How to Start Using Zero-Based Budgeting

This post is for entrepreneurs who don’t budget at all – the non-accountants.  Those who don’t know how much they spent in the last month, who have no idea what their costs and income will be in the next twelve months.  You who use the, “I don’t know how much money I’ll make” line of thinking to stop you from budgeting.  This is for you!

Inc. explains that “many small businesses try to operate without a formal budget”.  Some entrepreneurs create one, but don’t use it as a tool to manage their businesses, which means they’re not gaining the insights that could help them to grow their businesses.

If you’re saying to yourself, “Once I have money, then I’ll budget,” STOP.  You need to define success before you can achieve it!  Your financial world will change when you start saying, “Once I budget, then I’ll have more money.”  There are too many success stories to fit into this post that reflect this line of thinking to be true.  Now, what is Zero-Based Budgeting (ZBB), and how does it apply?

Management consulting firm Bain & Company describes it well:

[ZBB] differs from traditional budgeting processes by examining all expenses for each new period […] justifying every expense item that should be kept, not just incremental expenditures in obvious areas.  Zero-Based Budgeting analyzes which activities should be performed at what levels and frequency and examines how they could be better performed—potentially through streamlining, standardization, Outsourcing, offshoring or automation.

Simply put, a zero-based budget starts with zero, and it’s built from the bottom up!  Notice that there are two big ideas here:

  • Better financial visibility.  ZBB keeps your mind awake to the reasons why you are spending on certain items, and it makes you reevaluate those decisions every week/month/quarter/year (depending on how often you budget).  It raises a kind of internal introspection that asks, “Why did I spend money on ‘X’, and what outcome did it bring me?”  Since we are acquiring new information every day, this practice will help us identify more efficient ways to spend our money.  For example, it will be hard to justify continually taking people out to dinner every night for “biz dev” unless you are starting to see a return.
  • Better financial planning.  Analyzing which activities are better for your bottom line can be seen in terms of the 80/20 rule (20% of one’s effort produces 80% of one’s results).  Savvy entrepreneurs are good at using this framework to prioritize their time.  Adding the practice to the financial arena would put in place another layer of accountability, and if it leads to outsourcing, Tim Ferriss would be proud.  But this is not just about outsourcing; it’s a practice of identifying opportunity in terms of processes and standardization as well.

 

So grab your finances for last month and perform the simple exercise of asking yourself: “Why did I spend money on ‘X’?  How could I do better this week/month/year?”

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