Using ROI to Build the Perfect Budget

It’s every manager’s favorite time of the year—budgeting. Time to put down on paper (or spreadsheet) financial justification for your department’s efforts over the last 12 months and for the year moving forward. But can you explain to your CFO and executive team how your budget dollars directly relate to revenue? For some departments, it’s easy. Others not so much. If you’re struggling, using a budgeting formula based on return on investment (ROI) can help you work toward measurable results that directly impact the bottom line. We'd like to help.

CALCULATING ROI

ROI compares the amount of money you spend on a project with the amount of revenue you gain from it. At its most basic, calculating ROI requires knowing two things—how much you are investing and how much you earn from that investment. 

ROI % = (Net Return on Investment / Cost of Investment) x 100

For instance, let’s say you spend $100 on a Facebook ad and that ad generates $150 in sales. Your return on investment is 50%. It all sounds so neat and simple (and for sales, it often is), but for some departments getting accurate numbers to fill in the calculation and accounting for more qualitative impact can present a challenge.

ROI BUDGETING ELEMENTS

Using ROI for budgeting can be used in nearly every department by incorporating a few specific elements into your planning. 

Figure out your strategy

When setting your strategy, consider long-term as well as short-term objectives that address every part of the sales funnels. This way you won’t miss an opportunity to measure your contribution. 

Set goals

Every company, and sometimes every department director, has a different way of setting goals. Are you focusing on your company’s primary objective (the North Star Metric) so you can optimize your spending on what converts the best to increase profit? Or are you using Objective and Key Results (OKR), where the objective is the goal you’re working to achieve and key results are the measurements that get you closer to the goal using initiatives that impact those results? Another popular option is using SMART goals, which are specific, measurable, achievable, relevant, and time-based. Whichever method(s) you choose, setting goals is essential.

Define your metrics

ROI isn’t measured by dollars alone. You need to be able to measure each metric in direct relation to the gains realized from the dollars you invested. For instance, if you’re in marketing and can’t show how brand building and lead generation directly affect overall profits, then only the parts of your plan that convert directly to sales will be recognized. Defining and analyzing your metrics is a crucial process of ROI.

Set benchmarks

Setting benchmarks is critical when determining ROI. Without benchmarks, you won’t know what succeeded and what didn’t, much less where things stand throughout the year.

Follow best practices

Following industry best practices is an easy way to stay on top of ROI and leverage the experience of others in your field. By measuring continually and over time, and comparing your results against the benchmarks of peer companies, you’ll have a firmer grasp of what works and what doesn’t.

MEASURING ROI BY DEPARTMENT

For some department budgets, it’s easy to apply ROI. Take a sales team—if it costs $100,000 a year to employ a full-time sales rep, and that rep generates $500,000 in profit, that’s a solid return. Other departments may not be as straightforward. Let’s take a look at three departments that often don’t have sales numbers to back up their budgets and how they can incorporate ROI.

Human Resources

Even though employees make up between 40–80% of a company’s operating costs, measuring the ROI of Human Resources isn’t as easy, simple, or straightforward as some other areas of business. And since roughly 90% of operating expenses go toward compensation, benefits, and other employee-related expenses, HR must prove that their initiatives improve the bottom line. Phrases like “improved morale” and “greater employee satisfaction” sound great, but it’s difficult to translate them to a significant increase in revenue or improved productivity. But HR can use ROI metrics to analyze the value of almost any service as long as a dollar cost can be determined. For instance, if you introduce a new wellness program, measure its effectiveness by the associated reduction in costs of sick days. The ROI of a new employee orientation program can be measured by assessing the costs saved by correlated reductions in employee turnover. Using a variety of methods to collect data—follow-up surveys and questionnaires, on-the-job observation, tests and assessments, interviews, focus groups, etc.—will help you apply the hard numbers that your CFO and executive team are looking for. 

Marketing 

When it comes to producing revenue, marketing is often a long-term investment and doesn’t always produce immediate ROI results. You need to determine a threshold and floor for each marketing campaign and only run a campaign if you project it will hit the threshold. If your projections show that the campaign won’t hit your threshold, cut the campaign and put your money elsewhere. Monitor the time it takes to make marketing materials, production and promotional costs, page analytics, and non-financial returns like social media engagement, unexpected traffic boosts, and other bonuses. And use tracking URLs to provide you with accurate traffic numbers. Here are some ways to incorporate ROI in common marketing tactics:

• Written content. 82% of marketers who blog see positive ROI in their inbound marketing strategy. For blogging, calculate time-related, production, and promotional costs into your total spend. To translate time into a dollar amount, either plug in the freelancer’s fee or track the number of hours it took your employee to write the post, then multiply that number by the hourly wage. 
  
• Email marketing. You can make $38 for every dollar you spend on an email. Use the size of your mailing list, the type of ad in the email, or the target audience for the email to help you figure out your ROI. 
  
• Video marketing. 83% of marketers say video gives them strong ROI. Track the time, money, and software it costs to produce your videos, as well as the total cost of labor, equipment, and promotion. And don’t forget that tracking URL.
  
• PPC campaigns. Though ROI data is usually tracked automatically with PPC, small businesses waste 25% of their budget on poorly managed PPC campaigns. Closely monitor the data and wasted spend to learn from and avoid major losses on an ad. 
  
• Paid social media promotion. Set a goal or audience target, a time limit, and a budget. Tracking your ROI can help you determine if the social boost strategy is working, as well as the types of posts that lead to the best return.
  

Customer Service

It’s fairly easy to measure the costs of CS staff, training, and tools, but it’s more difficult to get an accurate number for money earned (or costs reduced) since customer service support staff aren’t directly making sales or generating new income. Yet great customer service correlates with business success, and individuals prefer to give their money to companies that look after them. To measure customer service ROI:

• Decide which behaviors you want to affect—upgrades, retention, or expansion. 
  
• Determine what you can measure and change—customer satisfaction, cost per contact, cost per conversation, customer lifetime value, retention rates, etc.
  
• Consider indirect returns from customer support—how customers think about your products, what language they use, what they think of your competition, how they found you.
  
• Report on what you can measure—number of bugs reported, feature suggestions added, sales leads who came in via support.
  

Worthy custom service KPI metrics to consider include ticket volume, ticket backlog, average resolution time, average reply time, average first response time, customer satisfaction score, average handle time, first contact resolution rate, and replies per resolution.

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Budgeting is not an exact science. But by keeping ROI at the forefront during your budget planning, you can create a plan with carefully defined metrics, goals, benchmarks, a sound strategy, and best practices that your executive team will approve and you can use throughout the year to ensure success.

 

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