Whether you’re budgeting for your business, organization, or a department you’re in charge of, it can be a daunting task! But believe it or not, the nuts of bolts of how to create, manage, and execute a budget is the easy part. Most often, the challenge is to train ourselves how to treat the funds we have stewardship over.
Traditional Budgeting, Right or Wrong?
If you’ve ever worked for large corporations, institutions, or organizations, the attitude is usually “use what’s been allotted to you, or lose it!” That attitude is reactive in nature because you base the budget off of what happened in the past. So, you may ask, what’s wrong with that? The short answer maybe nothing at all. But if you work for a cash sensitive business where funds are closely monitored, either due to cash flow, or the nature of the funds is more custodial in nature (tithes in churches), this is generally the wrong approach to budgeting. Chances are if you’re reading this, that you fall under that categorization.
The Proactive Approach
Zero-based Budgeting (ZBB) is a term that has become popular in recent years, and is truly the proactive approach to budgeting. Instead of basing budget amounts and expenditures on what happened in the past, it requires those who are designing the budget to ask “what do we need for this year or program?”. So instead of using last year’s performance, you effectively wipe the slate clean and ONLY plan for what your expectations are coming up.
For example, let’s say you are budgeting for your kids extra-curricular activities for the upcoming year. Last year your kids played soccer, with a total cost of $300 for the year. This year, you decide your kids don’t have what it takes to be the star player, so you put them in Karate, for a total annual cost of $1200. Now, let’s budget!
Under the traditional method, you would use history to create your new budget so we have $300 in the budget. I bet you can already see the problem! Now, because you used a traditional budget, before you make it half of the year, you are already over budget.
Under the ZBB method, you think ahead: “I know my kids played soccer for $300, but I know they want to try karate and that’s going to cost $1200″. So you budget for $1200. Viola! You just created a budget and it looks like you’re going to stick to it!
You can see the difference in the budgeting methods used in the example above. It’s up to you to think about your budget from a “Zero-based” point of reference so that you can use your funds proactively. It may be hard, and take some cognitive training, but in the end, it will be worth it when your are using hard-earned funds, to their maximum potential to achieve your goals.
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