No matter how profitable your company is now, the future growth of your business depends on a constant improvement of your offerings through research and development (R&D).

“All small and medium-size businesses need to do research and development to stay viable,” says Emerson Smith, president and CEO of Metromark Market Research, in Columbia, S.C. “Success is about whether, in the long term, you can adjust to the marketplace. Research and development is your ticket to the future.”

Budgeting for R&D

“Many companies don’t budget for R&D for two reasons. Either they don’t think they need it or don’t know they need it,” says Smith. And, “if they already have a product that’s doing well, they don’t want to take resources away from moving it along,” says Beth Zimmerman, founder and principal of Cerebellas, a business strategy consultancy, in Long Beach, NY. Unfortunately, she says, “this complacency blinds companies to the fact they need “an innovative, new-opportunity pipeline” in the form of R&D.”

Finding R&D Funds

If trimming other budgets within your operation is still not enough to fund your R&D efforts, Steve Kaplan, a Chicago-based serial entrepreneur and co-owner of four companies, including stevekaplanlive.com, has a simple strategy: He pre-sells yet to-be-developed products to his core customers.

Kaplan, whose most recent book is Be the Elephant: Build a Bigger, Better Business (Workman, 2006), suggests that the customer pay a certain amount to the producer upfront – as part of a pre-order – to cover R&D costs. “In return for the pre-sale, the customer may receive exclusivity, a long-term or volume discount on the product, or other negotiated benefit. Pre-selling decreases risk to the entrepreneur,” says Kaplan.

Another solution may be the academic community. Smith encourages his clients to contact local universities that have small business development centers. “In some instances, students will conduct research for free,” he says.

Using Your R&D Budget Efficiently

Even with an R&D budget in place, you need to be strategic and vigilant about using it. For example, Kaplan suggests you may not realize the product you plan to create will require an entirely new packing and shipping procedure. “By amending the new product’s design, you might avoid those extra and costly procedures. Companies often run into trouble when they fail to consider how a new product or service will integrate into their current operations,” he says.

Another way to control spending is by taking a step-by-step approach. “Test and vet ideas along the way,” says Zimmerman. “Seek outside input – from customers, suppliers and partners – and use their feedback. Refine and tweak the promising ideas and trash the others. Get a sense that you’re on the right track,” she added.

It’s also important to pick someone to oversee the R&D budget in a dedicated way. “Senior management must take a hands-on approach because R&D is directly related to business goals,” says Zimmerman. According to Kaplan, R&D is not a “side thing.” “You can’t pawn it off on people who are already working at full capacity on core aspects of the business.”

Zimmerman points out, however, that a well-funded and monitored R&D budget doesn’t always guarantee success. “Risk is a part of R&D, and companies must give their employees permission to fail,” she says. “Every company must ask what return on innovation it expects, and realize that some money will be invested in ideas that don’t pan out.”