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Zero-based budgeting is always a good approach

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As a deacon in my church I recently recommended that our finance committee undertake zero-based budgeting in preparing their financial plan for our upcoming fiscal year.

“Why,” came one response, “isn’t that for when you have financial problems? We’re doing fine.”

I replied: “Actually ZBB is a great financial tool in good times, too, because it calls for each department or ministry to carefully examine and justify its financial needs and expenditures.”

And that’s exactly what happened, as some departments found that they could actually reduce spending, still meet their objectives in a solid way and free some funds for other church works.

Now I recognize that my church isn’t a marine dealership. But the fact is ZBB can help dealerships even more by identifying spending that isn’t getting a desirable return and thus trigger the redeployment of those funds to get better results or be moved to the bottom line.

Equally beneficial, ZBB converts what’s likely a culture of “spend” to one of accountability. Team members are held accountable for categories of spending, and they are encouraged to treat the company’s money like their own and question the value of each expense. Cost management becomes an innate dealership philosophy.

Unfortunately, it’s common to take a pass on the use of ZBB when times are generally good, as they are these days. But the benefits of ZBB, likely undertaken when the Great Recession hit in 2008-09, are reported today to have become an ongoing regular process at many companies that want to continue the benefits produced by ZBB.

As was the case for some members on my church finance committee, not everyone has experience with ZBB. As I explained, it’s a planning effort that reverses the process of traditional budgeting that everyone is used to doing in which managers justify only variances from the previous year because they assume the "baseline" is automatically approved.

By contrast, ZBB requires that every line item in a budget be approved, rather than only changes and additions. ZBB holds feet to the fire, causing every budget request to be thoroughly re-evaluated and justified, starting at a zero base. So it calls for a fresh budget every year, rather than just asking for more over last year’s base.

There’s no question ZBB is more complicated than traditional budgeting. It certainly takes more effort, time and leadership. It must involve all of the sales, service and administrative functions, as every team member who controls any spending is asked to focus on the “why” of every line item request.

So is it all worth the effort? Yes, if you’d like to end wasteful spending. Sure, if it makes sense to you to eliminate costly redundant functions or if you favor dumping unproductive products or services. And yes if you’d like to free up cash resources to reinvest in growth ideas.

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