Life-cycle budget definition
/What is a Life-Cycle Budget?
A life-cycle budget is an estimate of the total amount of sales and profits to be garnered from a product over its estimated life span. This estimate includes the costs to develop, market, and service the product. Thus, the time span covered is from the initiation of a product as a design concept through its estimated withdrawal from the market. A crucial element in this analysis is the estimation of the lifespan of a product, since managers tend to be overly optimistic and estimate a longer lifespan than is really the case, resulting in overestimated sales.
Example of a Life-Cycle Budget
A company plans to launch a new electric scooter and prepares a life-cycle budget to estimate its financial performance over the product’s expected 5-year life span. The budget projects total sales of $5 million, with sales peaking in year 2 at $1.5 million before gradually declining as newer models enter the market. Initial development and launch costs are estimated at $800,000, with annual production and marketing costs totaling $2.2 million over the five years. After accounting for costs, the company anticipates total profits of $2 million over the product’s life. This life-cycle budget helps management assess the product’s long-term viability, plan resource allocation, and make informed decisions about pricing, marketing, and potential updates or successors to the product.
Life-Cycle Budgeting Best Practices
A key enhancement to life-cycle budgeting is to periodically revisit the estimates stated in the latest version of these budgets, to see if they are still valid. For example, the costs of ongoing marketing and field support may turn out to be higher than expected. If so, update these figures in the budget and see if these adjustments alter your decisions regarding how long to continue offering the related products to customers.
Advantages of Life-Cycle Budgets
There are several advantages to using life-cycle budgeting within a business, including the following:
Initial investment decision. Life-cycle budgets are useful for estimating the profits and cash flows associated with a project, and can be used in the decision of whether to invest in a product.
Ongoing investment decisions. The concept can be used to determine the investment level at different stages of a product's life. For example, investing additional funds in a more robust product can reduce the estimated cost of warranty claims and customer service later in the life of a product.