Why You Need A Budget & How To Get Started
As a business owner, you’re all too familiar with the phrase, “Every penny counts.”
You understand what’s at stake. Your payroll numbers are attached to real people: people sitting across from you in the lunchroom, working beside you on challenging projects and celebrating when the Lions win!
The weight on your shoulders as a business owner can be heavy. Having spent much of my career working alongside business owners like yourself, I know from first-hand experience just how much of that weight can be lifted with simple easy-to-implement tools like a zero-based budget.
I also understand how daunting implementing any new system can be, but every business owner we’ve worked with at Doescher Group has seen the power that a budget can provide for their company.
How does having a zero-based budget help your business?
Having a budget gives owners financial control, guides decision-making, and supports short- and long-term goals.
A zero-based budget ensures resources are allocated wisely, helps anticipate financial needs, and tracks performance. A budget helps build financial discipline by promoting the habits of saving and preparing for unexpected expenses. A zero-based budget also enhances credibility with key stakeholders like banks and investors, demonstrating fiscal responsibility and the ability to plan strategically. Ultimately, a budget serves as a necessary tool for managing finances effectively, helping you make informed business decisions and steering the business towards sustainable growth and success.
Recommended Reading: The Dreaded Budget: Arbitrary Constraint or Useful Tool?
As an owner, you may or may not have ever created a budget for your business. Perhaps you are just starting your business and have no baseline to compare with. You may not even know where to begin. Or maybe you even searched online for ways to budget, but you don’t know which method to use or even how to use them. We are here to
Terms like zero-based budgeting, incremental budgeting, activity-based budgeting or cost-based budgeting might sound like a foreign language. It can seem like a daunting task, but let’s demystify the process a bit and look at Zero-based budgeting (ZBB).
Demystifying The Zero- Based Budget
A great method for owners who want to ensure every dollar counts, Zero-based budgeting is a technique where all expenses must be identified and justified, regardless of whether they were included in the previous budget or not. You are building a budget from the ground up.
In other words, this isn’t a hypothetical (or fantasy) budget based on projections or wishful thinking: it’s a reflection of where and how your money is actually being used.
In ZBB, every expense starts from a "zero base," and must allocate every dollar received or spent, aiming to optimize costs and prioritize expenditures based on current needs and benefits rather than historical spending patterns.
Key features of zero-based budgeting include:
No Assumptions: Unlike traditional budgeting, where previous budgets are used as a starting point, ZBB requires a fresh evaluation of every revenue and expense item.
Cost Optimization: ZBB encourages a thorough review of all costs, promoting efficiency and eliminating unnecessary expenditures.
Focus on Activities: Budgets are linked to activities and objectives, ensuring resources are allocated based on their contribution to business goals.
Continuous Review: ZBB necessitates regular reviews and adjustments, allowing businesses to adapt quickly to changing circumstances and priorities.
Encourages Accountability: By justifying each expense, ZBB promotes accountability among managers and departments.
Flexible and Strategic: It offers flexibility to reallocate resources to areas with the highest returns and aligns spending with strategic priorities.
> Recommended Read: Who Spends the Money?
Zero-based budgeting is particularly beneficial for owners looking to control costs, drive efficiency, and prioritize spending based on current needs and strategic objectives rather than past practices. While it can be more time-consuming than traditional budgeting methods due to the detailed analysis required for each expense item, this granularity forces you to budget with a goal in mind and ensures every dollar of revenue is accounted for and allocated where it can have the biggest impact.
Creating your budget involves several key steps to ensure it is effective and aligned with your business goals:
Prepare and Communicate
Understand the concept of ZBB
Communicate with key stakeholders and get their input
Define Objectives and Goals
Set clear goals and establish a budget period
Communicate objectives
Gather Financial Information
Estimate revenue
Estimate and justify expenses
Identify Fixed and Variable Costs
Fixed Costs – do not change based on volume
Variable Costs – go up or down based on volumes
Allocate Resources
Essential and high-priority activities should receive funding first
Adjust allocations, if necessary, based on available resources and organizational priorities
Implement and Monitor
Distribute the budget and ensure everyone understands their allocations and responsibilities
Regularly monitor expenses against the budget to ensure adherence and investigate variances
Review and adjust as necessary due to real world implications
Key Tips for Successful Implementation:
Strong Leadership: Ensure strong leadership and commitment from top management to drive the ZBB process, because discipline and buy-in starts from the top.
Clear Communication: Maintain clear and consistent communication throughout the process to keep everyone aligned and informed; accountability is necessary as you progress through the budget period.
Flexibility: Be prepared to adjust the budget as necessary based on actual performance and changing conditions. There is no crystal ball, and you will never be able to precisely predict an uncertain future. It is better to be directionally accurate than precisely wrong.
Continuous Improvement: Use insights gained from the ZBB process to improve future budgeting cycles. Practice and refinement will be necessary, even professionals get it wrong, and no budget is ever 100% spot on.
Implementing zero-based budgeting can be a transformative approach to financial planning, promoting efficiency and accountability. By following these steps, you can ensure a thorough and effective implementation of ZBB in your organization.
If you are considering an exit or hope to grow in the future, we strongly recommend you set yourself up for success with this level of robust engagement with your budget. Future you will be grateful.
Looking for more hands-on help? Here at Doescher Group, we are excited for the opportunity to share the power of these tools with self-made business owners like you, we welcome the opportunity to connect and see how we can help illuminate the path ahead.
