During a difficult financial period in the life of our organization, i.e., income was down, expenses were up (a bad combination), I learned one of the most valuable career lessons about managing. We were moving into “budget season” for the coming fiscal year. I never considered it as a season of joy, it was work and a necessary exercise that often included some creative writing.

Our Chief Financial Officer (CFO) had a two-part message for all leaders. “We will implement a zero-based budget for the coming fiscal year, which means you have no budget to work from” and “all budgets will be highly scrutinized this year.” The most common reaction was, “what?” or “I don’t understand”. We quickly learned that zero-based budgeting simply meant all expenses needed to be justified for the new year.

Typical budgeting

In past budgeting cycles, a leader would justify an expense increase by saying we will spend $x this year, so with inflation we need another 3% more next year. There was an underlying assumption in this method that whatever you spent money on in the current year was both necessary and valuable to the organization. In good financial times, it was quick and easy to do. Afterall, revenue growth covers a lot of sins.

What I learned

If you manage a department, division or organization, your budget represents the financial resources needed to execute a plan. Doing what you’ve always done isn’t a plan, it’s complacency. As we poured through report after report showing what we spent money on in the current year, we experienced surprise, even gulped a couple of times at the reality of what we learned. We didn’t know as much as we thought we did, nor did we have a full grasp of where we were spending money. To us it was embarrassing. Our CFO was right, we had been on autopilot, which was costing the organization money we could use in other areas.

Zero based

Knowing everything we presented would be inspected closely, we built the new budget from scratch so we could defend and answer questions about anything. (Finance people love to ask questions and catch people unprepared. We vowed it wouldn’t be us.)

We started with our goals and critical targets for the coming year that would help the organization. Then we focused on including only expenses we believed answered two critical questions:

  1. Did it help us achieve our goals as a division and organization?
  2. Was it necessary or critical?

If we couldn’t answer those questions, it was left out. What was left we were confident we could defend it.

We took an additional step and made certain we knew what the cost was for every item. We made sure our pricing was appropriate by checking out other vendors and for major costs, we considered a competitive bid process.

When we went to our meeting, we were prepared, knew our numbers and successful.

Adaptable

Plans change in all organizations during the year. With our new budget in place an unexpected benefit for us was we were prepared when goals or expectations for our division changed during the new year. If we needed to request additional resources to achieve those new goals, we didn’t just say “more please”, we had the numbers to say why.

A career best practice

For the rest of my career, my teams always zero-based our budgets. When I was in a new organization, they hated the first year of budgeting, until they too recognized the process made it easier to answer questions and get the resources needed to achieve our goals.

Whether times are good or challenging, it’s a good practice for your organization.

Careful planning puts you ahead in the long run; hurry and scurry puts you further behind. Proverbs 21:5 (MSG)

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