Knowing how to budget effectively is one of the things that separates businesses that thrive under pressure from those that scrape by. If you're ready to make sure your business is in the first group, we can help.
Our advice? Start by understanding value proposition budgeting (VPB).
VPB is a method of analyzing and forecasting future outcomes, and it's especially useful when restructuring your financial procedures. The goal of VPB is to determine the areas of your business that offer the most return—whether you track it manually or with the help of business budgeting software. This way, you can restructure your financial practices and use your cash more wisely.
With multiple budgeting methods to choose from, like zero-based and activity-based budgeting, it can be challenging to find the right system for your business. At Relay, our mission is to improve the rate of small business success by giving you full visibility into your finances and control over your cash flow. That's why we put together an entire series about business budgeting.
Ready to get started? Let's dig into everything you need to know about value proposition budgeting.
What is value proposition budgeting?
Value proposition budgeting is a method that examines each of a business's expenses for a given fiscal period and asks a single question of every line item: is the value this expense delivers worth its cost to the business, its staff, or its customers? At its core, value proposition budgeting aims to find out where a business should spend money based on how much value each expense brings in.
But let's take a minute to discuss what "value" actually means. Since value is subjective, it's often measured in different ways. Consider the best way to achieve profitability for your business. Is it through product development? Customer service? Something else altogether?
Value proposition budgeting illustration: Amazon vs. Apple
Let's look at how some of the most well-known companies prioritize their expenses based on value. For example, Amazon offers competitive shipping options—a major advantage for its business—which means it likely places a lot of value on its shipping and logistics expenses. On the other hand, the visual aesthetic of Amazon's website probably doesn't have as much of an impact on the company's bottom line, which is likely reflected in its design budget. However, design is a core brand pillar for a company like Apple. This likely means design is a key value for the business, and its budget undoubtedly reflects that.
So, what does this all suggest? Simply put, financial statements alone don't always show how certain investments lead to higher profits. Instead, you need to figure out the highest value for your business holistically—beyond just studying your financial statements.
What a value proposition budget includes
A value proposition budget should include revenue and expense estimates based on historical results. You can then use this data to make profitable decisions in the future. For example, if you know an expense brought in a lot of value previously, you may want to continue investing in it.
Since financial forecasting is a priority—or, at least, it should be—it's essential to run accurate budgets to ensure consistent growth. Say your business is in a crisis. You'll need to get strict about where to spend your money to ensure profitability. VPB is a strong approach here, because it helps prioritize the most important expenses. It keeps you focused, helps you eliminate unnecessary spending, and drives growth.
How does value proposition budgeting compare to other budgeting methods?
Value proposition budgeting is often confused with other methods, but it's distinct: it keeps your existing budget lines and interrogates each one's value-for-cost, rather than rebuilding from zero or ranking whole programs. Here's how it compares to the methods it's most often mixed up with:
Method | Core idea | How it differs from VPB |
|---|---|---|
Value proposition budgeting | Every line item must justify its value against its cost | — |
[Zero-based budgeting](https://corporatefinanceinstitute.com/resources/fpa/zero-based-budgeting/) | Build the budget from $0 each cycle; justify every expense from scratch | ZBB resets to zero and re-justifies existence; VPB keeps the structure and weighs value vs. cost |
[Priority-based budgeting](https://envisio.com/blog/the-advantages-and-disadvantages-of-priority-based-budgeting/) | Fund programs by how well they advance top-ranked organizational goals | PBB ranks whole programs against goals; VPB scores individual line items on value-for-cost |
[Values-based budgeting](https://www.sofi.com/learn/content/values-based-budgeting-explained/) | Align spending with personal or company priorities | A personal-finance method aligned to beliefs; VPB is a business method scored on economic value |
[Incremental budgeting](https://corporatefinanceinstitute.com/resources/fpa/incremental-budgeting/) | Use last period's budget as the baseline and adjust at the margin | Incremental assumes existing lines are justified; VPB makes each line re-earn its place |
[Activity-based budgeting](https://corporatefinanceinstitute.com/resources/fpa/activity-based-budgeting/) | Budget costs from the activities that drive them | ABB derives spend from activity volume; VPB judges spend by delivered value |
The takeaway: value proposition budgeting is not the same as priority-based or values-based budgeting, even though the terms are sometimes used loosely. If you want the lightest-touch method that still forces discipline, VPB sits between incremental (too loose) and zero-based (more rigorous, but heavier to run).
How value proposition budgeting works
Ever wish you could take back an expense that hurt your cash flow? Now you can prevent those incidents from happening in the first place. At a basic level, VPB works by prioritizing the expenses that bring in the most financial return and eliminating expenses that don't provide significant value.
Within a value proposition budgeting process, there are three basic steps to follow:
Determine your company's vision, goals, and ideal results
Identify the programs, products, and services you spend capital on
Allocate resources to the programs that drive the highest value
Sounds simple, right? Of course, when you actually sit down to do this, you realize that determining the value of each expense is a challenge. To implement the three VPB steps, consider the what, why, and how of each expense. Ask yourself:
What value (monetary, customer-driven, or other) are we getting in return for this expense?
Why is our spending up in this category?
How will this expense contribute to our operating profit?
These questions emphasize how a given expense will result in value—hence the purpose of value proposition budgeting. But don't forget to consider your business's goals when measuring value. The importance of a given expense will be completely unique for each business.
> Tip: To take your budgeting method one step further, learn how to use the envelope budgeting system to ensure you don't spend more than what you earn.
Value proposition budgeting example
Let's walk through an example of value proposition budgeting in action.
For example: You own a product-based company that sells bicycles. This year, you decided that attracting new customers to your store is the most important measure of value to increase net profit. But you recently ran a profit and loss report and noticed that your net profit was down.
You need to get to the bottom of the issue, so you use the value proposition budget method and list out all of the different expenses that you believe drove value in your business.
Previous month | Current month |
|---|---|
Rent: $2,500 | Rent: $2,500 |
Payroll: $3,500 | Payroll: $3,500 |
Supplies: $500 | Supplies: $500 |
Marketing: $2,500 | Marketing: $500 |
Equipment: $1,000 | Equipment: $1,000 |
Total profit: $30,000 | Total profit: $20,000 |
Net profit: $20,000 | Net profit: $12,000 |
After looking into this month's expenses, you realize that profit and marketing spend were both down. Since you know you just ended a marketing campaign that saw a high return, you realize you'll need to continue investing in marketing expenses to see growth.
In this example, you were able to identify the importance of marketing expenses because you decided that attracting new customers to your store was the best way to measure value. Without analyzing the value and priority of the expense, you may have continued to see a decline in profit.
Revenue vs. profit: the difference in plain English
The advantages and disadvantages of value proposition budgeting
Value proposition budgeting is best suited for businesses that need to restructure their finances and reduce excess spending. That focus matters: rising costs and uneven cash flow are among the top financial challenges small businesses report, according to the Federal Reserve's Small Business Credit Survey. To determine if value proposition budgeting is right for you, consider the top pros and cons of VPB:
Pros of value proposition budgeting:
You can quickly eliminate excess spending.
VPB makes it easy to see where your cash flow is going.
It lets you focus spending on the areas you find have the highest value.
When performed frequently, it provides greater clarity around expenses.
With greater clarity, you can more easily prioritize future expenses.
Cons of value proposition budgeting:
Expense value can be challenging to gauge, since you can't quantify everything by a dollar amount.
The value of an expense could change depending on industry trends.
Focusing only on existing expenses could cause you to miss valuable opportunities you're not currently pursuing.
How to stick to your value proposition budget
With today's competitive landscape and fast-paced markets, it's essential for business owners to develop smarter ways to budget and forecast for the future. Having a baseline budgeting plan is an excellent start. But sticking to it? That's an entirely different story.
As your business grows, you'll also grow incredibly busy. It's not enough to set it and forget it. Instead, you'll need a money management platform in place to continually reevaluate and prioritize your business expenses so you stick to your budget and maintain adequate cash flow. You can streamline this process by:
Determining a budgeting schedule: To keep up with your value proposition budget, you'll need to continually re-evaluate your expenses. How often depends on the type of business you own, such as service-based vs. product-based, your expense list, and your goals. When in doubt, it's better to be on top of your expenses and budget more frequently. Try monthly or quarterly budgeting to start, then adjust as you find what works.
Tracking where your cash flow is going: One of the best ways to simplify budgeting is to keep track of your transactions. You can do this by setting up a bank feed that automatically imports transactions from your bank account to your accounting software. With the VPB method, having an organized list of your transactions at your fingertips makes the budgeting process much quicker.
Understanding your transactions: It's not enough to just track your transactions; it's also essential to understand and interpret them. Expenses can stack up, and it can become increasingly difficult to manage cash flow. Using a tool that auto-categorizes your expenses creates visibility into the different types of expenses your business has, letting you see spending trends more easily.
By following these steps, you'll be able to not just set up a value proposition budget, but ensure you stick to it. As you get used to your budgeting process (and we promise you will), you can make adjustments to fit your business's needs and accurately plan for the future.
Creating a budget that works for you
Ultimately, the right budgeting method for your business is up to you and the goals you set. As your business grows and changes, so will your goals and objectives. There's no one-size-fits-all approach, but with a solid understanding of the different budgeting methods, you'll be able to find one that's unique to your pain points.
At Relay, we strive to educate and support business owners when it comes to the complexities of business banking. With a banking and money management platform like Relay, you can better categorize expenses with separate checking accounts (like one for taxes and one for payroll) and stick to your budget more easily.
Don't wait to start budgeting. If you're looking for an online banking and money management platform that helps you implement a value proposition budget, try Relay today.
Frequently asked questions
Is value proposition budgeting the same as value-based budgeting?
No. Value proposition budgeting is a business method that scores each budget line on the value it delivers relative to its cost. Value-based (or values-based) budgeting is usually a personal-finance approach that aligns spending with your individual priorities or beliefs.
Is value proposition budgeting the same as priority-based budgeting?
Not exactly. The terms are sometimes used interchangeably, but priority-based budgeting ranks whole programs against an organization's top goals, while value proposition budgeting evaluates individual line items on value-for-cost.
What's the difference between value proposition budgeting and zero-based budgeting?
Zero-based budgeting rebuilds the budget from $0 every cycle, requiring every expense to be justified from scratch. Value proposition budgeting keeps your existing budget structure and asks whether each line's value beats its cost—lighter to run, but less exhaustive.
Who should use value proposition budgeting?
It's best for businesses that need to restructure spending or cut excess without rebuilding their entire budget—especially when cash is tight and you need to focus dollars on the expenses that drive the most value.
