Justify Spending

Does your company have a way to justify spending? If so, have you realized that there may not be one all-encompassing way? If not, the why spend?

A Little Background

One of the first times I encountered this after college involved justifying expenditures for capital equipment. Actually I don’t even remember what method was used. It could have been return on investment (ROI), time to recover the cost through expense reduction, discounted cash flow or some other method. The point is, though, they did at least have some method in place to justify capital expenditures.

Years later a client would not even entertain the idea of justifying equipment purchases. The only method this particular client used was somebody said they needed it or the owner wanted it. I saw equipment purchased that was never used. It should have been expected as it was also a common practice to purchased inventory at what was thought to be a bargain, only to have it sit in a warehouse and never sold.

But it’s More

To justify spending involves more than just equipment or inventory. The same concept needs to be applied to hiring decisions and marketing expenditures. For example, if hiring someone will increase efficiency and as a result save money, this should be calculated as a justification. Of course, when it comes to employees, sometimes it is necessary because existing employees are maxed out. In this case, any savings may not come until later when growth has occurred or the justification may simply be that errors will be reduced.

When it comes to marketing expenditures, it can be very difficult to calculate ROI to justify spending; difficult, but not impossible. Think about it. You can track marketing expenditures and even establish methods of tracking response to marketing efforts. For example, web analytics can be used to track response to an ad or social meeting posting and even determine how many of the responses result in a sale. Once a customer is obtained, it is possible to develop over time a pattern of their purchases. This can help you determine the cost of obtaining a customer and the expected lifetime value of a customer. Additionally, by tracking the results of different marketing methods, such as advertising on the web, on the radio or TV, or in print, you can begin to see which methods produce the best results. Using this data makes it possible to choose the best combination of marketing efforts that will produce the greatest return on the expenditures. This presents a relatively straight forward method to justify spending for marketing by being able to make reasonable estimates of the expected ROI.

If this is not something you have considered, I encourage you to do so. If you are already tracking this, it may be time to evaluate whether the methods you are using are still producing meaningful information. There have been significant changes because of the increasing use of the web and the growth of social media. Unless you develop a way to capture meaningful information, you will not be able to know whether to use Facebook, LinkedIn, web or some other form of advertising, etc. or whether a combination of methods works best.

If you want to know more, contact AimCFO – Contact

As always, your comments are welcomed.

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