Your ERP was built to produce a trial balance. Not to run your business.

Revenue by region by rep. Token spend per employee. Last year restated under the new org chart.

Your ERP can't answer any of them. It reduces every transaction to an amount, an account, and fields someone picked up front. So FP&A rebuilds a shadow ledger in a data warehouse or works out of exports.

Numeric's Financial Data Platform is built reporting first - storing the original business event in a data lake with every contract, dimension, and amendment connected. Accounting is a controlled, auditable layer on top.

An ERP replacement that finally helps you run your business. 

Not sure if you know about my passion project, but I write a second newsletter for PE backed finance leaders. It’s called Looking for Leverage.

If your cap table has names on it like Vista Equity, Thoma Bravo, KKR, or Warburg Pincus, this newsletter is for you.

The last three topics we’ve covered:

Who picks the first number? It's the age old standoff.

The budgeting cycle starts with the CEO and CFO, who discuss high level revenue, productivity, and profitability targets to frame up the mission.

This is the tops down target setting.

Then it extends to leaders from Sales, Marketing, Customer Success, Product, Engineering, Finance and People.

That's the bottoms up budgeting we'll get to later.

And finally, it gets rolled up and approved by your board.

Tops down comes down to three targets.

The best cadence I've heard comes from Dominic Phillips, CFO of Samsara, a roughly 30% grower with 20% EBITDA margins and one of the prettier P&Ls in software. He learned to forecast under Mike Scarpelli at ServiceNow, serving as the FP&A leader to one of the great tech CFOs.

Dominic then walked into Samsara as CFO, well past $100M in revenue, only to find there was no annual planning process. While the company was enjoying massive commercial success, it had no budget versus actuals at the end of the quarter, and barely any communication with the business functions. Over a few years, on their way to going public, he built the whole budgeting process.

Here's how he sets the top.

Samsara starts with a 1,000 day strategy, which is what most companies call their three year plan. This contemplates larger net new initiatives, like which countries to be in, whether to add product or vertical specialists, and the three year R&D roadmap.

Once they feel good about it, they lop off the last two years and go deep on the next one.

To kick off the one-year plan, they set operating principles. In Dominic's words:

I call these the guardrails.

Mine usually look something like this:

Other things you might put an initial rail on:

They all come off your target P&L (you should have one in a drawer somewhere) and they're the first line in the sand for what you'll validate in the bottoms up build.

The order matters. Samsara sets top line first, through a heavy triangulation between finance, sales, and R&D, benchmarked against what good looks like for public companies their size.

Then they set profitability targets.

On timing, Samsara wants a solid draft done by the end of Q3 and uses Q4 to make tweaks as new information lands.

While a smaller private company may not have that line of sight or ability to hustle, it’s an aspirational target.

Planning, at its core, is putting capital to its best marginal use.

Once you have the envelope, the tops down job is deciding roughly how it splits across the big functions before anyone builds underneath it.

Samsara puts the most capital behind sales and marketing, which is what's fueled multiple years of 30%+ growth at scale.

R&D is next, high teens to 20% of revenue, and inside it they get specific about what the dollars should build.

The rest goes to G&A, the bucket that's provided them more and more leverage as they've scaled.

Before you copy that pie, Samsara is a sales-led company well past a billion in revenue, and the split you'd target at a Series B looks way different.

Early on a company’s org chart is almost all technical folks (engineers and product people) because if it weren't, there would be nothing to sell.

You hit an inflection point after some product market fit, usually around a Series B or C, and start hiring sales and marketing bodies fast. Past roughly $20M in ARR, sales headcount climbs until it rivals R&D.

How far it swings depends on how you sell. A product led company, where customers try before they buy and self serve with a credit card, keeps engineering heavy and leaves more room for R&D (Atlassian claims zero sales reps, which is a stretch, but you get it). Sell to the Oracles and Workdays of the world through a heavy enterprise motion and you need expensive reps plus a bench of implementation people, which drags the mix toward go-to-market.

A couple things hold roughly still regardless of size.

Both get out of whack during periods of building, when you're standing up core functions.

No matter how many times you do the math, there's only 100 points to go around.

How each function builds inside its slice is a bottoms up call.

Some of it is a legit rebuild from scratch, and some of it, in Dominic's words, just needs to roll forward, so you don't over-engineer it and run a process for the sake of the process instead of the outcome. That's the next chapter of this budgeting saga.

Finance works with each department leader to build a budget envelope comprised of direct and indirect costs.

Direct costs are labor: W2 employees, where cost per employee is salary plus on-target variable pay plus benefits based on location, and contractors.

Indirect costs are everything else people need to do their jobs: software and tooling, travel, learning and development, rent, IT, and office.

During the build, each leader brings a business case for three things:

Before any leader builds, FP&A arms them with their baseline costs from the past twelve months (e.g., September through September) to catch seasonality and the big annual purchases. Each one gets an Excel workbook, or their rollup in a planning tool like an Abacum or Adaptive Insights, plus a summary of spend across software, contractors, and headcount. That covers most of the attributable costs, with the exception of travel (which always gets overspent) and L&D (which always gets underspent).

The one thing I insist on is laying out existing software by vendor name when you give it to department leaders. Not everyone thinks the way FP&A folks do, and a leader needs to hear the name of the tool to connect the dollar to the use case: Salesforce for CRM, Jira for ticketing, Github for code repository.

Once a leader has their envelope, the question is how they build inside it.

The instinct is always to gross up:

“I spent $100 this year, we're growing X%, so I need Y next year.”

That's incremental thinking, and it assumes you need everything you already have, that all of it is already pointed at its best use, and that you learned nothing from actually living out last year's budget. Not likely.

The heavy-handed answer is zero-based budgeting, a full rebuild from a blank sheet. I've run it (and was so exhausted I think I saw my ancestors). It was a six month all-hands lift, 85% of last year's plan ended up back in the plan, and maybe we found an extra 5% to 7% in savings.

There's a time and place for ZBB, like getting to profitability, a reorg, or a new majority investor. But most years the juice isn't worth the squeeze.

Confluent's CFO Rohan Sivaram runs a version I'd point you to instead; a hybrid that keeps the benefit without torching six months. The core of it is killing the urge to begin with incrementality.

You fund a chunk of next year's net new asks from the dollars you're already spending, and you only get to talk about new asks after you've named what you'll stop.

Say marketing went big on local events last year… 13 cities… and it absorbed a quarter of their budget.

You're not making them defend all 13; you’re making them think hard about which was a good bet and which wasn't.

Did Detroit actually throw off leads? Would they run Albuquerque again? Shake $350K out of the tree and it happens to fund half the much bigger (and new) user conference they want in Q3.

Same question for engineering. Last year they did a big push to firm up the extensibility of the legacy product, coded in some language called Cobalt that you're pretty sure is a mineral. That work shipped. So do you really roll the budget forward and tie up 12 engineers and 4 in product on the same thing again? Probably not.

In terms of what to take out - if leaders want a number to start from, don't hand them 50%. That’s halfway back to zero-based pain. Something under 30%, maybe closer to 10%. I tell people to start at 5% and move it up over time. The number matters less than the push to cross something, anything, off.

The dream is to start each year with a quarter of your costs already primed to be reallocated.

Be forewarned - you will meet some resistance. People will squirm, because they're incremental thinkers wired for growth. So you must say why you're doing it, and you repeat it every year at kickoff.

Then the interlock at the end of planning catches the knock-on effects, like the sales team counting on pipeline from the Detroit event you just zapped.

(Interlocks are a fancy term for forcing functions with high overlap, like product and engineering, to review their near complete plans together)

The unsaid benefit of Hybrid ZBB is you've gifted every leader an out, a mulligan of sorts. Instead of pointing at them for spending on what didn't work, you're rewarding them for walking back into their own department and bringing you the things they no longer want to fund.

Budgeting is as much about the people holding the budgets, and whether they feel ownership over them, as it is about the line items.

Two things should gate the roll up.

First, a leader's departmental priorities have to ladder back to the CEO's global priorities, one to one, so everyone feels there are only so many dollars to go around and they're all aimed at the same initiatives.

And headcount must be presented and documented clearly, which is the most important part of the bottoms up exercise. People are around 75% of costs at most tech companies, so each leader presents an org chart covering butts in seats today, roles being recruited for, roles budgeted but not yet worked, and the future roles they need next year. There must be a map. Otherwise you’ll get lost hiring.

Getting that org chart right is its own chapter, and it's featured as a section in the book below.

On this episode of Run the Numbers, I sit down with Zuora’s COFO (that’s CFO AND COO) Todd McElhatton to talk about what’s broken with AI pricing today. We also cover the journey from public back to private at Zuora, as well as his days running a major commercial transformation at VMware.

Wishing you a budget envelope that can fit cool stuff in it,

CJ