You make go/no-go decisions on strategies half blind, not knowing the true enterprisewide costs of each strategy.

Challenge

When you're deciding a strategy, you have a sense of value. But what about its cost?

The full cost of a strategic option is more than its direct costs. For example, entering a new geography may require budgets for engineering, marketing, sales, and logistics (direct costs).

But it will also place an incremental burden on indirect support services like IT, HR, Finance, Purchasing, etc. And these functions may, in turn, draw more heavily on those who support them.

Indirect costs may add up to as much as the direct costs. Ignoring them puts you at risk of making an unprofitable choice.

How can you know the full cost of a strategic option, including its implications for budgets enterprisewide?

Solution

With investment-based budgeting, every department submits a budget for its products and services (not just expense codes by manager, as in traditional budgeting).

When considering a new strategy, each includes the appropriate deliverables to in its business plan, and calculates the full cost of those internal products and services.

Then, you can total up the full enterprisewide costs of various strategic alternatives.

Comprehensive solution....

Other Resources

White paper for CFOs and Budget Directors: Investment-based Budgeting