WTF: Zero-Based Budgeting

A scattered pile of U.S. one-dollar bills on a pink background.

Picture it: You’re living in an apartment, and you’re paying $2,500 a month in rent (stop rolling your eyes New Yorkers). You need a new apartment, and you start with $2,500 as your base, because that’s what you’re paying now. This means if you’re booking for a new place to live, you’re likely using $2,500 as a gauge. That’s what most people do when they budget, they start from where they are now and go from there. 

Instead, you should clear your mind and start from scratch. You’re no longer required to go to an office, do you even need to live in the same neighborhood (or state for that matter)? Maybe a 1-bedroom that allows pets in a less pricey area-code would be a better fit for you now that you’re working from home with your pandemic puppy. That’s Zero-based budgeting. Justifying each expense with fresh eyes each budgeting season.

Zero-based budgeting asks “What do you REALLY need? (NEED not WANT) What do you want to be close to? How much space do you need?  Can you live in another state? Maybe even another country? 

It’s like resetting your thinking back to zero. EVERY YEAR.

Say you’re a CEO, and you’re planning for growth in the coming year. You look at your staff and decide you need to add people. What you really should be doing is laying out what you need for your business, then taking your current people, layering them into the spots you need and seeing where the gaps are. That’s zero-based budgeting — starting from zero and building a plan for where you want to go. Change is difficult, and it’s easy to be biased toward what we already have. And starting from scratch?! That’s really HARD, which is why most people don’t do it.

If you are always assuming that what you did this year is what you must do next year, you aren’t taking, well, anything, into consideration. And this is particularly egregious now. Market forces have been changing so rapidly for so many reasons that looking back at what you did last year just isn’t a good foundation on which to start budgeting for next year.

I hear people say this all the time: “If I had to do it all over again.. I wouldn’t have done XYZ.” Zero-based budgeting is an opportunity to avoid saying that.

I’ve written about using your budget as a roadmap to help guide you as you react to market forces. Zero-based budgeting is a version of that. We don’t have time to stop throughout the year and completely upend our company to start from scratch, but the budgeting process is a perfect opportunity to do that. 

One of the reasons people don’t employ this kind of budgeting is because, admittedly, it’s a painstaking exercise to reimagine your organization from scratch every year. But the benefits clearly outweigh the pain-in-the-assedness. It means you are really evaluating your business for what you want it to be vs. where you were before. 

People also avoid looking at things this way, because it forces them to make difficult decisions, mostly around staffing. If I say, “I know you thought that Chief of Staff was a great hire last year, but it doesn’t seem to fit in with the new vision of the company.” What does that mean? The CEO’s got to make a decision at that point. Am I going to waste another X dollars on a Chief of Staff, or am I going to cut bait, because this isn’t the right plan for the business?

If they can’t make that difficult decision, chances are they’re going to have to do what many companies do, which is to wind up laying people off in a panic. My advice is this: Instead of setting yourself up to make desperate, reactive changes (especially at the end of the year when you’re trying to make your numbers), be proactive during the budgeting process about how you want to set your organization up for success and implement it from the get-go. 

Don’t be afraid to use zero-based budgeting. It’s not as scary as it sounds. Call me. I’ll help you.

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