How Zero-Based Budgeting Can Change Your Life
Regular readers of the Red Three blog and newsletter understand the dual nature of the topics we cover – which reflect the dual nature of how I spend my time. On one side, we have technical posts on Crystal, SSRS, Excel and finance. On the other side, we have general posts on how I’m trying to better run my life and business. In this post, I’m going to tie the two together because “zero-based budgeting” (a geeky finance term if ever there was one) is changing my life, and it can change yours too.
The basic concept is simple. You create your budget without making any assumptions. You certainly don’t come up with your number by adding a percentage to last year’s actuals. And you don’t start with the question “What can I get past finance?” Rather, you start from the beginning, or zero, and try to justify everything you do and the money you spend on it.
This came up recently during a client’s spending review. For years, they’ve outsourced pretty much all of their financial system support and reporting work to us. And they’ve been pretty happy with the work and overall cost. But with a new CEO, they’ve been asked to take a closer look. To justify our costs, we divided our work into basic maintenance that has to happen, major project work and then “nice to haves” they could probably manage without. So, we had to show what had to happen, and what they could cut back on.
Which got me thinking about my own business. Last year, I took on more office space because I was thinking about hiring more employees. But that’s not how things turned out. And while the rent isn’t killing me, it’s substantial – partly because our office is in a hot neighborhood. So we’re in the process of reducing our occupancy costs by going elsewhere.
Next, I’ve been thinking about whether I need a new part time assistant because of all the miscellaneous tasks that need to get done. It’s a reasonable idea – I’ve had someone in that role for years. But, with zero-based thinking, just because I’ve spent money on that role in the past doesn’t mean I should continue to spend on it in the future. Maybe it would be more efficient to automate some tasks (yes shoemaker, meet new shoes) or find ways to simplify (as with our ridiculously complex 401K).
Zero-based thinking also helps with small, non-financial things. As we move to new offices, I’m confronted with having to pack things – like the mugs we give away at events. I’ve never gotten a client because of a mug. And having to store and cart them around is a hassle. Maybe at our next event I’ll just give out a gift card prize instead. Even though the expense of the mugs was reasonable, zero-based thinking says they’re not worth the time or effort.
My overall point: Zero-based thinking means you don’t have to keep doing things the way you’re doing them. Sure, in larger organizations it’s harder to make adjustments. But even so, going through the process of challenging/justifying everything will get you moving in the right direction. Even if the inspiration comes from something geeky, like your budget.
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