The world has grown increasingly more connected and small business now feels the shift in stock markets and economies in a matter of hours and days. Small businesses must now be even more flexible and not rely on traditional accounting and budgeting philosophies, but consider more drastic approaches in order to remain competitive. One such budgeting method takes a holistic management approach to budgeting by making significant cost reductions using a process called ‘zero-basing’ or zero-based budgeting. Costs are tackled at the root by reexamining each activity as if it were brand new. The common calculation used is: Total income – total expenses = 0.
The process forces you to assign a dollar amount to every possible expense and more importantly, ask if it is necessary long before the money is spent. One of the benefits of zero-based budgeting is that you can maintain tight control over every single expense. For months where you spend less, the surplus can be easily redirected to a line item that needs additional funding. According to Zero-Based Cost Management A Holistic Approach to Managing Budgets by Booz & Company there are four steps in the Zero-based Cost Management Process:
1. Reexamine the vision,
2. Zero-Base the Activities,
3. Assess the outcomes, and
4. Embed the change.
Let’s review each step in a bit more detail.
Reexamine the Vision. When you started your business what was the original goals of the organization? Are they still the same? Is your roadmap and operating model still valid or does it need to be redrafted? If updates need to be made, now is a great time to put the changes on paper and make them a reality versus just a concept without any substance.
Zero-base the activities. For each and every task and activity in the budget, which ones can you live without painlessly? Ask yourself and your team what eliminating the activity will mean from a sales, marketing, public relations, compliance, legal, and client relations perspective. If the answers back are a resounding ‘nothing’ then it’s time to stop paying for those activities. For activities that will require a little more debate, Booz & Co., recommends setting up a review panel that can objectively review the budget items and/or projects and determine their value. The role of the team isn’t to automatically toss any project or program, but rather to thoroughly review the project and its related expenses to see what benefits it brings to the business.
Assess the outcome. Without taking the opportunity to review your actions and decisions, you will never fully understand if the choices you made were successful. It’s important to take a litte time, step back and objectively assess how the cuts are impacting the business. It is advised that you gather your team in an assembled “challenge session.” Here they can both defend their recommendations and provide opposing viewpoints to ensure that the budgets presented are in the best interests of the company and its customers. To get the most from the exercise, tell your managers to come to the meeting prepared to “build a case for the business objectives their plan strives to meet, the activities that will be executed in support of these objectives and the operating model, and the minimum resources required.”
Embed the change. Like anything else in your business, ideas are only practical if they are implemented, otherwise, they are just wishes. Bear in mind, that sustainability is the cornerstone of a successful zero-based budget. If the plan cannot survive and thrive throughout the course of the year then it is not worth doing.
While zero-based budgeting can be time consuming, it can be worth the time to do a little business introspection. Remember that you don’t have to use zeroing as an ongoing process, as it can be used annually or even just a few times over the course of several years. The point is to thoroughly examine your budget decisions and be able to defend them as necessary. To learn more about looking at your business from different approaches and accounting styles, talk with a Professional Small Business Advisor today.
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Please be advised that, based on current IRS rules and standards, any advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty that the IRS may assess related to this matter. Any information contained in this article, whether viewed or subsequently printed, cannot be relied upon as qualified tax and accounting advice. Any information contained in this article does not fall under the guidelines of IRS Circular 230