Zero Based Budgeting

You may have heard the term 'zero based budgeting'. But do you know what it is and how it can help you? This tried and tested tool can work for your business AND your personal finances.

Let’s start with the history. It was initially developed in the 60’s – 70’s as an alternative to traditional budgets. The traditional budget looks at historical spending, assumes all is necessary (or at least justifiable), and then forecasts from that starting point. Zero based budgeting (ZBB) starts at zero and requires you to justify all expenses. It has been implemented successfully in the public sector (at least when they paid attention to it and did not ignore deficit spending), the private corporate sector, and by many individuals.

You can see how this can work personally and professionally. Particularly now during COVID, we all need to reevaluate our spending. Do you need that subscription or service? Can you purchase something at a better price with the same quality and service? Have you ever tried? You may be closer to lower expenses, so it may be easier to start the first time.

With your debt, can you restructure or get lower interest costs? Do you need that CapEx (capital expenditure)?

Take a look at all of your expenses. We had a saying in banking – during the good times we are all fat, dumb, and happy. We may be profitable because a rising tide lifts all of the boats. Well, these are extraordinary, unprecedented times.

You need to justify each existing expense. Is it a need or a wish? Can you live without it? Remember, if you have never attempted this exercise, you may be amazed at the little unnecessary things that add up. This is not a program to limit or curtail growth. New ideas, new products; they all have a purpose. Just make sure that you justify the related expenses and that you have the capital (money) needed to fund those ideas. Another experience from banking - we always said that the only thing that was accurate in a projection was the expenses, not the income. Somehow our enthusiasm overtook our better
judgement.

You are preparing the budget from zero. Do it on a monthly basis so you can incorporate seasonal timing. For example, on a personal basis, holiday shopping and vacations do show different levels of expenses certain times of the year. When the year is over, income or revenue must equal or exceed expenses. If not, the bleeding cannot continue unabated forever.

You budgeted monthly. Now track it monthly. Do you need to revise your estimates or assumptions? What do you need to do “on the fly” to be better prepared.

The first time you try ZBB, it might be overwhelming. However, the rewards will vastly exceed the energy required upfront.

Happy budgeting, and feel free to drop me a note with any questions or comments.