No business management technique is sacred anymore. And rightly so.
In my world, there’s been a trend in recent years with businesses moving away from traditional, fixed budgets towards more flexible approaches. I think that could be said for most tasks within business management.
The ever-changing market landscape, economic uncertainties, rapidly developing technology, and the global scene are all forcing us to look beyond what our predecessors taught us.
What challenges are you facing right now? I’d be really interested to hear about them:
More on that in a sec…
A quick reminder here that the Employee Retention Credit voluntary disclosure deadline is approaching (March 22, to be exact). If you claimed the ERC falsely, this is a big opportunity for you to right that. The IRS recently did a big webinar on all of this. It’s worth a listen if you fall in this category.
And note, if this is a challenge you’re facing, let’s get something scheduled ASAP. I’m here for you.
And that’s why I’m making sure you’re staying on top of what’s best for your business. Zero-based budgeting is a technique that’s been around for a while and has stayed around, for good reason.
It’s often appealing for its emphasis on linking spending to strategic goals, which resonates with modern business practices that prioritize creating value and optimizing existing resources.
Might it be something for you to explore? Let’s see…
Zero-Based Budgeting in Your Small Business
“A budget is telling your money where to go, instead of wondering where it went.” – Dave Ramsey
Zero-based budgeting (ZBB) is not a new idea in the business world. It first emerged in the 1970s at Texas Instruments and led to significant cost savings within the company.
So much so that the Carter administration took notice and even gave it a try in Washington. That experiment was not as successful, for reasons not necessarily related to the technique itself. (We all know how the federal government tends to operate, after all.)
What makes zero-based budgeting unique is the way it starts each budget year with a clean slate. Instead of adjusting the prior year’s figures based on anticipated changes, ZBB allocates zero dollars to each expense category.
Every department head then builds their budget from the ground up, justifying each cost – from rent and salaries to marketing campaigns and office supplies. This forces a critical evaluation of spending habits and prioritizes resources based on current needs and strategic goals.
This approach has some pros and cons, which I’ll discuss with you briefly to help you determine its appropriateness for your business.
Disadvantages
- I start with the cons first because the time and effort costs are what stand out most to businesses considering this type of budget analysis. It’s time-consuming and hard work to start over from scratch with your budget. There’s no denying that.
- This type of change can also be very disruptive, as it requires buy-in from all departments and demands a shift in mindset from past years.
Advantages
- It promotes cost-consciousness throughout the organization. A study by the Hackett Group found that companies using zero-based budgeting reported higher levels of employee engagement in the budgeting process.
- It’s profitable. A study by the American Productivity & Quality Center (APQC) found that for every dollar invested in implementing ZBB, companies saw an average return of $7.50.
- Financial transparency is ensured. The detailed review process provides a clear picture of your current financial health and future needs.
Implementation of ZBB, as I already mentioned, is not for those with short attention spans. You’ll be analyzing each department and function, identifying essential costs, and eliminating unnecessary spending. Buckle up.
Obviously, the goal is to reveal hidden savings that you can reinvest in growth initiatives or improve your bottom line. That’s a goal we’re all interested in achieving.
Is zero-based budgeting right for your business? It depends. If you’ve grown quickly or are facing economic challenges, it might be the clean-up project your business needs. It can help identify cost-saving opportunities and ensure resources are strategically allocated for your future goals.
But if you’re already on track and moving toward those goals, it might be best not to upset the apple cart. My team and I can walk you through those questions:
218-623-6050
Always here with a fresh perspective,
The TCG Accounting Team
