Today, we’re going to discuss everyone’s favorite topic…budgeting, of course!
Let’s face it—no business owner wants to spend their time creating, refining, or even talking about budgets. However, failing to budget is the most expensive mistake a business can make. Conversely, owners who budget well are significantly more successful than those who don’t.
At its core, budgeting is a tool that helps you deal with the future. It helps you turn expectations into reality.
And get this—there’s a form of budgeting that has the potential to revolutionize your business. It allows you to simultaneously slash unnecessary expenses and reallocate funds toward the things that have the greatest effect on your bottom line.
This method that I and many other certified public accountants (CPA) recommend is called Zero-based budgeting.
What is zero-based budgeting, how does it work, and what are the benefits of implementing it for your small business? Keep reading to find out!
The Problem with Traditional Budgeting
To grasp the true power of zero-based budgeting, you first need to understand the shortcomings of traditional budgeting.
With traditional budgeting, your business carries over last year’s expenses and uses them as the starting point for next year’s expenses. With these figures in place, you simply increase (or decrease) each item in your budget to account for inflation and any expected changes to your company’s revenue.
The problem with this method? It’s extremely inefficient in terms of resource allocation. Not every line item in your business’s budget requires an increase or decrease. What’s more, not every line item from last year’s budget deserves to be carried over in the first place!
While the simplicity of a traditional budget may be attractive to small business owners, this method takes a lax approach to spending that often results in waste.
The Power of Zero-Based Budgeting
Now, what is zero-based budgeting, and why is it such an effective alternative to traditional budgeting? A zero-based budget assumes that last year’s expenses were all zero. In other words, every time January 1st rolls around, you start from square one!
This means that whenever you build your new budget, you’re working with a blank canvas. Of course, you’ll still comb through all of the expenses from last year’s budget, but you won’t automatically carry them over for the next 12 months. Instead, you’ll start by adding the things your business really needs.
Similarly, your supplies expense account will start at zero. It’s then your job to determine who consumed what supplies last year, who will be consuming them this year, and how many of those supplies will be consumed.
Herein lies the true power of the zero-based budget. This system forces you to assign a job to each dollar, allowing you to actively manage your consumption while reviewing your costs. You’re not baking in past mistakes. Instead, you’re forced to scrutinize every expense and make the necessary cuts.
How to Implement a Zero-Based Budget
Creating a zero-based budget might seem like a daunting challenge, and for a large company, make no mistake—zero-based budgeting can be extremely time intensive.
Fortunately, there are several ways to make this mammoth task easier, such as using the famous 80/20 rule, which can be applied to many areas of business, including your budget. If roughly 80% of your expenses are in 20% of your categories, start with the 20% first!
You won’t have to look very hard to find areas to cut. An easy place to start? Your subscription services! How many items are you paying for that you don’t actually use?
What about the routine tasks you’re handling in-house? Is it more cost-effective to outsource them? What about jobs you’re currently outsourcing? Would it be more cost-effective to handle them in-house? Is there a better way to do things? Is there a cheaper way to do things?
Supercharge Your Profits with Zero-Based Budgeting!
Despite the power of zero-based budgeting, very few business owners use it. The ones that do are the lucky few that see more efficiency and less waste throughout their businesses.
Yes, zero-based budgeting requires more of the owner’s time, but it pays huge dividends by helping you raise your bottom line. After all, that’s the whole reason why you’re in business—to boost profits!