The shift to digital and tech-related revenue isn’t affecting just Silicon Valley. Across the business spectrum, more and more companies are looking to grow overall revenue by tapping into digital assets and channels.
Whether it’s the manufacturing business looking for new opportunities in online training, the printer expanding its digital offerings, or the engineering firm developing new software to manage its clients, digital initiatives are starting to impact bottom lines.
Striking the right balance can prove challenging, though. As with traditional business development, seeing the benefits of a tech expansion can take years. All the while, associated costs are creeping up, putting budgets in a bind and tempting leadership to ax growing projects before they can pay off.
A recent Gartner survey found that 31% of CEOs counted IT-related revenue growth as a top priority. But traditional budgeting and forecasting systems can quickly get in the way of those digital dreams.
Budgeting for digital business in a traditional world
In the same Gartner survey, 56% of respondents said that, when they did invest in digital, they saw an increase in net profits. So, if we want it and it pays off, why aren’t more people actually doing it?
One of the problems is that companies are not set up to accurately forecast and measure the impact of digital revenue or spend, lumping them in with other revenue and expenses instead.
If a business drops new building costs, airfare costs, and 401(k) costs into its annual budget, it all makes sense. You can quickly estimate the long-term costs and benefits of those expenses. Some of them are tied to projects that never end—the new office that has a 75-year expected lifespan—while some generate cash within the year their incurred—a sales lead heads to Seattle, racks up a $2,500 bill, and then brings in $750,000 in new revenue.
Digital adventures—especially when they require in-house development or research—often don’t have clear timelines for revenue generation. To get anything out of a digital shift, businesses need to understand that the very nature of plans—budgeting, project management, revenue forecasting, accounting—has to change.
Today, we’ll look at three strategies businesses can use when looking to grow digital revenue without losing sight of their core businesses. After all, it’s not good growing a new division if it means putting the rest of the company out of work.
1. Account for digital outside of the normal operational budget
Key Takeaway: Break your digital budget out from the operating budget.
One of the biggest problems with developing a balanced digital strategy is that businesses fail to properly account for digital spend. By lumping development and associated costs in with operating budgets, you both obscure the impact of your research and make everyone at the top nervous.
When costs rise, people pay attention. If a new development is just wrapped up in existing budget lines, people won’t be able to discern the true impact—good or bad—of the work.
Instead, split development costs out into their own bucket. This allows you to track those impacts accurately and make better, more informed decisions about future spend. In the same Gartner survey, “51% of CFOs [reported they] did not distinguish ‘digital’ as a separate revenue category when reporting results.”
Those businesses now have to make choices about growth based on muddled categories and confusing growth metrics. By splitting digital costs and revenue out early on, you can avoid those headaches.
2. Stretch your digital budget by killing projects quickly
Key Takeaway: Fail fast to keep your existing budgetary system in place.
Very few tech projects happen over the course of a single year. Development, implementation, and sales can often last years, especially as iterations of the original project continue to be designed and redesigned.
That means that businesses need to focus on forecasting beyond the typical 12 months, for both costs and revenue. In that sense, digital assets are more like depreciating assets—a tractor, for instance—except you’re building the assets yourself.
To overcome the budget problem, businesses can either change their entire budgeting system, which is a palaver, or they can adopt a “fail fast” mentality toward development. By focusing on developing, testing, and canning projects quickly, you can keep an in-year budgeting system intact while getting many of the benefits of multiyear planning.
One of the many benefits of quick failure is its relatively low cost. Canrock Ventures suggests baking low costs into the very nature of any fail fast program.
“Fail Cheap,” the investment firm advises. “No failure should be big enough to sink the company. Set low budgets and stick to them.”
In addition to being prudent, this attitude keeps impacts on company-level budgets low, allowing a business to test and innovate without worrying about too large a shift in the bottom line. This changes when you hit pay dirt, but then you’ll be adding to revenue, as well—at least a little—which dulls the bottom line impact yet again.
3. Use the business’s base to expand into digital
Key Takeaway: Existing businesses should look to expand, not pivot.
“Pivoting”—moving from one product to another—is one of the most powerful things a startup can do. By failing fast and accurately evaluating the market, a troubled or slow growing business can quickly take up a new position and establish itself as a leader.
Yet, for all its success, pivoting is one of the more dangerous moves in business. Abandoning—or reworking to the point of effective abandonment—your initial product means starting from scratch.
Established businesses should almost never pivot. They can shift or tweak or expand, but pivoting is not recommended.
Instead of a traditional pivot, Intellyx analyst Charles Araujo suggests businesses should focus on organizational agility. That is “the ability to rapidly adjust the structure, operating processes and/or functions of your organization to adapt to changing market conditions.“
Focus on having a plan in place for unexpected opportunities. Sometimes, the chance for new digital expansions or products arrive unannounced. Thinking about the budget, this means setting aside a reserve or flexible fund, allowing your business to quickly move on these lucky breaks.
Get your digital priorities in order
Gartner fellow Mark Raskino sums up the process by saying:
“It starts by remembering that you cannot scale what you do not quantify, and you cannot quantify what you do not define.”
Companies looking for digital growth should start the process by setting clear definitions of what counts as digital growth for them. Complex traditional businesses, like manufacturing, may have a very different toe-dipping standard than a consulting firm, for instance.
By knowing what resources you have in place, what your final goals are, and what money you’re actually spending, any business can push for more digital revenue without breaking the bank.
For more small business finance tips and tricks, check out Capterra’s Finance blog. If you’ve had great results building digital revenue streams in your business, drop a line in the comments to let me know how you turned a plan into a reality.