Summer has just begun but many publishers are already planning their 2008 budgets. To make sure you set reasonable, healthy goals for revenue and costs, you have to have a process, not something scribbled on a napkin or knocked off in an all-day meeting. Robert Hardy, CFO of Endurance Business Media and Dan Kinnaman, president and publisher of Professional Media Group, share the steps they’ve taken to improve their budgeting process.

The first advice is simple: Start early. Endurance will begin planning for 2008 in September, with the goal of a final budget being completed by November and board approval by December. Professional Media Group will begin its 2008 budget planning in the next month or so.

Inheriting the Budget
One of the biggest challenges, especially for small publishers, is inheriting a budget that has evolved over the years under different managers, and often, different owners. "Our budget had become a document that the accounting department took and added a small increase relative to what they hoped the revenue growth would be each year," says Kinnaman. "That’s not a budget, that’s a way to give people spending limits. In a changing industry like ours, you don’t want spending limits. What you spent last year may not be representative of what you need this year."

Two years ago, Kinnaman instituted zero-based budgeting, where managers start at zero and determine how they spend and what they need to spend. "You can look at line items and say, ムGee, looks like we’re spending more here, and less there,’ but until you look at the details, you don’t really know," Kinnaman says. "We needed to get things in order so we know what we’re talking about when we say, ‘editorial freelance.’ To be honest, it’s not always so clean for a company. They may say, ムWe’ve got a consultant, throw him under freelancers.’ The first step is to take a clean look at your accounts. Then sit down with your managers, obviously you’re not going to spend zero, but try to only spend what you’re required to spend. What do you think you’ll need in 2008?"

Endurance kicks off its planning process by gathering market information. "We try to determine how much market share we have, and then set internal goals for sales including organic growth with our existing customer base," says Hardy. "Then we may factor in a rate increase."

Who’s Invited to the Budget Party?
Once the sole province of the CEO, CFO and a few other top executives, the budget planning process now needs input from many levels. Involving the manager who makes day-to-day decisions is critical. "Honestly, I could do a budget for the whole company in about 30 days and it would probably be pretty close," says Hardy. "But if there’s no buy-in, it’s just, ムWell, this is what a finance guy said.’ Definitely involve the guys who are responsible for it. Accountability and responsibility go hand in hand."

With each product, Endurance involves the magazine manager and the president of that division;who oversee 25 magazines. As CFO, Hardy is obviously involved, as are support staff from finance who assemble historical information. From there, the budget goes before the CEO for approval. "As we go through the process and wait for revises, the process continues to move forward on the expense side," says Hardy. "You need to take the budgeting process seriously. Revenue and expense-wise, you won’t know what new money you may have to invest in new ways of distribution or new products. Publishers also really need to understand their revenue and cost structures, because if they are not achieving revenue growth, they need to come back and make adjustments on the cost side."

No Hand-Holding
Emphasize personal responsibility for the budget. "As someone who didn’t have a lot of confidence in the budget process I inherited, I felt like people were asking for a spending plan;whatever number I said, that’s what they’d spend up to," says Kinnaman. "I think if anything was a wise decision, it was that I pretty staunchly refused to produce a budget. I said, ‘I don’t have a budget, reduce your costs.’ There was some anger and some confusion;people asked, ‘How do we know what to spend if we don’t have a budget?’ You know what to spend because you run your department. You know what it costs, now ask can we produce the same quality and spend less?"

Identify the business process behind the numbers. "We asked why we needed to spend X on freelance," says Kinnaman. "There was one place in our custom publishing group where assignments were always being made late. And if the writer wanted $1.25 a word, not 75 cents a word, the editor in charge of the project would say, ‘Okay, I need it by Monday, so I’ll do it.’ We really had to look at how money was being spent and not say, ‘Gee, revenues are forecast to go up 10 percent, expenses should rise 5 percent,’ and then give everyone their budgets. It took a good deal of doing, but now we’ll have confidence in the budgets we put together for 2008."

Assessing New Revenue Streams
As revenue streams rapidly shift from print to other outlets, publishers are faced with the challenge of budgeting for new and unproven products. "We may also lay out new products and services we’re going to roll out, not every member of our existing customer base will pick them up," says Hardy. "With stuff we’re offering online, like video, we know that lower-end customers probably are not going to spend money there, so we look at the upper-end customers. A lot of those guys will spend a larger percentage of money on that."

If it can, Endurance will test these new products and services in the year prior to rolling them out to get feedback on how they worked operationally, as well as get any pushback from customers.

New products should be assessed for cost and revenue. "When we launch something new, we want it to be profitable out of gate," says Kinnaman. "We need cost containment, you know, you have to make an investment but you need to know where revenue is coming from."

Professional Media Group approached Webinars cautiously. "We debated whether there’s any market there," says Kinnaman. "We did our first Web seminar three years ago. We paid the market rate and charged the sponsor a little more than that, and essentially broke even. However, it proved people would register for it and there was interest. We said, ムLet’s figure out a way to do Web seminars and lower costs.’ We already had the revenue, could we do better on the cost side?"

Growing Revenue, Reducing Costs
Ultimately, even as publishers rush to launch new services such as video, the emphasis should be to grow revenue but not have costs increase as a percentage of that revenue. "I want to budget more for online, more for events, but then a fundamental principle comes in, we want each expense to account for a smaller percentage of revenue each year," says Kinnaman. "That doesn’t mean expenses won’t grow, but they shouldn’t be as much a percentage of revenue."

Tips for Avoiding Budget Headaches

  1. Start early. The budget process will go through several revisions. The more time you give yourself, the less chance of any nasty surprises next year.
  2. Give people responsibility for their budgets. It’s one thing playing with house money but it’s quite different when revenue goals and costs have a direct impact on compensation.
  3. Define specific functions. Come budgeting time, managers will seek to cram functions that are not easily defined into applicable categories. This obfuscates the process next time around.