Zero Based Budgeting for Your Start-Up Business Decatur AL
Auburn University, AL
Zero Based Budgeting for Your Start-Up Business
Justify Every Cost Item, to Generate More Cash Flow and Profits
By Richard J. Maturi
The harsh reality of today’s declining economy, shrinking markets, and rising costs, makes it time to take a hard look at zero-based budgeting. What is zero-based budgeting? Zero-based budgeting is the budgeting process where every single item has to re-justify itself in order to get approved. It’s a no-nonsense approach to cutting costs, improving cash flow, and generating more profits for your home-based business.
In order to be successful, zero-based budgeting relies on a clear concept of your firm’s long-term objectives, specific short-term goals, and available financial resources. Each expenditure analysis should include an analysis of cost, purpose, expected benefits, alternative courses of action, and measures of performance and review. The exercise strengthens your firm’s planning and decision-making by concentrating on what expenditures improve your operations and move your business toward achieving its goals.
Rethinking and Building a Budget
Zero-based budgeting forces owners to “rethink” their business operations and build a budget from the ground up; taking into account new input, the current market situation and other factors not considered or known during the previous budget generation process. In essence, you focus on the things that are essential to making your business as profitable as it can be. It forces you to find more cost effective ways to conduct your business. It may also create outsourcing opportunities that reduce costs. Zero-based budgeting is also known as priority-based budgeting since it concentrates on giving priority to the activities that further your firm’s goals.
Concentrating on What’s Essential
In other words, you don’t look at last year’s budget and factor in an inflation estimate. With zero-based budgeting, you forget your previous assumptions and concentrate on what is essential to your cash flow, profits, and ability to run a successful business. For example, last year’s budget may have factored in X amount of dollars for print advertising based on current ad rates. With zero-based budgeting, you analyze what type of advertising is required to reach your potential audience/customer base. You may determine that an email campaign is more cost effective and fruitful than print advertising.
In other words nothing is taken for granted…you need to justify each and every expenditure and what benefits will be derived from that expenditure. The process forces you to analyze and compare various spending options. Numerous benefits derive from employing the zero-based budgeting process. It helps eliminate built-in cost increases, improve cost containment, remove inefficiencies, and increase discipline in budget creation.
Inflated budget items are uncovered since no expenditure is approved without an analysis of how that expenditure improves the operation of the business and its profitab...