If we observe a company carefully, we will see that it looks like a living organism. Therefore, to understand what causes your problems, it may be wise to do some analyzes. An example of an effective “examination” is the zero-based budgeting (ZBB).
It is likely that you already devote resources to develop an efficient budget, but the zero-based budgeting is different. Its methodology was designed to help large companies gain efficiency.
If you are curious to understand more about this subject, it’s easy: just read this post!
What is zero-based budgeting?
When designing the budget plan, a company examines its past and tries to predict the future based on projections and studies. However, this logic can take into account isolated facts, which are not rules and, therefore, should be left out of the equation.
An example: company X had a big expense with the purchase of raw material, because its main competitor had problems in its headquarters and it is temporarily inoperative, causing company X to sell more.
The purchasing department should not rely on this rare fact to buy raw material, nor should HR take this information seriously when it comes to hiring. By developing a zero-based budget, the company can better analyze this information.
Zero-based budgeting requires the detailing of expenses, justifying them and improving their analysis. But how?
How to do the zero-based budgeting?
The zero-based budgeting asks the manager to think strategically about spending. Therefore, the company will try to know the minimum investment needed to accomplish their tasks.
Going back to the example of company X: what is the minimum investment in raw material needed to produce? With the detailing of operations, the director of this company ignored the period without competition and focused on the market’s reality experienced by the company.
Each new expense will be organized according to its strategic importance to the company. By doing so, it will be possible for managers to understand their need.
Remember that the zero-based budgeting requires the minimum necessary for the company to operate. The ideal solution is to apply this thinking to each board. Once this is done, a hierarchy of expenses is created.
Set a cut
The entrepreneur will define a line of cut, and what is not needed for the progress of tasks will be cut. For this reason, the entrepreneur will need to question the costs and justify them so that they remain in the company budget.
Below the company’s survival line are the essential costs – that is, those that cannot be cut -, and above that line are the high priority, medium priority and low priority costs.
After you find out where each cost is in the zero-based budget, it is easier for the company to know where to cut expenses, depending on its economic or growth scenario.
Now that you know a little more about zero-based budgeting, it will be simpler to understand how your business is wasting resources.