Zero-based Budgeting

One of the most powerful financial tools available is zero-based budgeting;…a tool that is seldom mentioned much less employed today.

What is zero-based budgeting?

It’s a budgeting approach that essentially answers the question: “If I were starting out today, how would I structure this business differently?”

This is especially important for companies that have been around for awhile because, as the saying goes, familiarity breeds complacency. Zero-based budgeting prevents complacency by reexamining the rationale for doing what we’re doing and whether that rationale is relevant today.

Let’s explore some of the questions that can be employed in zero-based budgeting.

Zero-based budgeting questions

Would I target the markets that I’m currently targeting? If not, what markets would I target?

Are my customers the ones I really want? If not, how can I replace the undesirable customers with those who are more enjoyable and more profitable?

Are my marketing messages attracting the customers I really want? If not, how would I change my messaging?

Am I in markets I wished I’d never entered? How can I exit these markets? Should I seek new markets or simply shrink my infrastructure and enjoy greater profits with less effort?

Are the marketing media I’m using producing the results I desire or did I fall victim to the latest marketing trend?

Have I leased property and equipment that I should have purchased? Or, conversely, have I purchased when I should have leased? As a wise man once told me “There are no fixed costs in the long run.” In other words, we can buyout leases or sell assets and lease them back.

Am I employing processes that were put into place to solve a problem that hasn’t been an issue for a number of years? Alternatively, you might ask “When is the last time we revisited a process to see whether there’s a more effective process available?”

From which areas of my company does the most frequent and useful innovation come? Are there departments that resist change and, consequently, hinder our progress?

What’s the culture in my company like? Is morale high and production steadily rising or am I battling frequent absenteeism and infighting in my organization? What should i be looking for in new hires and replacements for troublesome employees?

I could go on, but you get the picture. You’re examining all aspects of your operation through new lenses.

Zero-based budgeting caveat

The intense focus required to set aside familiarity is tiring. To avoid falling back into the familiar, limit the time you spend on zero-based budgeting to one-hour increments; less if you feel that you’re accepting the familiar.

Don’t be afraid to spread zero-based budgeting over several weeks or even a month or two. The result you’ll get will be well worth the slight delay this approach involves.

Takeaways

Zero-based budgeting is a powerful tool that yields huge results. It does require that this tool be used in small time increments, an hour or less.

I don’t recommend using zero-based budgeting every year. Typically things don’t change enough in one given year to warrant the time and energy investment required by zero-based budgeting. Every other year, or every third year, should be adequate.

Unfortunately many business owners don’t consider the questions listed above until they experience a dramatic downturn in their business. Zero-based budgeting can help you avoid the trauma of big economic shifts by keeping your business financially and operationally strong.

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If you’d like the leaders in your organization to learn how to use the numbers more effectively and dramatically improve the productivity of your workforce, contact me to learn more about these resources:

Resources

Making the EXCEPTIONAL Normal program helps you identify and nurture emerging leaders who elevate all around them to higher levels of performance and greater job enjoyment.

Financial Awareness & Strategy program where employees learn to identify opportunities to improve financial results and prioritize these opportunities on the basis of which produces the greatest impact with the least effort. Greater financial awareness = Better decisions.