Picture this: You're slumped over last year's budget, marking off line items you believe you can live without. And then what happens? Regardless, the same items return to the list. Why? Because "that's what we spent last year," correct?
Every dollar matters for a small and medium-sized business. Despite this, many businesses continue to operate on a budget that is essentially a slightly modified version of the previous year's. However, if last year's expenditure was not optimized, you would incur wasted expenses month after month and year after year.
This is where Zero-Based Budgeting (ZBB) comes in to rescue the day.
Zero-Based Budgeting is a simple principle with a fancy name: each new budget period begins from zero. You do not presume that a cost or department gets X dollars just because they spent it last year. Instead, each cost must justify its existence by demonstrating its relevance to your company objectives.
In other words:
1.Begin from zero.
2.Justify every spending.
3.Only then add the expenditure to the budget.
The days of repeatedly copying and pasting last year's figures are over. ZBB allows you to design your budget line by line from the ground up.
Clear accountability : Department leaders prioritize concrete ROI above "because it's in the budget."
However, just half of your staff utilizes it, and only for a subset of its features. In the previous system, you'd probably shrug and leave it in. ZBB, on the other hand, questions if we absolutely need the complete plan or whether we can move to a lesser package—or a new tool entirely.
Before you start crunching figures, you need to understand what success looks like for your firm. Is there a bigger profit margin? Aggressive expansion in a new market? Whatever it is, your budget should correspond to these objectives.
Each department makes a list of what they will need to accomplish their aims. Need new software to automate tasks? Justify it using facts demonstrating how it will save 40 hours of manual labor each month.
Go line by line, giving a cost to each item or initiative. No money is spared to capitalize on last year's successes. Everything must justify its value.
Compare the planned expenses to the income predictions. If the arithmetic does not add up, you cut or decrease until it does—prioritizing the spending that will get you the closest to your objectives.
Once configured, monitor how each cost operates. You may and should examine your ZBB plan on a regular basis to ensure that your budget is in line with your company objectives.
If you just copy and paste last year's figures without thinking about it, you're most likely leaving money on the table—or allowing it to silently dribble down the drain. Zero-Based Budgeting isn't a cure-all, but it may help rethink your whole spending mindset: everything has a cause, or it doesn't have a budget.
Perhaps you're fascinated... Or maybe you're concerned about the increased burden of beginning from scratch. In any case, we can assist you determine if it is worthwhile to invest your time and money.
Contact us now to arrange a brief conversation. We'll help you evaluate if ZBB is a great idea—or whether there's a better method for your unique company objectives.
Nobody enjoys burning money. Your company deserves every opportunity to flourish.