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How to Leverage Zero Based Budgeting to Really Test your Business

How to Leverage Zero Based Budgeting to Really Test your Business

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Last edited May 2, 2023

How to Leverage Zero Based Budgeting to Really Test your Business

Here we are the 1st of December and day one of The Recruitment Network advent Calendar. I’m excited to bring you the first article in a whole host of content that we will be providing over the coming month – Each day we’ll be opening up one of the doors on the Advent Calendar page, and each one you’ll find a little value-add that’ll hopefully help you become a better Leader and Recruiter.

Budgeting is a vital tool to challenge your business and set targets for the coming financial year. You definitely need to take the process very seriously, because if you don’t, your bank manager and / or investors will, leaving you struggling to justify why they should have confidence in you. Right now, confidence in your business model is the best tool to combat market risks.

Too many businesses decide their budgets based on what happened last year, adding a proportional increase or decrease to revenues and costs. So what’s wrong with this approach?

  • It assumes you will have the same level of activity as last year, without enough justification. What makes you think you will keep your current customers spending at the current level?
  • You do not challenge your costs properly.
  • It encourages managers to spend their full budget so that they get the same next year and offers no challenge to cut cost.
  • It’s lazy!

Zero-based budgeting provides a real test to what your business can achieve, by examining every nook and cranny.

Where do you start?

  • As the name suggests, each line of your budget starts from zero. Assume nothing.
  • You must be clear on what the overall business objectives are, since each line in the budget must be justified against these objectives.
  • Set up a project plan to ensure on-time delivery.
  • Parcel out the work to each line manager, and give them a strict deadline for completion.
  • You will need to look at the sales line first, because this defines the level of activity.

Why does zero-based budgeting help me?

  • It improves understanding of what marketing channel drives your sales, and whether those sales are profitable.
  • It motivates managers to determine their key efficiency metrics.
  • It identifies cost centres which have been previously overstated.
  • Each cost will need to justify its existence.
  • Line managers will develop a greater ownership and responsibility.

It does however provide some difficult challenges.

  • The level of sales activity needs to be defined before anything else, so what gross margin is acceptable?
  • It is an iterative process that requires a lot of time to get right. It is useless as a tool if it is not completed.
  • Defining who owns certain costs may prove difficult.

If you have not used this process before, it will potentially transform your bottom line as you get a much better handle on your revenues and costs. It will free up your time, as you delegate responsibility more effectively, and will give you a much better platform for growth.

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