Ah, Budgeting! It’s one of those habits that we all SHOULD have but sometimes (due to many reasons) we don’t tend to it. Some may call it pure laziness but we do have a solid reason behind that. Because it’s really difficult to estimate accurately what the expenses will be every month. Just take a peek into your monthly statement, we swear, you will be so petrified that Freddy Kruger will look prettier than Cinderella.
This is why the 50-30-20 rule was created. It is one of the most popular budgeting technique that was created by Sen. Elizabeth Warren, a former professor and Democratic from Massachusetts, with her daughter Amelia Warren Tyagi, in their book,” All Your Worth: The Ultimate Lifetime Money Plan,” This technique was created to balance household finances and get ahead in our personal lives. But how is it going to be helpful in the business sector.
This is what we are going to explore today in this blog.
What is the 50/30/20 Rule?
This rule originated as a personal finance framework designed to simplify budgeting by dividing income into 3 primary categories: Needs, Wants and Savings or Investments.
The goal is pretty straightforward. It is to ensure that all essential expenses are covered while still having room for non-essentials and financial security.
Let’s break this down even further,
- 50% Needs: It consists of essential expenses necessary for day-to-day survival, This includes personal finance, rent, groceries, utilities, transportation, insurance and other unavoidable bills.
- 30% Wants: It consists of non- essential expenses that bring in the “luxurious” aspect of lifestyle. This can include dining out, entertainment, hobbies and other miscellaneous purchases.
- 20% Savings/Investments: It consists of savings and investments that focuses on financial security. This includes emergency funds, retirement savings, debt repayment and long term investments.
Now how does it work for business,
Let’s break it down!
Framework Breakdown:
50% Needs: In business, this will cover the fundamental expenses that will keep the doors open and continue operations. Here is what it entails:
- Salaries and Wages: This includes wages for operational, administrative, technical staffs and any outsourced labor that are extremely vital for daily operations.
- Rent and Utilities: This includes physical overheads associated with office spaces, manufacturing facilities or warehouses, electricity, water, internet and telecommunications.
- Technology and Infrastructure: This includes SaaS tools, cloud storage, CRM systems, ERP tools and cybersecurity measures.
- Licensing and Compliance: This include licensing fees, legal feels and any other costs that comes with maintaining industry regulations (Healthcare, Finance or Manufacturing)
- Insurance and Taxes: This includes business insurance policies such as liability, property taxes and worker’s compensation.
30% Growth: In business context, this means costs that are directed towards Growth and Innovation. These are the areas where the company can choose to allocate funds for expansion, increasing market share or gaining competitive edge. Here is what it entails:
- Marketing and Advertising: For any company to grow it is really important to invest in marketing efforts. This includes social media, content creation and brand campaigns.
- Research and Development: This can include the cost that will go in developing new products, improving existing services and exploring product innovations.
- Customer Acquisition and Retention: Its really important to allocate funds for gaining new clients and retaining existing ones. This might include investing in CRM software, customer success initiatives, loyalty programs and personalized customer experience.
- Employee Development and Training: Supporting employee development with training programs, certification courses and skills development aligns with immediate needs and future growth.
20% Future Security: This safeguards the business against uncertainty while providing funds for long term financial health. This might entail:
- Cash Reserves: Lets call it a financial cushion that can cover unexpected costs, downturns and temporary revenue losses. These “Rainy Day” funds can keep the business stable during slow periods and unforeseen economic challenges.
- Debt Repayment: If your business has loans or credits, it’s really important to set aside funds for debt repayment and to maintain a balance sheet. This will reduce interest expenses over time and enhance the company’s credit profile.
- Strategic Investments: This includes funding new business ventures, mergers or acquisitions, expanding facilities or investing in technology that promises long term cost savings.
- Retirement and Contingency Funds: Sometimes overlooked in planning, retirement funds of executives and key stakeholders is an essential piece of the planning puzzle. This helps in smooth leadership transition or unexpected shifts occur in the organization.
Implementation of The Framework:
Step 1: The first step in implementing the framework is to gain clear view of your company’s financial obligations and priorities. As you have seen above how the breakdown happens, it is important to adhere to it. Here are some of the pro tips to remember:
50% – Create a detailed list of recurring and fixed expenses that fall under Essentials. For non fixed costs such as utilities, take an average out of the expense from the past few months to get an approximate monthly figure.
30% – Identify growth initiatives that align with your company’s goals. Rank these initiatives by priority to ensure that your investments in growth provide a higher return on investment.
20% – Assign a portion of your revenue to savings and investments account each month. It will be really helpful to set up automated transfers if possible, so funds are consistently added to these reserves.
Step 2: Once you have categorised expenses, regular audits are immensely crucial to make sure you are staying within the allocated framework. Audits reveals areas where you may be overspending or underspending and help identify potential adjustments to keep the budget aligned with business goals.
Monthly and/or Quarterly Audits: Its important to schedule regular reviews of your financials. A monthly audit can be ideal if your industry has rapidly changing expenses, while a quarterly audit can work if the spending is generally consistent. Keep an eye on trends that can indicate changing operational costs. For example: If the utility costs are rising or technology fees are increasing , note these shifts for budget adjustments. If one category constantly has a surplus, the consider reallocating that excess to another category that might need it.
When making the allocation decision, involve all the department heads or managers in the auditing process to get a full picture of spending.
The percentage of spending might shift temporarily. For example, if the growth is essential in a competitive market , you have to increase growth opportunities to 38% and decrease future security by 12%
Step 3: To keep the framework from crashing and burning, it’s really important to use tools that can simplify the budgeting process by automating allocations and providing real time tracking. This way, you will always know where your business stands financially. A reliable budgeting tool can help categorising expenses, generate financial reports and monitoring budget allocations.
Speaking of tools, it’s important to have features such as expense tracking, categorisation, report generation and automatic allocations. Most of these tools also provide real time analytics which are useful for staying on top of category spending. Some tools allow you to set alerts if spending exceeds a certain percentage.
Advantage:
The 50/30/20 rule provides a foundational framework that helps B2B companies achieve more strategic, balanced budgeting. By dividing expenses into core categories, businesses can enhance financial transparency, growth potential, and resilience. Here is its advantage:
Financial Clarity:
Clear Allocation of Resources: This foundation provides a structural outline of how funds should be distributed. It will give a clear understanding of where each dollar is allocated. For example: Business can differentiate between essential operational expenses, such as utilities, salaries etc., and growth related investments, which can be marketing, R&D.
No Financial Ambiguity: Now that all the expenses are categorised into different pockets, this will help the company avoid financial ambiguity. When looked from afar, decision makers can evaluate budget allocations more effectively, pinpointing areas where spending might be too high or too low. Transparency in financial reporting is achieved which is useful for investors, stakeholders and internal teams
Balanced Growth:
Prevention of Resource Drain:
The framework prevents companies from overextending in one category at the expense of others. For example: If the company is spending excessively on growth activities such as product development or marketing, without covering core operational needs, it will lead to cash flow issues and affect the overall stability.
Sustained Expansion:
Now let’s take our previous example, with a what if scenario: If a company invest in marketing and new product development WITHOUT compromising its ability to maintain core operations and financial health, it can see a sustainable growth without compromising the integrity of the revenue. This is only possible if the framework is followed with absolute discipline.
Increased Savings and Resilience
Preparation for Economic Downturns: Your business might be on top of the game, getting more clients, hiring non stop and there is no looking back but what if things take a huge downturn? In such cases, that “20%” you must have allocated will come in handy. This is especially valuable for companies which often face fluctuating demand due to industry cycles or economic challenges.
Leveraging Opportunities: With a portion of the budget consistently allocated for future security, companies can seize the emerging opportunities when it’s presented. It can be acquiring a competitor, entering a new market or investing in an innovative product. This can all be achieved without disrupting the financial stability.
Challenges:
This whole framework looks straightforward, there cannot be any challenges right? Right?
Unfortunately every coin has a flip side to it. Let’s look at the “Tail” end of this framework
1- As a business grows, the financial needs and budget can change. It will require a different allocation strategy. For example: A startup might initially spend more on growth activities (Marketing and customer acquisition) and less on savings, whereas a bigger corporation might need to focus more on savings and operational efficiency.
2- Larger companies typically have more complex financial structures. This makes it difficult to categorize expenses neatly into three buckets. For example: A company might need separate categories for compliance, legal fees and strategic partnerships. This can make a strict framework like ours seem impractical and require a more nuanced approach as the company scales.
3- Different sectors have unique budgetary requirements which can make it difficult to allocate them into our simple framework. For Example: The technology company might allocate more to R&D and employee training while a manufacturing business might prioritize raw materials. facility maintenance and supply chain management.
4- In industries like healthcare or manufacturing, there are regulatory compliance and operational costs that can be significantly higher. This necessitates a larger percentage of budget for essentials which can potentially reduce the allocation for growth and future security. Thus companies in high cost industries may need to modify the rule to better align with their core expenses.
5- Certain companies necessitates agile budgeting that adjusts to marketing dynamics. Lets say, a competitor releases a groundbreaking product, the company might need to immediately reallocate funds to R&D or marketing to catch up.
6- Some technology companies operating in cyclical industries might need to adapt their budgets to seasonality or economic shifts. In a recession, the business might prioritize essentials and savings over growth activities while a booming economy might encourage a higher allocation toward innovation and customer acquisition.
Conclusion:
For B2B businesses looking to expand sustainably, the 50/30/20 rule provides a sensible and well-rounded strategy. Another important advantage of the 50/30/20 guideline for B2B businesses is its flexibility. Because of the model’s ease of use, businesses of all sizes and sectors may easily adjust the ratios as necessary. This flexibility guarantees that companies may adjust to changing market conditions, meet industry-specific demands, and modify their financial plans to meet both immediate and long-term objectives.
