In short:

  • Leaders need to know when a project needs an ROI study versus a cost/benefit analysis.
  • Generally, the ask for cash goes through the CFO, but company owners may get pitched directly. Here's how to make an effective case to both leaders.
  • CFOs: Getting poor pitches? Here’s a guide to hand off to your business colleagues.

Among 500 respondents to Brainyard’s latest Outlook survey, 88% of finance pros said their 12-month economic forecasts are either very (42%) or somewhat (46%) positive, versus just 4% expecting negative results in the coming year.

As business revs up, budget requests start to flow in. The marketing team wants a campaign automation platform. Operations wants a modern ERP. Sales wants to hire a dedicated social seller. All these growth drivers cost, but hey, you have to spend money to make money, right?

Yes, but even CFOs who want to spend know they can’t sign off on every request, so it’s a matter of establishing priorities. At that point, the project advocate needs to articulate the “why” — will this initiative increase revenue or margins? Take risk out of the business? Help meet KPI goals? Strengthen the supply chain?

If you’re a line-of-business lead preparing to pitch a new project, software purchase or hire, there’s likely competition for that funding. Be prepared to make a solid case, tailored to your audience.

We talked to finance leaders to see where department heads get it right (or wrong) when pitching for more budget. We also checked in with an expert for cases where the budget decision-maker is the CEO.

Our Sources
For this article, we spoke with:

Rob Lancuba and Andrew Free, CFOs with CFO On Call
CFO on Call is an outsourced finance firm that helps clients with bookkeeping, SEC financial reporting and more, while providing CFO services to clients who’d like one on a part-time or interim basis.

Janet Schijns, CEO at JS Group
JS Group is a channel consultancy that specializes in creating indirect go-to-market strategies for technology firms. The team has built multiple award-winning channel programs for Fortune 100 firms.

For this article, we focused on revenue-enhancing projects, which are amenable to standard ROI calculations. Note that risk-management projects are much trickier to quantify: Efforts like spending more on security or implementing ERP, for instance, may need more of a cost-benefit analysis, which involves comparing the explicit and implicit costs of taking various actions as well as of maintaining the status quo.

The idea of a CBA is to compare the opportunity cost of doing nothing versus investing cash and reaping expected benefits. Then comes the even trickier business of assessing those projects with high benefit scores but a hard-to-quantify ROI against those projects that have a clearer ROI.

On to assessing the latter group. To come up with an ROI estimate, use this formula:

ROI = (Net return on investment / cost of investment) x 100

Here’s an example. Let’s say you hired a part-time inbound salesperson for $42,000 and saw your gross profit, that is, net sales due to the new rep minus cost of goods sold, increase by $95,000 over 12 months. The annual ROI for that sales pro would be:
= ($95,000 – $42,000 / $42,000)
= 1.26 x 100
= 126%

Building a Budget Pitch: First Things First

Here are some basic facts to have in hand:

  • Does this new expense fit within the department’s existing budget, or will it require new funding?
  • If this is a reallocation, what is being cut?
  • If it requires more budget, is the department meeting current goals? If sales was expected to add 25 new logos this quarter but signed only 18, the conversation will be quite different than if you have 30 new accounts.
  • What is the ROI period? Is this a six-month payback or a three-year payback? Both can make sense, but the bosses need to know the timeline and the assumptions that went into figuring it.

For CFOs, It’s All About the ROI

CFOs and other senior decision-makers want concrete evidence and a credible rationale for why giving the go-ahead would be a great business decision.

Quite often, companies consider the return on investment in terms of projected costs compared with projected returns. But Rob Lancuba, CFO at CFO on Call, knows that ROI only predicts what happens if things go as the department head hopes — the metric by itself says nothing about the likelihood of seeing those returns, what it takes to succeed or the potential risks.

Thus, a rosy ROI calculation alone may not win the “yes” you want. Rather, Lancuba says, today’s CFOs are looking for a quick ROI and a business case that:

1. Provides practical value via comprehensive information that gives decision-makers confidence to act.

2. Scores high in credibility. The case is believable. This is where those risk management projects run into trouble. It’s all but impossible to assess the value of cybersecurity spending for instance because it’s about preventing a cost that may not actually occur.

3. Provides a range of possible scenarios, both favorable and less so. This helps everyone understand and agree on the risk factors associated with the project. For instance, hiring a new salesperson dedicated to social selling will be risky if you have no current sales from that channel. Management may ask that the existing team try social selling first, possibly with the help of a consultant, which should be a lower-cost proof of concept.

To achieve these goals, he recommends hitting the seven areas below.

“Failure on any point can sink the case,” says Lancuba. “When your proposal fails to address one or more of these points, case credibility, practical value and accuracy suffer.”

1. Reflect important business objectives.

Quantify the higher-level benefits of your solution. Your proposal will ideally address business objectives that go well beyond a high ROI. The business case benefits should represent tangible contributions to meeting company objectives.

2. Compare your proposal against different action scenarios.

The proof that your proposal is a solid business decision rests on a compelling scenario comparison. Each scenario predicts business costs and benefits that are reasonably expected to follow one course of action. A scenario for implementing your proposal should compare favorably to alternate scenarios, including a “business as usual” status quo.

For companies, adopting a standard scenario analysis framework can make it easier for decision-makers to compare multiple proposals.

3. Make non-financial benefits tangible, and assign value to them.

Your proposal should meet important non-financial business objectives, such as:

  • Increasing brand value;
  • Lowering risk, as with increasing supply chain diversity or omnichannel selling; or
  • Improving product quality and/or customer satisfaction.

Reference benchmark studies, analyst reports, industry statistics or other third-party data to help convince the CFO that your proposal adds intangible value.

4. Provide complete financial metrics for each scenario’s outcomes.

Financial metrics include KPIs such as:

  • Return on investment (ROI): This should be positive and greater than, say, 10%, meaning that returns will exceed costs. But that’s just the baseline. Again, it’s hard to calculate the ROI or net-present value of, for example, implementing an ERP system, onboarding new suppliers or purchasing cybersecurity insurance. When a project is more about reducing risk, improving resilience or setting other initiatives up for success, think beyond pure ROI. Add a narrative that explains why this sort of foundational effort is good for the business.
  • Net present value (NPV): NPV places realism on returns expected in future years. It is a discounted cash flow metric that addresses questions like, “What is the value today of a $1,000 cash inflow to be received seven years from now?” In that example, with a discount rate (interest rate) of 5%, the PV formula is: $1,000 / (1.0 + 0.05)7 = $711
  • Internal rate of return (IRR): This refers to the minimum percentage rate of return that incoming proposals must reach or exceed to qualify for approval and funding. It is set above the borrowing rate at, say, 10%.
  • Payback period: In how many days, months or years will we recover the investment outlay required?

CFOs often have individual preferences for one or more of these metrics, says Lancuba, based on their experience in the company and the industry. As a result, it pays to find out their individual views and preferences on financial metrics before submitting your proposal.

5. Build estimates from a valid cost model for the case.

Cost estimates for your proposal must apply a single cost model to all your potential scenarios. This is because CFOs and decision-makers need to assure themselves that:

  • All scenarios were compared fairly with one another;
  • All relevant costs are included; and
  • No unpleasant cost surprises are in store later as proposal implementation begins.

Note that the internal data may not exist to make a case for your project. In that situation, you can add credibility by showing what happened in similar companies. Sales reps for technology firms normally have industry snapshots and reference customers. Peers at other companies may be willing to discuss their projects, or you can look to your consultant and service provider partners or even analyst firms. Just don’t walk in without data.

6. Provide a thorough, credible risk and sensitivity analysis.

While CFOs realize that actual results will always differ somewhat from predictions presented in your proposal, and that you cannot eliminate all uncertainty from your predictions, finance expects you to consider a reasonable spectrum of risks, says Lancuba.

“Your aim is not to provide a perfect picture; your job is to provide an accurate and realistic perspective,” he advises. “Be upfront about the potential downsides or drawbacks to investing in your solution. If the CFO thinks you’re hiding something, you will definitely lose credibility.”

7. Your conclusions and recommendations must circle back to business objectives.

Show why your solution is a good use of funds for the company as a whole, not just your department. Your proposal will be viewed more favorably if the outcomes of implementing your proposal represent real value to the organization, meaning it contributes to meeting business objectives.

Your proposal has real value only if you establish and measure these contributions in concrete terms. CFOs will always look for hard numbers and evidence that the company should fund your project. That means your proof of value has to be unbiased, polished and persuasive.

Economic Outlook

Finance leaders reported positive economic outlooks in our recent survey. As business builds, your budget request will likely compete with others, and it's more important than ever to build a strong case.

When Budget Requests Go Wrong

Andrew Free, Lancuba’s colleague at CFO On Call, once held the CFO position at an inbound call center that provided various healthcare services by telephone. The business, based in Australia, was growing revenue at a substantial rate and was currently sitting at a turnover of AUD $38 million. However, it had never turned a profit in its five years of operation.

Free’s remit was to ensure that the company transitioned to making a sustainable profit, with earnings before interest and taxes of at least 10%. Here, he gives an example of a time he turned down a budget request, his reasons for doing so and how the leader could have better framed the argument.

Case Study: Subscription Database

To provide the service, we employed registered nurses and other health professionals. In order to meet strict quality and risk requirements, the staff had to follow a scripted triage process with documented decision trees and referencing a medical knowledge database. That database was monitored and updated by advisory doctors and medical specialists.

The head of the advisory group approached me with a request to subscribe to a third-party medical database. This service came at a significant cost. The only justification I was given for that cost was that it would improve the quality of the advice that our staff provided. Furthermore, the proposed expenditure was not included in the approved budget.

I did not approve the expenditure because it was unbudgeted and had no cost versus benefit analysis attached. This caused a great protest, as this sort of expenditure for improving quality had always been approved in the past.

This refusal had a positive outcome because it meant that there was a broader discussion within the leadership team about the whole approval process. We agreed that any proposal needed to have a cost/benefit analysis attached so that we could determine whether it would have a positive or negative impact on the bottom line. Sometimes that required some detailed modelling to be done of the metrics involved, to determine the financial impact.

We had detailed call center operation KPIs, which were measured daily. This enabled us to ensure we were meeting the minimum service levels required by our contracts and take corrective action if we weren’t. One important KPI was average call length; it was one of the metrics that determined how many employees we needed to answer the anticipated volume of calls within the service-level requirement that 80% of calls would be answered in 20 seconds.

In the case of the database proposal, the chance of approval would have been far greater if it could be demonstrated that the improvement in quality would be reflected in an improvement in operational metrics. If the increased quality of the database meant that the average length of calls was reduced, for example, then we could quantify the savings. A significant reduction in average call length would result in a reduction in the staffing required to answer the volume of calls and an overall savings in employee costs.

In that case, because it was a subscription service, it would have been possible to have a trial period where we could measure the impact on the metrics and calculate the overall financial impact. That is one consideration a CFO should keep in mind: Is the proposal for a one-off cost, where you are fully committed, or is it an expenditure that can be terminated if it does not have the positive impact projected?

More Resources From NetSuite

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Get the full results of our quarterly Outlook survey, with insights on how leaders from all industries are perceiving and preparing for the year ahead.

The CFO’s Toughest Challenges in 2021

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Making a Budget Pitch to the CEO? That’s a Little Different

If your organization doesn’t have a CFO or equivalent, odds are you’ll be pitching your CEO, who may also be the company owner. And even in businesses with finance leads, most significant expenditures will need that sign-off.

Remember: CFOs work with established budgets and ROI targets. The CEO, on the other hand, often reacts on gut feeling, says Janet Schijns, CEO of JS Group.

“As a CEO, most of us in our brains, regardless of what accounting principle we use, think like zero-based budget people,” says Schijns. “We say, essentially, that you have zero budget, then you work up from that to arrive at what exactly you need to spend or invest to be successful, in contrast to traditional accounting budgets, where there’s room for movement. So your ROI numbers have to be crisper for the CEO than the CFO — which is almost counterintuitive.”

That doesn’t mean you walk in with a 27-page spreadsheet, but you do have to show three very specific things.

1. How does this align with our greater strategy?

As with a CFO, how does this specific investment align with the departmental or overall business goals? How does it get us to our Point B faster, or where does it address a risk the business is facing in getting to that Point B?

2. Are our competitors making a similar investment?

This is almost like a use case, and if you’re considering investing in a product, the rep you’re dealing with should be able to paint this picture for you.

3. What is the story the CEO can tell about this investment?

Whether to other department heads, investors or the industry at large, you have to make this spend easy for them to explain.

Schijns provides an example of a successful pitch — one that may never have even made it to Lancuba’s desk.

Case Study: New Practice Area

We’re going to make a significant, likely six-figure, investment in building out a 5G practice to supplement our existing [data communications] practice areas. That investment is going to include automating platforms, automating requirements and having an ability to bring a 5G vendor and a partner together to capitalize on an opportunity. The solution needs to be able to aggregate certifications and have sales and marketing tools — it’s a considerable investment.

If you evaluated this spend strictly on ROI, you probably wouldn’t approve it. But if you take a look at what has been done in other industries at other times when new, innovative trends have launched, and you’ve seen other firms become the de facto standard for it and capture significant market share, then you would.

In evaluating this investment, we of course had to break down the numbers to arrive at an exact, detailed cost-benefit analysis and projected timeline until we hit our ROI. But more than that, we had to make sure it aligns with our overall strategy. We looked at other organizations that did similar things with IoT or cloud. And we made it easy to tell the story of why we’re making such an investment in 5G.

The Bottom Line

CFOs and CEOs are being hit up for money all the time. If you want to make your case stand out, you can’t just throw together a couple of PowerPoint slides and call it a winner. You need detailed financial analysis, a strong business case, an objective view and a compelling story.

Answer: How will this investment help the company reach its goals? It isn’t that CFOs don’t want to fund new initiatives; it’s just that they need a metrics-based reason to do so.