Like the zero-based and activity-based budgeting method, VPB analyzes each budget line so you can determine its importance to the business, customer, staff, or other stakeholders.
What is value proposition budgeting?
As its name implies, value proposition budgeting (VPB) is all about driving value.
This means that you’ll have to justify expenses. But when you evaluate every cost item, you also know how much value every dollar spent should bring in.
With this information, the business can focus on value drivers and eliminate unnecessary spending.
While this may sound like a fundamental objective when creating business budgets, other methods don’t dive so deeply into value. VPB is a unique method that may only suit specific organizations, like those looking to do financial restructuring.
Here’s what you should know about value proposition budgeting and how to use it to create an effective spending plan.
The ins and outs of value proposition budgeting
Value proposition budgeting, also called priority-based budgeting, is all about analyzing and justifying the value of every single item on an expenditure list. Ultimately, it is an attempt to find out where a business should spend money when aiming for a positive return.
Spending money on successful products or services means a business can take home more income. So, when opting for the value proposition budgeting method, business owners must first ask these essential questions:
- Why is this amount included in the budget?
- Why are we spending this money?
- Does the item create value for customers, staff, or other stakeholders?
- Does the value of the item outweigh its cost? If not, is there another way to justify the cost?
This budgeting process is excellent for successful companies and small start-ups that want to assess their most highly-valued services. By allocating a greater portion of the budget to, for example, investing in popular services or in-demand products, businesses can project higher revenue because customers will spend more money.
How to work with the value proposition budgeting method
As a business, you earn a certain amount of money, and you spend a certain amount of money—but what if the money you’re spending could go to more sought-after services or products that you know will generate more future income?
And how can you evaluate what services deserve more attention versus those whose budgets need to get cut?
With the value proposition method, you can determine which areas deserve attention and which areas have unnecessary expenditures.
Examples of a value proposition budget
VPB is commonly seen in government spending since this sector involves a lot of financial restructuring throughout the year. A government entity may use this method to decide which city services are most valuable and most needed within the community.
A city government, for example, may identify the programs that offer the highest value for the community during their annual budget review. It will then decide to continue funding them while reducing other lower-value services.
Advantages and drawbacks of a value proposition budget
Value proposition budgeting is a great tool for determining where you should allocate money to bring in more income and satisfy current and new consumers. However, it’s also a time-consuming method that requires careful planning.
Here’s a breakdown of the advantages and drawbacks of the value proposition budgeting method.
- It’s easier to see where money is going and should be going, which is the best way to prevent wasteful spending.
- You can spend money on areas that bring in more value and reduce unnecessary expenditures.
- Ultimately, it helps you save money while also boosting revenue because you’re focusing on high-value areas.
- Value can be difficult to quantify, especially in government funding scenarios where officials need to ask how to value necessary community events and how to fit that into the budget.
- Value might change with societal/seasonal/cultural trends, which means the budget needs to be reassessed whenever necessary.
Although VPB is a great budgeting process if your goal is to highlight what your company does best, this method may not be ideal. Determining value can be an involved process, and continually reassessing budget targets is time-consuming.
Take time to research the differences between VPB and other business budgeting methods, such as zero-based budgeting, incremental budgeting, activity-based budgeting, and flexible budgeting, so you can figure out what method is most suitable for you.
Assess and drive meaningful value for your business
At its core, the value proposition budgeting method helps business owners and accountants determine if an item, service, or activity results in value. Then, it asks whether the cost of that item, service, or training is justified by the value it creates.
No matter what type of budgeting method you choose, every business needs competent budgeting software to keep track of finances. With Divvy, you can upload your entire financial history and keep tabs on what’s coming in and what’s being spent.
The best part is that Divvy can help predict your future economic needs, including accurately assessing a value proposition budget. Learn more about using Divvy to manage budgets today.
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