Zero Based Budgeting

Budgeting is one of the hottest topics in the finance world this year. The reason why this issue, which has always been extremely important, is on the agenda now can be considered to be related to the fact that financial statements have started to be examined more carefully than before after the pandemic.

Zero Based Budgeting

Zero, as if it never happened.

Budgeting is one of the hottest topics in the finance world this year. The reason why this issue, which has always been extremely important, is on the agenda now can be considered to be related to the fact that financial statements have started to be examined more carefully than before after the pandemic.

Alternative scenarios, which started to be studied in almost every company after Covid-19, once again proved how critically valuable realistic budgets are as a guide.

In today's world, where optimizing processes is among the strategies for the future, methods of making budgets have also started to be reviewed. There are two basic budgeting methods on our agenda today.

One of them, and the usual one, is to move the strategies and expectations to the new year based on the data of the past years. The other, more striking, is zero-based budgeting.

A budget set from scratch may not sound ideal. Who wants to start from scratch when you can use existing templates and customary methods?

On the other hand, budgeting from scratch has the potential to bring huge strategic benefits. All the big companies that have made Zero-based budgeting a part of their corporate culture in the past have clearly seen that they have increased their level of benefit from cost optimization.

Zero-based budgeting can certainly be an effective alternative to traditional budgeting.

So what exactly is a budget set from scratch?

Budgeting from scratch opens a clean slate for your organization in every budget period. In this way, it ensures that the budget depends only on real financial performance and the real expectations of the market, independent of past habits.

In doing so, it offers something that traditional budgeting does not: the chance to review and justify every expenditure at every stage.

Zero-based Budgeting came to the fore as a new solution-finding tool in this period, as finance teams struggled to align budgets with company goals by seeking opportunities to reduce costs, reallocate resources, and maximize efficiency.

Data is much more accessible today than ever before, empowering teams to examine every initiative, employee, and tool in all departments, asking whether they're worth the cost and contributing to their business goals.

In doing so, it opens up the opportunity to see and optimize all your costs based on the value they bring to organizations.

These gains become even more important in an environment where savings are very valuable, no matter where or how they are made, especially in difficult economic conditions where growth has decreased. Of course, it is just as valuable for scaling the business with growth even when things are on track.

Budgeting from scratch is also useful for companies that have gone through mergers and acquisitions and have changed in nature as a result.

In short, with the right support, it can be used in any corporate setting, and a good zero-based budgeting process can move organizations forward.

Budgeting from Scratch vs. Traditional Budgeting

Traditionally, your current year's budget and actuals serve as a starting point for your next year's budget. This means that certain expenses are usually fixed, and deeper analysis is reserved for new expenses.

This process is relatively simple and routine for your budgeting team. However, because it is based on the status quo, traditional budgeting can overlook potential cost savings and opportunities that can help your organization thrive.

It may not promote transparency or a holistic view of the organization as scratch budgeting does. Instead of relying on historical data as in the traditional method, it ensures that every item in the budget is produced from scratch.

Every expenditure is linked to ongoing financial performance and must be aligned with company goals. Reducing costs doesn't just mean reducing new spending or reducing limits.

You start from scratch each time, examining new and ongoing expenses with the same level of scrutiny to see where the funding should go.

The Budgeting Process From Scratch

This process will be more interactive and detailed than the traditional method. In this process, communication between finance and other business units is very important.

Recognition of each department's own place in the budget, cost visibility, cost management, and everyone's sense of responsibility ensures that optimization is a general purpose, not just a financial-specific one. Adopting the Zero Budgeting method will add value to the culture of the organization over the years.

Of course, there are a few basic steps that we can talk about for the proper execution of this process:

Step 1: Extensive reporting and performance evaluation:It shows what works in the organization and what will contribute to the goals.

Step 2: A team of experts, almost every day. It analyzes the spending of business units, cost centers, and categories in depth by examining the following:

Step 3: Starting from scratch, the new year's budget is determined. Adjustments are made for goals and strategies.

Step 4: Opportunities for operational improvements are identified between departments, taking into account business comparisons and targets.

Establishing a zero-based budgeting process will take a long time from a full-time finance team with contributions from profit, loss, and cost subcategories. But all this work can pay off with in-depth visibility into cost drivers and achievable goals.

Advantages and Disadvantages of a Budget Calculated from Zero

Budgeting from scratch can be used in specific areas of your business or throughout your organization. The important thing is to understand which areas of your business can benefit most from it.

While budgeting from scratch can enable companies to quickly respond to new market changes, consumer needs, or business goals, it also requires the right people, processes, and tools.

This will probably not be very productive without leadership as well as full participation from relevant teams or individuals. To understand if it's right for any area of your business, consider both the benefits and potential drawbacks of zero-based budgeting:

The Advantages and Disadvantages of Starting From Scratch Budgeting

While improving operational efficiency as a whole, it can provide significant cost savings by giving you new opportunities to invest elsewhere.

It gives your team real visibility into your organization. It allows you to provide strong leadership and insights.

It can enable better organization-wide collaboration while identifying programs that need to be prioritized and how they will work together to contribute to company goals.

It can make your business more agile by keeping teams on top of every expense and goal.

Cons of Starting From Scratch Budgeting:

It can be a more complex process that takes more time to complete the first time.

It may require special training or operational intelligence to do this right.

This requires full organizational involvement; otherwise, it can put other departments on the defensive as they try to justify their own programs and initiatives.

Without the right metrics to analyze, it could potentially impact departments that deliver less tangible results.

Knowing if this is right for your business means understanding the goals you want to achieve and how budgeting from scratch can help. But with the right organizational culture in place, zero-based budgeting can help you advance your planning and decision-making processes and, in the process, help you understand the implications of these changes.

At Finsmart, we create a positive and welcoming atmosphere to foster collaboration and creativity. Our team is treated with respect, kindness, and professionalism, leading to increased productivity, innovation, and success.

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