How should small businesses budget and assess ROI on strategic initiatives?
Creating a budget allows you to manage cash effectively. It also positions you to plan for growth and assess your return on investment (ROI) on strategic initiatives. One of the key indicators every business owner should evaluate is the budget versus actual at the end of each month to understand overall performance and cost management across your enterprise. Here are some tips to help small businesses with budgeting and assessing strategic initiatives ROI:
- Set clear goals: Before investing in any strategic initiative or growth plan, set clear, specific, and measurable goals that can be monitored weekly or monthly. This will help you define for you and your entire organization the objective’s success. Transparency on these goals and results will assist you as the business owner because it will engage your entire team toward the common goal.
- Develop a budget: Once you have your objective clearly defined, developing the budget is a necessity. This should include all anticipated revenue as well as the costs associated with the initiative, including labor, materials, and any other fixed or variable expenses.
- Track expenses: Keep track of all fixed and variable expenses associated with your strategic initiative to ensure you stay within your budget. This also provides the added benefit of being able to react quickly when things go off track.
- Monitor progress: Regularly monitor progress toward your goals and adjust your budget accordingly. Be transparent with the key stakeholders in these initiatives to maximize results.
- Assess ROI: Not every new initiative will go as planned. Once your strategic initiative is complete, assess the amount of capital invested compared to the profits it generates and compare to the original estimates. Post-mortems assist in determining the organization’s successes or failures, but more importantly provides key learning experiences for the entire organization so any critical misses are not duplicated in future projects. React and adjust based on this data.
- Consider qualitative factors: In addition to quantitative factors such as revenue and profit, consider qualitative factors such as customer satisfaction and employee morale when assessing the ROI of strategic initiatives. Even though a project ROI may miss expectations, there can be positives such as it established you in a new business segment or significantly enhanced your position with many of your top customers.
These are just a few tips to achieve positive ROI contributions. While the results are important, many of these success factors are built around a process to track and maintain accountability across your organization. After all, if an organization is not tracking and measuring how can you ever fix or elevate it.
Author: Tim Mages, Expansion Capital Group Chief Strategy Officer