How in the world can you know how much to invest in something before you know what you hope to get out of it? Articulate the value of an initiative first, conservatively. Then, decide how much to allocate based on the expected value. And, if the value doesn’t surpass the potential cost, why bother with the initiative?
Some people suggest it’s impossible to determine value in advance. That’s malarkey. Value is what something should be worth. What something should be worth is based on why you want to do it. So if you don’t know what something’s worth, that means you don’t know why you’re doing it. I’m not suggesting you’ll know value to a high degree of accuracy, but you should have a ballpark and you should see substantial margins based on potential cost. If you don’t, it’s reckless to proceed.
Here’s a simple formula for budgeting:
- What do we want to do? How will the business be improved as a result?
- Why dod we want to do it? What should it be worth in the short, mid and long term?
- How much is it likely to cost?
- What’s the ratio between value and cost? If it’s not at least 2 to 1, why bother? And the greater the uncertainty in cost, the more likely you should shoot for a 5 to 1 or 10 to 1 ratio.
How can you go wrong with such a large margin for error?