Whether you’re a new business owner or an old pro, your business growth and success rises and falls by your ability to stick to a budget. Small business budgets help control the amount of money you spend by checking it against expected cost and expense levels. For rapidly growing businesses that have no previous benchmarks to go by, the process itself can prove challenging. So how do you calculate future financial measures when your revenue and expenses prove unpredictable? A zero-based budget just might be the answer you seek.
What Is a Zero-Based Budget?
Zero-based budgets essentially start with blank slates. This means that at the beginning of the budgeting period, you set all aspects of your business budget to $0. You then determine and justify spending before adding it to the budget. For example, if you had a marketing budget of $7,500 for the last year, you set next year’s marketing budget at $0 instead of growing it at a fixed percentage. This means that instead of having a set amount to spend on marketing, you must justify and rationalize potential campaigns before adding them to your new zero-based budget.
Do Zero-Based Budgets Cut Costs?
Many zero-based budget concepts revolve around cutting costs, though they don’t write cost-cutting measures in stone. Instead, zero-based budget strategies ensure you only incur necessary costs, which might or might not mean cutting costs to the bone. In essence, owners or management develop and incorporate the cost-cutting strategies into the budgeting process. For instance, let’s say your small business wants to cut expenses by 20%. In this instance, you as a business owner define the depth of the cut rather than allowing the zero-based budgeting process to define it.
What Are the Pros and Cons of Zero-Based Budgeting?
Some pros of zero-based budgeting include that it gets you in the habit of asking, “Does my company really need this?” While this doesn’t seem like a big deal, it can help you gain more control over your business finances by eliminating wasteful spending. With regular budgets, you typically have a set amount you can spend, and that sometimes makes you more free with your money. With zero-based budgeting, you always know exactly where your money goes, which helps you better assess whether that spending boosts your revenue and grows your business or whether it just eats into your bottom line while hindering or even reversing growth trends.
Timeliness and cost often prove downsides to zero-based budgeting. Since you must build your budget from scratch each year, it requires more in-depth analysis of revenue and spending plus more attention to detail. Also, it can take longer to develop than many other budgeting processes. For these reasons, some small businesses avoid zero-based budgets. A one- or two-person shop might not have the resources to specifically justify every budget line. This sometimes makes the opportunity costs of zero-based budgeting more than the process itself is worth.
What Kinds of Companies Benefit Most From Zero-Based Budgeting?
Businesses with stable growth and a lasting track record often benefit more from zero-based budgeting than rapidly growing companies in unpredictable markets. While companies with cash flow difficulties might retain more stability by reviewing every expense, companies with unreliable or untested revenue streams, including those introducing new products into new markets with new competitors, might struggle to stay within relevant ranges. That being said, most any business can use zero-based budgeting in at least some aspects of their business budget. This cuts down on the associated workload by focusing attention on certain types of expenses rather than all the business’s expenses.
How Do You Implement a Zero-Based Budget?
The first steps to creating a zero-based budget are simple — you just write down all your revenue and expenses and tally them. If this proves challenging due to irregular revenue, err on the side of caution and use revenue numbers that match your lowest earning months. When you have all those numbers lined out, subtract your revenue totals from your expense totals. When you make your first zero-based budget, you typically find your total doesn’t equal zero, and that’s fine. This helps you hone in on areas that need improvement or where you can cut costs or add money to rainy day savings.
Zero-based budgeting gives you a fresh start and makes you pay attention to where your money goes. This, in turn, helps you be more aware of expenses that create profit, go nowhere, or even cost your company money. Of the potential benefits zero-based budgeting provides, the most important is that it gets you in the habit of asking if this or that expense is really necessary, which can keep your business’s revenue levels and cash flow optimally positioned for success. Always know exactly where your business stands. Make smarter business decisions now.