If there’s one word that’s being applied almost universally to the U.S. economy right now, it’s “uncertain.” Although a new law has provided some clarity regarding taxes, stops and starts in the federal government’s tariff policies are still a source of insecurity. And other factors have many employers remaining in holding patterns while they wait for the fog to clear.
This all presents a major challenge to budgeting. A previous period’s numbers may not mean as much when you’re not sure what the future holds. In the meantime, some employers are turning to zero-based budgeting. Could this approach work for your organization? Let’s take a look.
Starting From Zero
Under zero-based budgeting, every budget cycle begins from zero rather than from the previous period’s numbers. The organization or department setting the budget must justify each expense for the new period — nothing carries over automatically.
Philosophically speaking, the approach “flips the script” on traditional budgeting, which assumes that previously established expense numbers represent a reasonable baseline for making adjustments for the future. Rather, the organization or department starts from a “zero base” and builds its budget from the ground up, providing a clear rationale for the purpose and value of each line item.
Note: Although the process generally begins from zero, fixed or mandatory expenses (such as lease agreements and insurance) are typically reviewed in categories. This allows for a greater focus on discretionary spending.
When executed properly, zero-based budgeting provides everyone — especially leadership — a detailed explanation of not only where money is going, but also why it’s going there. Proponents of the practice argue that this kind of budgeting leads to more mindful spending, particularly in operational areas subject to the old axiom, “Because we’ve always done it that way.”
Considering Feasibility
To be clear, implementing zero-based budgeting may not be appropriate or feasible for every employer or department. Generally, the approach works best for organizations seeking to substantially control costs or realign resources, which, as mentioned, may make sense in today’s uncertain economy. It’s also often used by employers looking to significantly grow, contract, or transition to a new strategic purpose or market.
In some cases, zero-based budgeting may be a good fit when an organization is simply looking to create or more strictly enforce a culture of accountability. Because the approach forces regular reevaluation of every dollar spent, it often uncovers outdated or unnecessary expenses. Organizational leadership or department managers must think critically about their spending priorities and expected outcomes and articulate them clearly.
Recognizing The Challenges
As you might’ve guessed, zero-based budgeting comes with its fair share of challenges — especially for employers that have never tried it before. The approach is typically more time consuming and labor intensive than traditional budgeting. Smaller organizations with limited staff may find that it strains resources.
Zero-based budgeting can be particularly difficult to implement if historical and current budgeting data isn’t well organized. Employers that lack up-to-date technological tools for tracking and analyzing expenses in detail may also encounter serious troubles.
In addition, because zero-based budgeting tends to restrict rather than loosen spending, some executives or managers may view the process as burdensome or even punitive. Therefore, you may need to first make a case for implementing the approach to obtain buy-in and help ensure its success.
Looking For A Good Fit
You don’t necessarily have to take an “all or nothing” stance when it comes to zero-based budgeting. As alluded to above, you can apply the approach organization-wide or only to specific departments that may be struggling to control costs. We can review your budgeting history and processes and help you determine whether and where zero-based budgeting may be a good fit. Contact us to get started.