Effective Zero Based Budgeting

Any financial product purchased in the UK will have the warning “past performance is no guarantee of future results” or words to that effect. We know that in a world of constant change that has to be the case and so here we need to look at effective zero based budgeting.

The official definition of zero based budgeting from the British Business Bank is “budgeting by justifying and approving all expenses for each accounting period, rather than basing it on your past spending https://www.british-business-bank.co.uk/finance-hub/zero-based-budgeting/ and if you are in the business of passing exams this is a perfectly good definition but effective zero based budgeting is so much more than this.

Effective zero based budgeting is far more fundamental than simple income and expenses and those organisations and individuals who do it effectively go right back to first principles. It’s about accepting that nothing that has happened in the past is guaranteed in the future and planning accordingly. It requires you to look at everything, products, services, production methods, technology, skills as well as sales and purchases. Poor organisations don’t like zero based budgeting because it requires time, effort and cost and where their employees are already stretched to the limit they don’t have time for “blue skies thought”. These are the organisations that are caught out by “unforeseen changes” None of us can see into the future and we know the future is uncertain How To Be Effective In Uncertain Times but that doesn’t mean we should stick our heads in the sand and avoid zero based budgeting.

Many businesses budget once a year but that was for stable times, now we should be looking at things much more regularly. For those of you who want to be particularly effective have a look at https://12weekyear.com/ I like to use a thirteen week year but all of the principles are the same.

Effective zero based budgeting means knowing your ultimate objective and then budgeting toward it. Every budget period ( I would suggest every 13 weeks) you start with what is effectively a blank piece of paper. The lessons from the past are really important but no extrapolation of the current or past situation is allowed. Instead look at where you are and budget for the next thirteen weeks based on what you believe will be true for that period. Don’t assume anything from the past. Plan the use of your resources based on what you know or think you know about what will happen over the next three months. Constantly review as you go along and adjust. Before the 13 weeks are up prepare the budget for the next 13 weeks once again without any assumption that what has happened in the past will continue or happen again.

This is a time consuming business but very effective. In a world where we need to be highly reactive effective zero based budgeting over short periods but based on long term objectives is the way to go.

If you want help putting an effective zero based budgeting system or 13 week planning year in place in your organisation then please Contact us.

 

 

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