How to budget around common concerns and important areas of investment.
During budgeting season, SG&A often becomes the target of fiscal cuts. Because these expenses don’t directly contribute to production and profits, sponsors and executives alike often look to this portion of the budget when it’s time to reduce spending.
Every dollar of SG&A is critical to the overall value of a company, and with companies trading at record EBITDA multiples, the trickle-down effect to the bottom line can amplify the importance of a single dollar of G&A by 15-25 times. G&A-related expenses often take up anywhere between 15 to 25 percent of revenue, or up to 40-50% if you include sales. This makes sponsors eager to limit these expenses where possible. In an industry as earnings-focused as private equity, cutting down expenses and promoting growth is paramount.
But when planning the yearly budget, executives should beware of areas where cutting costs can have unforeseen negative consequences. While it can be difficult to justify reserving different areas of G&A in the face of impending budget cuts, it’s important to be able to evaluate the most important areas for investment, and where adjustments should be made. Determining where to invest and where to reduce spending without entering into endless negotiations with management is essential, especially as circumstances surrounding budgeting continue to change and fluctuate.
Budgeting and Business Processes
One way to revitalize your budget planning method is to reexamine your budget from a different angle. It’s common practic...