Are you financially responsible for a team, department or company? And are you doing your yearly budgeting round based on the budgeting and/or the actuals form last year? Copying numbers from last year’s sheets? Then this can be an interesting practice for you. Throw the numbers from last year away and start with a clean sheet, that’s called zero-based budgeting.
What steps to take for the practice
Start your new year budget based on zero, instead of last year. The process of zero-based budgeting starts from a "zero base," and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.
Set up guidelines to help zero-based budgeting:
Start analyzing main processes, the must do’s, and define what is needed to operate these processes and what costs are involved (people, systems, external costs)
Do this with the other processes and rank them with your colleagues in added value for the customer
Bring everything together
Compare with last year
Add new products/projects/nice to have’s based on the added value for the customer
Evaluate monthly the actuals vs budget (preferably real time)
Better allocation of resources. Freed up cash can be reallocated to activities and resources that support the purpose of the company
It can change the DNA of your team/company, because of sustainable cost management.
Eliminates waste and reduces costs, because you start from zero every year.
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