zero-based budgeting

Capify U: What is Zero-based Budgeting?

Have you ever heard of zero-based budgeting or tried implementing it at your small business?

Zero-based budgeting is basically an alternative method for budgeting in which every single expense is justified. While traditional budgeting uses previous spending as a basis for future costs and expenditures, zero-based budgeting takes the opposite approach and begins at zero. Hence, zero-based budgeting.

If your small business chooses to switch to zero-based budgeting, a big shift in mindset must occur. Many small businesses are family-owned and as a result have fallen into poor financial habits simply because “that’s how it’s always been done.”

But with zero based-budgeting, spending is much more closely watched, and things that you normally have committed resources to for years may not be get the same attention anymore. Ultimately, the goal of zero-based budgeting is to justify all expenses in order reduce overhead and  to contribute time and money to areas that will actually help grow and improve your business.

How it works

Zero-based budgeting starts with the owner/management reviewing the business and asking what resources are needed to remain competitive in the industry. For instance, what are the things your business absolutely cannot go without in order to not only remain in business, but also to make sure you’re on par with your competition? Once these are identified, it’s time to make concessions. What expenses are ultimately unnecessary? What full-time employees are expendable? Does the business infrastructure need to be reset?

Benefits

The primary benefit of zero-based budgeting is to save money and to put your company in a better financial position moving forward. But at a deeper level, it also helps with changing the mindset of employees and management who may feel entitled to spending more than they should. In traditional budgeting, businesses simply try to have money left over at the end of each fiscal period. This can cause problems in that some may feel like they can spend more money than necessary, so long as they aren’t going over budget. These expenditures, while not going “over budget,” can siend up being wasteful.

Negatives

One of the biggest drawbacks of zero-based budgeting is time. The time it takes to create your budget may increase exponentially and, understandably, not all small business owners have a lot of extra time on their hands. Also, it’s a pretty radical change to make at your company and not everyone may be on board with such a big change.

Ultimately, zero-based budgeting forces small business owners to take a long, hard look at business expenses. It may not be worth it for most small businesses, but some may find its principles to be beneficial.