The zero based budget is a popular method of budgeting, known for its complex process to give every dollar meaning. For many people, the concept of building a budget from scratch every time can feel hectic.
But then, there are times when the use of zero-based budgets has been praised for their benefits, especially for small business owners and entrepreneurs!
So this time, let’s talk about zero based budgeting, why you should consider it, and how to create one!
What is a zero based budget?
A zero-based budget is a budgeting approach where every dollar of income is allocated to an expense category or a savings goal. The simplest version of the zero based budgeting definition is having a balanced budget where the difference between total income and expenses equals zero.
In other words, you allocate all of your income to various spending and saving categories until you’ve accounted for every dollar, ensuring that there’s no money left unallocated.
The main principle behind a zero-based budget is that you give every dollar a purpose, whether it’s for essential expenses, discretionary spending, savings, investments, or debt repayment.
Zero based budgeting vs. traditional budgeting
Traditional budgeting often focuses on past performances. When you’re creating a new budget, traditionally, you take your previous one and slap a 2% increase on it for the upcoming period!
But zero based budgets are much different than that. They disregard previous performances and budgets. Instead, every expense is counted and recorded, leading to an improved cost management system!
Here are some main differences between traditional budgeting and zero based budgeting!
|Zero-based budgeting||Traditional budgeting|
|Focuses on current needs and financial goals||Based on previous budgets with a slight adjustment|
|Time-consuming and requires complex planning||Simpler and beginner-friendly to create|
|Provides a holistic view of every dollar earned and spent||Less awareness of income and expenses|
|Encourages intentional allocation for savings and debt repayment||Might not allocate for debt and savings efficiently|
Advantages of zero-based budgeting
As a budgeting approach, zero-base budgeting has many benefits. But more often than not, these benefits are yielded by enterprise-level corporations.
But this type of budgeting is just as much beneficial for small business owners and entrepreneurs. Here are 4 benefits of zero-based budgeting to small business owners and influencers:
Optimizes cash flow
By closely examining cash inflows and outflows, ZBB can help small businesses optimize their cash flow. This is crucial for maintaining financial stability, managing working capital, and ensuring the business has sufficient liquidity.
ZBB promotes a deeper understanding of how each expense affects the business. Entrepreneurs can make more informed decisions about where to allocate funds, whether it’s for marketing, product development, or operational improvements.
Increases cost efficiency and savings
ZBB requires a thorough review of all expenses, ensuring that each expenditure is justified and necessary. This scrutiny can lead to the identification of unnecessary costs, resulting in cost savings and improved overall financial efficiency.
ZBB requires clear justifications for each expenditure, promoting accountability and ownership of budget decisions.
Small business owners can become more aware of how their spending choices impact the overall financial health of the business, creating a practice of making informed decisions!
Disadvantages of zero based budgeting
While zero based budgets are a great way to start planning and budgeting every dollar of your business, it also comes with a set of flaws!
Here are 4 disadvantages of a zero based budgeting system that entrepreneurs and small biz owners might suffer from:
Small businesses and entrepreneurs often have limited resources, including time, personnel, and financial expertise. In fact, more than 80% of small businesses only have one employee: the owner themselves!
Zero-based budgeting requires detailed analysis and justification for each expense, which can be resource-intensive and divert attention away from core business activities.
More complex than other budgeting methods
ZBB can be intricate, requiring a thorough understanding of each expense category and its contribution to business operations. Small businesses and entrepreneurs might lack the necessary resources or expertise to perform this level of analysis effectively.
Not practical for volatile small businesses
ZBB assumes that all expenses are reviewed and allocated based on current priorities, which might not be practical for small businesses that need to focus on immediate tasks.
Frequent adjustments might be needed, causing disruption and slowing down decision-making processes.
Doesn’t focus on long-term goals
ZBB’s emphasis on justifying and allocating resources for the current budgeting period might lead to a short-term focus. Small businesses and entrepreneurs also need to consider longer-term goals, growth strategies, and investments, which might not fit well within the ZBB framework.
How to create a zero-based budget?
Ready to move away from traditional budgeting and start your zero-based budgeting process? Here’s how you can create a zero-based budget for yourself:
Calculate your income
Start by determining your total income for the budgeting period. This includes all sources of income, such as your salary, freelance work, investments, and any other money coming in.
List all expenses
Create a comprehensive list of all your expenses. Categorize them into fixed expenses (like rent/mortgage, utilities, insurance) and variable expenses (like groceries, entertainment, dining out).
Assign dollar amounts
Allocate specific dollar amounts to each expense category based on your priorities and needs. The goal is to ensure that your total expenses equal your total income, resulting in a balanced budget.
Adjust as necessary
If your expenses exceed your income, you’ll need to make adjustments. This might involve cutting discretionary spending, finding ways to reduce fixed costs, or reevaluating your financial priorities.
Savings and debt repayment
Don’t forget to allocate funds for savings goals and debt repayment! This could include building an emergency fund, contributing to retirement accounts, or paying down credit card debt.
Review and monitor
Regularly review your budget to ensure you’re sticking to your allocated amounts. Track your actual spending and make adjustments as needed to stay on track.
Ready to budget from scratch with ZBB?
Zero-based budgeting (ZBB) is a budgeting approach that involves allocating funds based on the needs and priorities of each budgeting period, rather than simply relying on historical spending patterns.
Unlike traditional budgeting methods, the zero-based budgeting style is often suited to small business owners, entrepreneurs and basically anyone with a fluctuating income!
Not only does it help improve accountability, but it’s also an incredible way to meet your strategic goals. So if that’s what you’re looking for in a budget, get started with the zero-based budget for your business!
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