The Pros and Cons of Zero Based Budget

Zero-based budgeting is a financial planning strategy that requires all expenses to be justified, starting from zero. This method can be a great way for businesses to manage their finances and keep track of where their money is going. While there are some benefits to using this approach, it may not be the best option for every company. Here we'll take a closer look at zero-based budgeting and discuss whether or not it would be a good fit for your business.

What is zero-based budgeting and how can it help your business?

Zero-based budgeting is a type of budgeting in which all expenses must be justified for each new fiscal year. This means that, rather than starting with the previous year's budget and making adjustments, businesses begin from scratch and build their budgets up from zero.

Benefits of using a zero-based budget in your business?

There are several benefits to this approach. First, it forces businesses to reexamine all of their expenses and determine whether they are truly necessary. This can lead to significant cost savings over time. Second, it helps businesses to focus on their goals and allocate their resources accordingly. Finally, zero-based budgeting can help businesses to identify and eliminate wasteful spending. As a result, it is an effective tool for businesses of all sizes.

Challenges you may face when implementing a zero-based budget in your business?

For one, it can be time-consuming. In order to create a realistic budget, you will need to gather extensive financial data and carefully consider all of your options. Determining wants and needs can be very subjective as well. Without careful planning and discipline, it is easy to overspend. However, if you are willing to put in the time and effort, a zero-based budget can be an extremely effective tool for managing your business finances.

How to build a zero-based budget?

One way to create a zero-based budget is to use a spreadsheet or budgeting software. Simply create a list of all your income and expenses, and then allocate each dollar to a specific category. You can use GFT’s budgeting tool here. However, the larger your business you may require a customized excel model and professional help to ensure the accuracy of your budget.

How to stay on track with your budget?

The best way to stay on track of your budget is to compare budget versus actuals periodically whenever the actuals are available and to monitor the remaining balance of your budget.

It may be in the best interest of your business to ensure every dollar spent is utilized wisely. If you have outgrown basic budgeting techniques and require professional help GFT offers financial planning and analysis (FP&A) services to help guide you through Zero Based Budgeting.