjust your spending based on unforeseen events or changes in the marketplace, strategic budgeting lets you do so without impacting the overall budget. As with rolling budgets, strategic budgets keep current financial statements in mind to ensure any expansions in budget grow in line with revenue.

Stronger Cross-Departmental Collaboration

Strategic budgeting focuses on asking, “How can we optimize budgeting to ensure we’re making the most proactive, strategic decisions possible?” Department leaders need to focus on how their departments contribute to revenue growth, and how their goals may shift due to any changes in revenue.

With each budget review, there are more opportunities to identify areas where departments can optimize spending, such as marketing with successful campaigns or making a critical hire for engineers to progress the product roadmap on a faster schedule.

6 Strategic Budgeting Methods

As SaaS companies vary in size, maturity, and product, you may be able to pull from different budgeting methods to ensure that you have the most strategic option possible. Among the most popular strategic budgeting methods used today are activity-based budgeting, zero-based budgeting, incremental budgeting, and value-based budgeting.

Activity-Based Budgeting

Activity-based budgeting (ABB) is a top-down method that analyzes financial activities to predict your company’s operating budgets and future costs. In this case, an “activity” is anything that incurs a cost and that accountants can look to for creating efficiencies. An activity-based budget requires plenty of research to figure out which activities your company needs to meet its specific goals, as well as to determine the costs of carrying out those activities.

The advantage of ABB is that you can see the exact cost for each operational activity. ABB gives a clear view into every dollar spent — which makes it easier to reduce costs while also retaining revenue. ABB also prioritizes a forward-looking view rather than focusing on cost allocation from previous activities. This helps companies eliminate (or avoid) unnecessary activities and expenditures that might be hurting their bottom line.

Zero-Based Budgeting

Zero-based budgeting gives companies a fresh start by assuming all department budgets are zero (and need to be rebuilt from scratch). Each fiscal period, all departments need to plan out dollar spend and build their budget from the ground up. This requires a justification for every single line item — though these items can change later on since zero-based budgeting is flexible.

The benefit of zero-based budgeting is that it allows company leaders to hone in on their goals and bypass excess or unnecessary spending. A zero-based budget can also prevent misallocation of financial resources, since you can see where to spend (and where to save) from a granular point of view. This translates to lowered costs and better strategizing for the future, especially since zero-based budgets allow room to adapt if changes occur.

Value-Based Budgeting

Value-based budgeting lands somewhere between zero-based and incremental budgeting. The purpose of the value-based method is to eliminate unnecessary spending by addressing expenses head-on and deciding whether their value justifies the cost. To do this, companies must first clarify their desired results, identify relevant line items, and then allocate resources to those line items (to achieve the desired outcome).

As the name implies, every line item is assessed to determine whether it provides value for the business. Each budget line item has to be justified, otherwise it becomes a cut cost. That’s what makes value-based budgeting a good option for businesses who want to scale back on unnecessary spending (but not to the extent of a zero-based budget).

Flexible Budgeting

Flexible budgeting is an adaptable budgeting style that follows the ebbs and flows of the business. A flexible budget is one that can adjust to changes in costs and actual revenue. Most of the time, flexible budgets use a percentage of your projected revenue to account for variable costs, rather than assigning a strict numerical value right out of the gate.

That way, you can make budget adjustments in real time — while accounting for external factors (like economic shifts) that add to the unpredictability of managing your business.

The advantages of flexible budgeting include its usability in variable cost environments, its detailed picture of performance, and its overall efficiency for budgeting teams. This budgeting style is a solid option for companies who experience changes in their budget throughout the year, and who have enough room for the more complex accounting that’s involved.

Rolling Budgeting

A rolling budget is one that’s updated on a regular, continuous basis. This method gradually extends the current year’s budget by adding on a new budgeting period (typically a month or quarter) once the previous period expires.

Rolling budgets and rolling forecasts offer more opportunities for business leaders to make proactive decisions around department budgets and where to optimize budgets to reduce or increase spend. Other advantages of rolling budgets are that they offer an accurate representation of the business’s financial health, and support greater collaboration across the company.

The 4 Steps of the Strategic Budgeting Process

The strategic budgeting process has four main steps:

1. Define Objectives

The first step in strategic budgeting is to define the company’s specific objectives, priorities, and long-term goals. Both executive and department leaders need a clear understanding of what they’re trying to achieve before they can do anything else in the process of budgeting.

Setting goals and objectives might relate to the bigger picture of company revenue, how the company will get that revenue to grow, or how to encourage customer engagement throughout the sales pipeline. Whatever the case may be, make sure long-term objectives are aligned with business needs so you can set the company up for budgeting success.

2. Discuss Targets

Discussing targets means collaborating with department and executive leaders to figure out where everyone would like to be at the end of the budgeting period. Ideally, each department will use their allocated budget (in a top-down budgeting model) and keep tabs on ways to improve operational efficiency while hitting or exceeding revenue goals.

The process for discussing targets includes analyzing past performance and market trends to identify where the organization has room to improve.

When discussing targets, finance teams and department leaders will:

• Examine short-term costs and factor those costs into the budget.
• Confirm short-term budgets align with any long-term budget goals.
• Allocate applicable funds depending on activities, expenditures, etc.
• Review operational metrics and check in on them throughout the year.
• Conduct scenario analyses to determine best, worst, and base-case scenarios between revenue and budget goals.

3. Develop a Strategy for Further Collaboration

With objectives and targets in place, you can create a strategy that moves everyone closer toward their goalposts. This strategy will likely involve communicating and collaborating with each department to understand where they are and where they’re trying to go.

Maybe the marketing team has its sights set on doubling inbound referrals, or the leadership team is in need of a new director. Allowing these stakeholders to speak for themselves can help you get to the root of things, so you can come up with a strategy for spending and budget allocations that benefit the business as a whole.

The strategy you develop will serve as the foundation for the budget and help everyone stay aligned with company objectives/outcomes. These conversations will also further define scenario planning, what-if scenario analysis, and sensitivity analysis, and ongoing budget analysis throughout the year to ensure the budget remains as up-to-date as possible in real time. You’ll want to ensure you check in on fixed and variable costs, cash flow, and any requests for additional spend per individual departments alongside potential surprises or critical necessities, such as new seats on a software as a department accounts for any new hires.

Schedule meetings with executives and stakeholders, or find ways to share information whenever possible. Some leaders appreciate face-to-face time on a consistent basis, or would prefer written updates. Of course, make sure to flag any optimizations or red flags you catch as the budget period goes on to ensure department leaders can make proactive decisions and optimizations — which is what strategic budgeting is all about.

4. Measure Budget Performance

Once the budget is in motion, you can track various budget performance indicators. Budgetary performance management requires regular budget variance analysis to compare actual numbers from a set period of time to the numbers previously laid out in the budgetary plans.

Each budget variance analysis unpacks the “why” behind the differences in those numbers. The true value of a BvA report is in gathering in-depth data you can share with department and executive leaders to identify why those numbers are off, or what line items are driving revenue to help departments find ways to repeat their success. This part of the strategic budgeting process is crucial to maintaining a healthy business and optimal financial performance.

Strategic Budgeting with Mosaic

Mosaic supports SaaS companies in their strategic budgeting through providing 150+ out-of-the-box metrics and custom dashboards that make uncovering financial insights quickly easier. By partnering with Mosaic, you’ll have the tools and new technologies needed to see changes in real time, right as they’re happening.

One example of a financial dashboard to pair with your strategic budgeting strategy is the forecast vs. actuals dashboard, which pushes your budget variance analysis to a new level by breaking data down into department and account levels.

Get started with strategic budgeting today by requesting a personalized demo from Mosaic.