Delegate spending with approval limits, department budgets and cards

1. The constraint and what graduates it

Finance is how you report and manage your money.

Item	At this stage
The constraint	Your team starts spending your money stupidly. You have kind of delegated a certain level of spending, because you are spending all over the place to grow and cannot approve every single thing spent every day
To graduate	Quarterly expense management; budgets by department; cards with limits for the leaders, and sometimes for managers, for specific things they can spend on; and you can pre-approve regular spending on set things up to a set level
Added on top, in one practice here	Insurance coverage, and fancier projections

2. Write the spending procedure

By now so many people have their hands in the pot. You have executives, then directors, and they all need to spend money to grow their departments in some way: technology, things for their team, employee swag, flights and hotels, equipment. You do not want to be the bottleneck who approves or denies every single expense. Instead, take everything in your head about how you make financial decisions and put it into a standard operating procedure, a written process, to protect the business from risk.

This is just an example of one business's procedure. What it holds:

• Who. The people, by name and position.
• What each oversees. The areas in which each can make financial decisions.
• The limit. Each can spend up to $10,000 without approval from the one who set the limits, on set things in set categories.
• A card each. They all have credit cards, which they can use to spend up to $10,000.
• What the money is for. A document explaining what that $10,000 can be spent on.
• Above the limit. A process to follow to spend more than $10,000, which gets it approved by a named approver.

That is how expenses are managed: the cards tie to the written procedure.

3. Budget each department from what it really spends

On the other side, use the same procedure to set a budget for each department. It is hard to create a budget when you do not know what people spend, and often people try to set one before they see how much it takes to run the department.

The order used in one practice here: get the departments in place; look at what is being spent; prune it, so that you stop spending on the wrong things and keep spending on the right ones; then use that to inform a budget. Doing this is a project of a couple of days, not a huge lift, and you will almost invariably save yourself a ton of money, because you find out how much is being spent.

Some problems are managed, not solved. Some problems recur and never get solved. Expenses will always need managing, since they tend to grow. So will focus: opportunities sprout like weeds and have to be weeded out, so that all the water and nutrition go to the one tree that matters. Neither will ever be solved; you only manage it.

Give each leader a budget now. Right off the top, assign the managers, or whoever leads each department, a specific budget. The reason given is where this goes: in a level or two, the leaders of these departments will be running what amounts to their own small company, with their own small profit-and-loss statement. That is not the case yet.

4. Let marketing spend against its return

In one practice here, one addition is to let marketing spend as much as it wants, as long as the spend stays within set key performance indicators, measures of profitability. Finance chiefs coming in to interview have asked how marketing budgets are thought about, a question that always grated. The answer offered: as long as putting $1 in brings more than $1 back, the limit is to spend as much as you can until something else breaks. Over a whole career in one practice here, marketing has typically not been what limited growth, it is said; it has always had to be throttled because other demands of the business were the constraint.

5. Cards: limits, the program, the rewards

Keep card limits apart from budgets. Card limits limit your downside as an owner. You give people the budget, but the preference described is to have a hard limit on the card as well, and the two need not be the same figure. If they were, every request for a higher spend would mean calling the card company to raise the limit, which is a pain. A level of trust has to be there.

Get a really good card program. In a good one you can set, person by person, how much each member of the team can spend on a card. For marketing you could make it millions of dollars a month, depending on your profit-and-loss statement and whether the business can support it. Another department, where someone only needs to spend $115,000 a month (the amount as spoken; section 10), can be held to that. So do not just take the card program your bank offers, because often those are poor; go with a custom card program.

Look at flexibility as one of the main things. Most of the time, in this view, what owners find frustrating about these programs is that they are not flexible enough: you cannot raise the marketing department's limit without raising every other department's, or it takes a ton of manual approvals to raise a limit or move money from one card to another.

Match rewards to where the money goes. Look at where your money goes and pick cards that give points or rewards for it. If you do a lot of travel, there is probably a lot of entertainment and travel spend that a card will give you double or triple points on. It sounds small, but when you are spending millions of dollars a year, 3 percent adds up; sometimes it adds up to a full-time role. It is put in the bucket of decisions made once that keep paying: not a lot, but you make it once and the returns keep coming.

6. Projections and the operating plan

Typically, getting fancier projections means becoming a little more professional, and getting a full-time person is usually required at this point to do it; that usually tends to happen at this stage anyway.

What the projections cover. Not only what the business is going to grow into, but what operating expenses will be over the next 12 months. At this point people need to know how much they can spend in their department.

A budget gives the team autonomy. Some people, you find, spend too much, but a lot of people do not spend enough: they do not invest in their departments because there is no budget. So an operating plan with projections that leads to a budget is, in the view here, how you give the team autonomy to invest in their own teams, by giving them a set amount of money to spend.

Overspenders and underspenders. However much is said about overspending, and it does happen sometimes, a lot of people underspend because fear of spending money holds them back; at least, that is where the best teammates tend to land.

• Some spend far too much, as though company money were free. It is not; it is still the owner's money, the same money as if the owner bought them dinner.
• Others would not spend $500, while spending 10 hours a week on a problem that $500 could have solved.

There are very rarely people in the middle. Rein the first kind in, and encourage the second: ask how many dollars it is costing you not to have the thing, and make a dollars-and-cents call on it.

Leaders who had a budget before need one. A lot of the people you are recruiting now, especially directors and executives, come from companies where they were given a budget. Without one, they do not really know how to spend: money is a resource to them, and if they do not know how much of it they have, it is hard for them to make decisions. They will solve problems relative to the budget they have. With a $50,000 budget they might be able to solve something significantly better than with 10. Being creative within constraints is welcome here, but a different budget makes you think of different solutions, and sometimes some solutions are better: often, buy nice or buy twice.

7. Insurance

As you get bigger you will have more exposure. Cyber cover came up in some of the earlier stages, but you will probably have exposures unique to your business that you will want to insure against. As exposure increases, the preference described is to limit downside. What to insure, and how to decide, is on SOP 156 — Insure against what could kill the business.

8. The function in one line

It starts with the team spending your money really stupidly. Then come quarterly expense management, budgets by department, cards with limits for the directors and managers, an expense approval process, added insurance coverage, and fancier projections. The list grows longer as the company grows.

9. Where this sits

• How the money side was set up at each earlier stage, from a first business account through the first financial statements: SOP 150 — Set up the finances stage by stage.
• At ten to nineteen people, a budget that saves for the big costs coming, and a forecast from the run rate: SOP 151 — Budget and forecast.
• Seeing what each department costs against what it returns, at twenty to forty-nine people: SOP 154 — Get granular financial data.
• A separate, ring-fenced sum for advertising tests you are willing to lose: SOP 42, section 6.

10. What this page does not decide for you

• What quarterly expense management involves. Not established on this page. The quarterly expense cleanse run at the next stage is SOP 171, section 2.
• Who the named approver above the limit is. Not established on this page.
• The right limit for your business. The $10,000 is one business's limit, given as an example. This page gives no figure for a limit in general.
• The card limit for a smaller department. The amount given is $115,000 a month, set against millions for marketing. Not established on this page.
• Which card program to use. No program is named. Not established on this page.

11. What this page does not cover

Tax and accounting standards are not covered on this page.