A strategic approach to annual budgeting
This article is about a strategic approach to PR budgeting.
Budgeting is not a sexy topic. It is fraught with politics, and annual PR budgeting strategy is rarely discussed publicly. However, communicators can take a street-smart approach PR budgeting.
In an ideal world, public relations budgets would be developed on the basis of principle, by deciding which communication programs and activities best support the organization’s mission and goals. Therefore your planning strategy would be undertaken on a long-term basis. In this ideal world, both the organizational and departmental strategic planning would look at the longer term, but in real life there are many variables in one year alone, much less any longer timeline, so it is difficult to plan very far ahead except in general terms. The horizons of your organization can be dominated by short term agenda. Indeed, as business cycles seem to be affected by more and more short-term, unforeseen events, it is not prudent to plan in detail too far ahead because events tend to overtake the best laid plans.
The vision and mission statements show the direction of the organization, but the pace of progress towards achieving the vision and mission depends largely on the available revenue stream. Major new projects and other initiatives can’t be implemented unless they can be financed, usually through the annual budgeting process, which is part of the annual strategic planning process.
Organizational budget dictates the shape and size of PR budget
The available funding in the organizational budget largely dictates the shape and size of the PR budget and hence the PR strategy. Since all organizational budgets tend to be prepared on an annual basis, the planning (including PR planning) in all organizations is conducted on an annual basis. So in reality, the budgets control much of the strategic planning process.
Management may try to plan ahead for the likely operational activities and funding needed 3-5 years ahead, but anything further than the next year has no certainty.
In the context of the annual budgeting process it is important to remember that PR activities are both a mix of continuing activities such as stakeholder relations activities, which are long-term in nature, as well as cyclical activities such as the production of annual reports, which fit by definition into a budget year.
If funding isn’t available, the annual PR plan is restricted and individual programs may be cut or cancelled, despite all your good intentions. The programs would need to be reviewed in priority order and any reduction efforts should logically be directed first to the lowest priority items. Also, when a budget is tight, expenditure can be cut on items where cheaper alternative actions could be put in place. For instance, research can be reduced or replaced by cheaper, if less satisfactory, alternatives such as your professional judgment, or a smaller sample of stakeholder opinions.
Check available funding first
The first action in considering a PR strategy or individual program/project is to check the likely funding. Sometimes financial managers will direct how much is available to the PR area as a component of the organizational budget. Sometimes business unit management will dictate the amount available to PR, and sometimes decisions flow from corporate management/head office decision making.
When budgeting, you need to be reasonably generous in estimating costs in each budget area because unforeseen factors can arise during the financial year that require PR action and can incur unbudgeted costs. Some ‘fat’ in the budget is therefore highly recommended. (But not too much, or you will find that when decision makers realize this, they are unlikely to trust your figures in future budget planning.) The buffer amount can be added to each budget item or can be added at the end as a contingency factor, around 10%, for the year. It is probably better to add it to each line item in case accountants see the contingency amount and decide without consulting you that it isn’t necessary!
If you base your budget on the minimum cost of each activity, this approach will usually backfire. Instead of impressing your bosses with tight housekeeping, you will find that some inescapable and unforeseen costs have exceeded the planned amount and you may have to ask for more funding – not once, but several times. What’s more, it is probably better not to conduct activities based on a minimum cost because this approach often provides dubious value for money over the life of the activity.
Starting a budget from scratch
When you start a job with a new employer, the PR budget is inherited – it has usually been prepared by a predecessor. Therefore, you are obliged to live within that existing budget for some time unless you can persuade management you need to start with a clean slate, which invariably becomes a more expensive slate since you are keen to do more than your predecessor did! An inherited budget can be useful because it already exists and therefore may give you some breathing space to assess the communication needs of the organization during the first few months of taking up the new position.
If the opportunity arises to start from scratch, you have the benefit of not being restricted by the activities of the past – no baggage. Budgeting in this case can be treated as zero-based budgeting, which simply requires you to not rely on any previous assumptions. You plan for what is needed for the new period regardless of whether the budget is higher or lower than the previous year.
A zero-based budgeting and planning process using stretch targets challenges conventional thinking and brings forth bolder ideas, according to an article, “Your organization wastes time. Here’s how to fix it.” by Eric Garton in the Harvard Business Review newsletter of 27 March 2017.
Traditional budgeting usually involves a general overall incremental increase over the previous budget, such as a 2% increase in spending for the coming financial year, rather than justification of both old and new expenses, which is required in zero-based budgeting. Traditional budgeting tends to focus only on new expenditures, while zero-based budgeting starts from zero and involves reviewing recurring expenses in addition to new expenditures.
The idea is to start from the beginning and establish priorities and directions without wading through the baggage of the past PR activities. Since there aren’t existing commitments to activities, you are probably going to be under pressure to produce a strategy quickly to replace the vacuum. Also, zero-based budgeting requires more work because it involves scrutinizing old as well as new expenditure to determine what suits best. Zero-based budgeting creates pressure to reduce costs because it doesn’t just accept previous costs as a given.
A cautionary note – zero-based budgeting tends to favor areas that have measurable outputs, ie dollar revenue or units of production, because their contributions are more easily justified than the often intangible outputs from areas such as PR, client service, and R & D. Therefore, in developing your PR budget, it is important you try to include measures/KPIs for each area of activity, especially if you can calculate the ROI for the activity. In this way you can justify the budget allocation to PR.
One method you can use to decide the potential areas to focus on is to conduct a communication audit. A communication audit enables you to determine the areas needing priority attention from a communication viewpoint and the interviews of management that comprise part of this process offer a tremendous opportunity to develop strong relationships with corporate and operational management. The audit is often best conducted by an external consultant who is experienced in such projects and who can carry out the work at arm’s length from any internal politics.
Educating/informing senior managers is essential
It is extremely important for you to continually inform and educate organizational management about the range of areas covered by the PR role and the potential value obtained from corporate communication. Since PR activities always involve spending, you are well advised to position the expenditure as a wise investment of funds and to make judicious use of various measurement techniques that enable a dollar benefit to be attributed to the public relations effort. Forget about ‘vanity metrics’ that may give a nice impression, but don’t necessarily relate to tangible results. For instance, don’t use shallow metrics such as media impressions, advertising equivalencies (AVEs), the number of Facebook friends and likes, and YouTube views. Try to refer to tangible measures that relate to potential sales or customer contact, etc.
Most PR managers find the corporate and operational management unaware of the sophisticated and valuable role of the PR function. Senior managers usually have backgrounds in more measurable disciplines such as finance, engineering and marketing and are not attuned to the important bottom-line benefits a well-run PR function can bring to the organization.
Being in senior management, they would probably have gained most of their exposure to PR in earlier years when the PR work was more likely to be heavily based on journalistic and event-organizing activities – the “technician’s” role – rather than the more recent strategic role. In this environment you should tactfully make management aware of the way PR activity can directly improve operating results.
Issue management is one heavyweight, vital, area in which PR pros can play a leading role. Just make sure you ‘sell’ to management the positive results you have achieved – because some of the most effective issue management activities result in nothing (adverse) happening at all and are therefore not measurable in the usual sense.
Budgeting generally requires long lead-times. Typically, a PR budget is first prepared at least six months before the start of the financial year to which it applies. Therefore you are planning for events that will take place between six months and up to 18 months ahead (at the end of your financial year). This is a long time in which many unexpected things could happen. In view of this, the budget items should preferably be kept broad to take account of the various changes that may take place.
Keep explanatory notes
You should always prepare explanatory budget notes in which the assumptions and the reasoning involved in calculating the dollar amount in each budget line are readily understood. Ensure the notes are sufficiently detailed to:
- substantiate to senior management and financial executives the need for the particular communication activity;
- provide a guide to the reasoning behind the expenditure;
- remind yourself over an 18-month timeline exactly what activities were included in the original planning (the details and the assumptions on which they are based can be forgotten in the meantime!).
One of the difficulties in budgeting is taking into account ‘big dollar’ budget items that are not certain, but would have a big impact on the budget. For instance, it is difficult to predict the amount to spend on issue management, corporate advertising or sponsorship commitments for a period that could be up to 18 months away. Unforeseen issues may emerge after the budget has been set, which would require costly action to resolve. If a significant contingency amount is built into the PR budget to address such issues, that amount may be queried by the accountants as being unnecessary speculation. However, if such a contingency doesn’t exist, there may be an unpleasant surprise later in the budget year by not having a reserve amount set aside. There’s no easy answer. Your decision is affected by company policy, precedent, risk management procedures, the PR department’s credibility with management, and their own professional judgment.
Depending on the internal politics of your organization, the pragmatic approach to high-cost, unforeseen budget items is to put the onus of funding back to the operational areas they most relate to, or to corporate management if the activities are more at an organizational level. If insufficient provision is committed by senior decision makers to such budget items, make sure you document your concern about this, so if an unpleasant, costly issue arises, the fingers can’t be pointed at you for lack of thought.
Decisions on allocating costs
In general, the components of communication budgets can be divided into (1) staff and administrative costs, and (2) program or operational costs. The operational part of a corporate PR budget can be segmented into types of activity, eg sponsorship. However, it would be equally valid to allocate each sponsorship project under the heading of a strategic program of activity, eg program to improve the corporate image of the organization among customers, government and corporate decision makers. In this example it would join other activities such as marketing communication activities, hospitality, production of information kits etc under the one heading of ‘corporate image program’ or ‘stakeholder relations program’, etc.
On the other hand, it can be difficult to allocate costs simply to one program or another. For example, photography of an event is usually taken for several possible uses – an initial main use, but also for various other purposes, i.e. to include in the annual report, website, brochures, posters, publications, or social media like Instagram, which are in different programs. However, the photographs may be suitable for some uses and not others, so to allocate the cost of photographing one event to one program or to split it into several programs is a little arbitrary and messy. It is simpler to put all photography under the heading ‘photography’. This makes it easier to know total photography spending and would perhaps enable a master contract with a photographer to be arranged to save costs rather than having photography split into various separate programs.
Negotiate budgets for shared activities
As a PR manager, you need to consider the budgeting responsibilities for some of the grey areas that don’t quite fall into mainstream PR. Often the PR department will take responsibility for some activity only because no other department owns it. For instance, sponsorship can be handled by either the marketing area or PR area in most organizations. However, if there isn’t a marketing department, then the PR function handles the activity.
Does some marketing support activity fall into marketing or into marketing communication, which is a PR responsibility? Is the PR department responsible for a direct mailing campaign? These types of activities have staff implications, if not budgeting implications. If the PR department is merely providing a support activity to another department, then the production costs etc have to be accepted by the other area. It always pays, therefore, to be quite clear in the initial discussions about such activities as to who foots the bill. A cost code should be requested from the other area that has the prime responsibility for the activity.
Taking account of the above factors should help you manage your annual budgeting process more effectively.