If COVID-19 has taught business owners and entrepreneurs anything, it’s that business as usual no longer exists. Common to all businesses, however, is a demand for greater speed and cost control amid continued unpredictability.
Under such pressures, a “perfect” budget may not be achievable—but a better budgeting process certainly is.
The best way to support a company's goals, growth or otherwise– is to utilize the concept of strategic resource allocation to your advantage. In this article, we'll look at why resource allocation is so critical, and what savvy leaders should focus on when making decisions about a company's strategic direction.
What is resource allocation?
Resource allocation is the process of managing and allocating assets to support a company or organization's strategic goals. For a business to be successful, a leader's primary focus must be on having the right resources to support these goals.
These resources are anything from money and talent to software and equipment.
Virtually every project, product launch and anything else an organization might create or update needs resources allocated to it. Having a budget and allocating or reallocating the means for said product/project properly is integral to success.
Despite being the most important part of managing a business, the challenge remains how to distribute time, talent and money in a way that brings the most value to the organization.
Why strategic resource allocation is critical
One of the biggest challenges for businesses is managing and allocating limited corporate resources in the most productive way so that they provide the highest possible return on investment for their organizations. This is especially true in the environment we find ourselves in -- with supply crunches, rising inflation and shifting demand across industries.
When a company allocates its resources, it’s actually determining the resources that will be dedicated to the company’s strategic plans. This means that resource allocation helps organizations put their efforts into the priorities of their operations.
Eventually, resource allocation affects business performance. Having the right tools and resources to succeed, and providing employees with the right tools and resources to perform their jobs effectively, is key to a functioning business.
In other words, the way resources are allocated has an impact on the company's operating margin and profit.
Benefits of effective resource allocation include:
- Increased productivity and efficiency
- Higher employee satisfaction
- Reduced workplace stress
- Lower employee turn-over
Conversely, poor allocation can run up costs, extend deadlines and cause frustrations for employees and customers.
How to better allocate resources
When you take the time to understand your company and its resource needs, you become well-positioned to support it. However, don’t get too comfortable. While you may have the right resources in place presently, you will most likely need to reassess them later as you move towards your business goals (and set new ones).
This requires data and facts about your company—things like revenue projections or historical spending habits—to make an informed decision about where the money should go. But at the same time, there are always going to be unknowns that affect the outcome of your decisions; sometimes you'll get lucky and everything works out according to plan; other times not so much.
Resource allocation is the process of forecasting funds and allocating them to their highest and best use. It's half science and half art—you have to predict what you'll need in the future and allocate your budget accordingly.
Start by refocusing on these three areas of your business:
Financial and capital resources
Every company has a finite pool of financial resources at its disposal. The challenge at hand is to put capital to use as productively as possible in order to generate the highest potential return on investment.
Often CFOs also find a way to set aside a portion of unallocated capital that the company’s most strategic initiatives can access if needed. This capital can be released for a variety of reasons; perhaps a project becomes more attractive than initially anticipated and should be expanded in scope.
Along with financial capital, human capital is the most valuable asset most companies possess. Therefore, it’s critical to make sure that your human resources are allocated where they can be the most productive.
In his classic book Good to Great, Jim Collins put it this way: “start by getting the right people on the bus, the wrong people off the bus, and the right people in the right seats.” Over time, a company will achieve its growth goals, and you’ll set new ones. Needs will shift to hiring additional employees, purchasing further training and onboarding tools, implementing processes and procedures, and upgrading production facilities and equipment.
Once financial and human resources are properly allocated, give attention to your system resources and your software systems. Continuing to rely on outdated legacy software systems can be “penny-wise and pound-foolish” — even if they seem to be getting the job done. Newer, cutting-edge software can help business leaders make better decisions, automate time-consuming or mistake-prone processes and capitalize on more business opportunities.
Based upon experience with resource-constrained organizations, we also recommend engaging mid-management (i.e., the people that own the actual work resources) to help strategically plan out resource requirements. They are often the ones in the trenches, and have a vested interest in ensuring that resources are aligned with a department, project or business goal.
Aligning resources with goals and growth
Resource allocation is half science and half art—you have to predict what you'll need in the future and allocate your budget accordingly. To put it simply, investing in the right resources is good for business.
It's an ongoing, strategic exercise. It's important not only to understand exactly how much money your business has available for discretionary spending, but also which areas are more likely than others to yield greater profits if they're funded appropriately.
Making key decisions that will help a company face short-term and long-term obstacles is a lot to take on for any business leader. It typically helps to have the insight and support of a business advisor, such as Focused Energy. We can work as a fractional CFO or alongside your existing financial team to ensure performance and real results.
Related reading: 3 tips to increase profitability