Use this structured process to create a culture of cost management within your business.
In recent years zero-based budgeting appeared to experience a renaissance, as cash-strapped businesses had to justify every penny of their spending.
While the UK economy continues to be volatile, it's vital that smaller businesses cut unnecessary expenditure while trying to grow at pace.
Sustained use of zero-based budgets could help to enforce a culture of cost management.
Isn't it time you examined whether it can benefit your business?
What is zero-based budgeting?
Zero-based budgeting means budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending.
By starting from a 'zero base' at the beginning of each budget, you can create a really effective process for analysing and deciding where to allocate your funds.
Peter A. Pyhrr developed the idea of zero-based budgeting in 1969 while he was an account manager at Texas Instruments in the US.
In 1977, he wrote his seminal book on the subject, 'Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses'.
Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-based budgeting within government when preparing the fiscal 1973 budget.
Advantages of zero-based budgeting
Here are some common advantages of zero-based budgeting.
Helps a business assess whether each of its departments is appropriately funded
Allows management to focus on current numbers rather than the figures within previous budgets
Can enable better communication within departments by involving employees in decision-making and budget priorities
Disadvantages of zero-based budgeting
Unfortunately, zero-based budgeting doesn't guarantee you'll make savings, as the trick is in how you execute it.
Moreover, the process can be complex and there may be opposition from managers who fear their budgets are under threat and who don't relish having to justify their spending.
That's why clear communication, and making sure you involve staff at all levels of the business, can help the process to work more effectively.
Reference to any organisation, business and event on this page does not constitute an endorsem*nt or recommendation from the British Business Bank or the UK Government. Whilst we make reasonable efforts to keep the information on this page up to date, we do not guarantee or warrant (implied or otherwise) that it is current, accurate or complete. The information is intended for general information purposes only and does not take into account your personal situation, nor does it constitute legal, financial, tax or other professional advice. You should always consider whether the information is applicable to your particular circ*mstances and, where appropriate, seek professional or specialist advice or support.
What Is Zero-Based Budgeting? Zero-based budgeting is when your income minus your expenses equals zero. Perfect name, right? So, if you make $5,000 a month, everything you give, save or spend should add up to $5,000. Every dollar
Every dollar
EveryDollar is a cutting-edge online budgeting tool that allows you to focus your money on what matters and it's included in your Ramsey+ membership (or as its own subscription). You start by assigning every dollar you earn to a category for the month.
A zero-based budget is a framework that assigns a job to every dollar of your take-home pay. In other words, you're aiming for what you bring in and what you send out to hit zero each month.
Zero-based budgeting differs from traditional budgeting in that the companies using it create a budget for each new period. The benefits can include lower costs by keeping old and new expenses in check. Potential disadvantages are that it can reward short-term thinking and be resource-intensive.
Traditional budgeting is based on historical information, which revolves around accounting. Zero-based budgeting is based on estimated data, and that's why it revolves around decision-making. Traditional budgeting encourages similar costing to the previous year. Zero-based budgeting supports cost-effectiveness.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
The most common way to use the 40-30-20-10 rule is to assign 40% of your income — after taxes — to necessities such as food and housing, 30% to discretionary spending, 20% to savings or paying off debt and 10% to charitable giving or meeting financial goals.
Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process begins from a “zero base” and every function within an organization is analyzed for its needs and costs.
Another common budgeting technique is incremental budgeting, which is the opposite of ZBB. Incremental budgeting is a method of creating a budget based on the previous period's budget, with some adjustments for inflation, growth, or other factors.
Now, a zero-based budget doesn't mean you let your bank account reach zero. Leave a little buffer in there of about $100–300. It also doesn't mean you blow all your money. And here's the reason we love this method: Zero-based budgeting just means you give every dollar a job to do—giving, saving, spending.
Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.
Personal finance expert Dave Ramsey says if you're going through a tough financial period, you should budget for the “Four Walls” first above anything else. In a series of tweets, Ramsey suggested budgeting for food, utilities, shelter and transportation — in that specific order.
3 Subtract expenses from income to equal zero. This. is called a zero-based budget, and it helps you give. every dollar you made that month a clear purpose.
In essence, a “no-budget” system is similar to a “pay-yourself-first” budget, where your savings and investment goals take precedence over everything else. With a “no-budget” approach, you take care of all your obligations, both now and in the future.
Zero-based budgets are also different than some other budgets because you generally assign money to categories as you earn it, rather than budgeting for the future based on your expected earnings. In other words, the money you earn this month will be for next month's expenses.
Zero-based budgeting, like activity-based budgeting, requires that every expense be justified for each new period, starting from a "zero base." However, while zero-based budgeting focuses on justifying each cost as if it were new, regardless of past spending, activity-based budgeting emphasizes understanding the cost ...
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