Zero-Based Budgeting: A Modern Approach for Small Business Financial Planning

In an ideal world, your business would have unlimited money to meet every need but for most small businesses, this isn’t the case. Because of this, it’s important to leverage the most effective budgeting tips to grow your business and maximize your ROI—careful financial planning is key to your long-term success.

Zero-based budgeting (ZBB) is an effective hands-on budgeting approach that helps prevent overspending and gives you more control over your business costs. With ZBB, each budgeting period begins with a blank slate rather than a template from previous years’ spending habits. This makes you rethink and prioritize every expense to ensure it aligns with current business needs and goals.

Read on for a deeper dive into zero-based budgeting. We’ll also explore a few savvy budgeting tips to enhance your small business’s financial planning strategies.

What is Zero-Based Budgeting

Zero-based budgeting starts your annual budget at zero instead of carrying over costs from past budget cycles. This lets you review every expense to ensure it’s necessary and cost-effective. Each cost should support your current business goals and invest in your business’s growth.

Expenses to consider in ZBB include:

• General expenses
• Operating costs
• Marketing expenses
• Distribution costs
• Sales expenses
• Cost of goods sold

ZBB can help your company save up to 25% of its costs, which can be reinvested to grow your business or added as profit.

Benefits of Zero-Based Budgeting

Even though zero-based budgeting (ZBB) takes more time and effort than traditional budgeting, it has many benefits.

• Cuts unnecessary spending and optimizes your budget: ZBB doesn’t carry over expenses from other budget cycles. Instead, every proposed expense for the current budget cycle must meet a strategic goal before being added.
• Improves financing understanding: ZBB involves meticulous financial planning, which gives you a better overview of your business’s financial standing.
• Increases operational efficiency of your business: ZBB helps your business prioritize costs that add the most value. Ultimately, this can facilitate growth and maximize revenue for your business.

Disadvantages of Zero-Based Budgeting

While the advantages of zero-based budgeting can’t be disputed, it does have its drawbacks. These include:

• Requires more time: ZBB is more time-consuming than traditional budgeting, often requiring more collaboration across team members to justify each cost.
• Difficulties in assigning values: While some expenses are a no-brainer regarding how much they contribute to your bottom line, others aren’t as straightforward. This could mean approving an expense that doesn’t add value or leaving one out that brought more to the table than you previously thought.
• Lacks long-term forecasting: With ZBB, you adjust your business’s budget to align with your current strategy and financial situation. However, this is also a disadvantage and doesn’t allow you to budget for long-term goals.
• Requires strict discipline: When carried out to the letter, ZBB can be very rigid, leaving little room for unexpected expenses or an opportunity to grow your business.

Zero-Based Budgeting Tips for Your Small Business

Our zero-based budgeting tips can help get you started on your way to better financial planning for your business.

1. Define your business’s financial goals and objectives

The first budgeting tip for your business is to examine your current financial situation and identify and set clear goals and objectives. These should align with the short and long-term visions you have for your business. Some of your goals might involve expanding your products or services, opening a second location, or simply increasing your ROI. Either way, it’s wise to ensure that each item in your budget contributes in some way to reaching those goals.

2. Calculate projected revenues and categorize all business expenses

Once you’ve identified your business goals, determine your average monthly revenue for the past year. Then, detail a comprehensive list of potential expenses to achieve your goals. Include operational costs, fixed expenses, and variable expenses.

Every expense should be listed and categorized into one of three primary categories: essential, strategic, and discretionary.

Essential Expenses Examples

Essential business expenses are those that are necessary. They usually recur as monthly expenses. They include:

• Rent or commercial mortgage
• Utilities
• Salaries
• Business loans
• Employee compensation packages including healthcare and IRA contributions
• Business credit card payments
• Company cell phones
• Business car repairs
• Company car insurance
• Student loans (though this can be argued whether it’s a personal finance expense or business expense)

Strategic Expenses Examples

A strategic expense is expected to produce a profit in exchange for that expense.

• Marketing
• Outsourced professional advisors (Example: A tax professional that can advise you on ways to leverage tax laws to minimize your business’s tax liability or how to maximize your company’s after-tax profit)
• Production efficiencies that lower business costs

Discretionary Expenses Examples

A discretionary expense isn’t essential for your business’s day-to-day operations. Examples include:

• Business travel (conferences, trade shows, etc.)
• Employee outings and other perks, such as work lunches, parties, fitness club subscriptions, tuition reimbursement, etc.
• Office furnishings and decor
• Software subscriptions that aren’t integral to your business’s operations
• Donations

3. Determine which expenses are justified

The next budgeting tip is to evaluate which expenses can be scaled back or eliminated. You may need to collaborate with essential department heads for more input to decide which expenses are necessary. For example, it’s wise to look more closely at which marketing campaigns have had the most impact on driving growth. In doing so, you’d evaluate the return on investment of each individual campaign or marketing tactic. Another budgeting tip worth considering is to reduce some of your recurring business expenses by looking into a digital solution that can automate and streamline tasks. It might require more investment at the onset but saves money in the long run.

4. Prioritize expenses.

Once you’ve evaluated every expense, prioritize justified expenses that contribute the most to your goals and bottom line. Meanwhile, consider reducing how much you allocate towards less important expenses. Zero-based budgeting should direct funds towards actions that facilitate business growth. You may need to develop new ways to achieve your business goals. Examples include developing new products, enhancing customer service, or servicing a new market.

5. Implement your zero-based budgeting plan with software

Cutting-edge budgeting and financial planning software that leverages AI and machine learning can help you become a wiz at zero-based budgeting. The best software solutions will provide proactive cost management insights and help implement best practices for ZBB.

6. Monitor to stay within budget

A top budgeting tip from industry experts is to track and monitor expenses to stay within allocated amounts. If your revenue or your business liabilities change, you can tweak your budget plan.

7. Revisit your budget when you get business financing

Small business financing comes with the territory of owning a business. The major downside to ZBB is the challenge of staying within budget. At the same time, you can revisit your budgeting plan as needed. At some point as your company grows, you will likely need a small business loan. Financing can help bolster your business’s cash flow and provide much-needed working capital during a downturn. It can also help fund equipment and inventory purchases or a business expansion. Either way, when funding is necessary, you can revise your ZBB plan to account for any new monthly notes.

Budgeting Tips for More Efficient Money Management

Whether or not you use zero-based budgeting for your business, these budgeting tips can help you save money.

Budgeting Tip #1: Maintain a positive cash flow

An essential small business budgeting tip is to maintain a positive cash flow to be successful and maintain your company’s operations. A positive cash flow will also help you pay bills on time, which can build your business credit score. When you need financing, it’s also one of the first things a lender will look for when determining whether or not to approve your business loan.

Budgeting Tip #2: Find ways to increase your business’s revenue

Ultimately, this is the best way to increase your bottom line and budget more efficiently. Depending on your industry, there are several ways to accomplish this. You can temporarily increase your marketing spend to boost short-term sales. Then, you can create a newsletter signup and send customers special offers.

Budgeting Tip #3: Slash spending if bad debt is out of control

It’s easy for bad debt to snowball more than you planned. There are many ways to decrease debt so it’s less daunting and more manageable. For instance, you can refinance high-interest credit card debt or business loans. By consolidating them, you can increase savings across all your debt and simplify your monthly expenses. You should also consider re-negotiating with suppliers and vendors. Get quotes from multiple suppliers so you know what your options are. Once you know how much you can save, ask your current vendor about a new discount. If you’ve been current on repayment with them, use it as a talking point when negotiating. If they don’t budge, change vendors.

Budgeting Tip #4: Create an emergency fund

A fund for rainy days is good for anyone, whether you’re an individual or a business. Having a little extra to set aside each month can help with emergencies. That way, Instead of increasing your credit card debt to cover those expenses, you can pull from your emergency fund. Start by mapping out your savings goals. Open a separate business savings account to keep your emergency fund separate from your business bank account. At the end of the month after paying bills, put any money left over in your emergency fund. Then, leave the savings account untouched unless it’s needed. You may also want to consider opening a business line of credit. A line of credit functions similar to a credit card, in that it gives you the opportunity to draw funds if you need them, but you only pay interest on the amount you draw.

Budgeting Tip #5: Stay up-to-date with your business’s accounting tasks

Some businesses use budgeting apps and accounting software to manage their finances. Many also partner with accountants or other financial professionals to ensure they meet their tax obligations. As an added budgeting tip, it’s wise to have financial statements on hand at all times in case you need to seek business financing.

FAQs

What kind of budgeting advice or managing money tips do financial planners have for small businesses?

Common budgeting advice from financial advisors includes keep your personal and business finances separate (i.e., separate bank accounts, debit cards, credit cards, etc.), implement a financial plan, have an IRA or investment account, set aside for a retirement account, and have an exit plan.

What are some top budgeting tools to consider for business finances?

The best budgeting tools automate and optimize your business finances. Some of the top budgeting tools include classics like QuickBooks as well as newer financial planning tools like Prophix, Budgyt, Sage, Xero, and Adaptive Planning.

Are there good budgeting tips about business loans?

Business loans are an important part of any business budget. Maybe the best tip is simply, when taking out a loan, make sure that it will have positive ROI so that you’ll be able to pay it back.

What is the easiest way to save money when running a business?

One of the best ways for small businesses to save money is to spend less and keep track of every expense. It’s also essential to have a budget plan and stick to it.

What is the best way to budget money when finances are tight?

It depends on your situation. For example, if you have a lot of high-interest business debt or credit cards, a good budgeting tip might be to lower your overall debt by refinancing the debt. Or, if you have a seasonal business that makes it tough to have a regular monthly budget, a working capital loan can make it easier to budget during slower months.

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