Budgeting. The word alone tends to bring a combination of angst and dread throughout the organization.

The reasons are many: It takes your managers’ time away from their “real” jobs, they hate “numbers,” or their numbers always get cut in the final version without explanation. Even the numbers-focused finance and accounting teams responsible for the final product in this process hate it, often for similar reasons.

To prepare a good budget requires commitment, planning, strategic thought, research, time, and effort. Small to mid-sized companies rarely have the resources to dedicate to financial planning and analysis or have someone willing and able to own the process. So it often falls on the finance or accounting teams — in addition to their regular jobs of closing the books and reporting on numbers.

Sound all too familiar? Probably. As a result, most of the time for budgeting is devoted to working on sales plans and the sourcing or manufacturing of the goods to be sold. For the rest of the expenses, companies usually add an inflation factor to last year’s numbers and move on.

Taking this approach means you’ll have a hard time gaining efficiency or improving costs. Why? Because the expenses are a lump sum and not specific — there’s nothing there for the manager to focus on and work toward. As a result, the task of trying to manage those cost centers seems out of their control.

Take a new approach to budgeting

This is where zero-based budgeting can help. Before I scare anyone off, I don’t mean every expense line item needs to be built from scratch. Rather, start with the line items where the most money is spent, especially those that are specifically managed.

Involve that line item’s manager in the process, assist them in finding the right historical numbers, and break down the categories within the expense line or cost center. Stress the fact that this is their budget. Tell them you’re here to help put the plan in place numerically so they can present it for approval and, ultimately, speak to the variances against their plan at the end of each month.

Using zero-based budgeting: A real-life example

End-of-the-month financials are often a source of stress and dread for operating managers when they have to try to explain why that line item is above or below plan.

Take repairs and maintenance in a manufacturing setting, for example. These line items cost a lot of money and are often unpredictable. You never know when a machine will break and need repair, but you can apply zero-based budgeting to the preventative maintenance portion.

As for repairs that are not routine, prepare a list, based on historical data, of how often the machinery needs repair and the cost to do it. The maintenance team will be very familiar with these numbers based on their experience, and you can assist by pulling historical invoices from vendors.

Have the team tell you the “plan” that they have in their head or on a schedule and then build the cost of that plan for them. As for the less predictable items, they can be planned based on estimates, knowing it’s likely to occur at a different time. But you still have a budgeted number in the plan for the manager to manage and report against.

Now you have a budget that the manager supports (because it’s their plan for what they need to do to keep the machines running), understands, and can use to discuss any variances from actual results. (For example, “We pushed back a planned overhaul from March to April, so I will still spend that money, just in April instead of March, as budgeted.”)

But, most of all, now the manager has ownership over that budget. Most people want responsibility and ownership in their work — it builds pride and makes them feel more engaged in their job. That engagement can ultimately reduce turnover in your business.

An added benefit is that you have a plan that can be accurately adjusted when sales or production time flexes. Reduced manufacturing time means there are some savings in repairs and maintenance. Increased manufacturing means you need to flex additional costs to this line item so that cash flow and profitability are not overstated when sales are higher than budgeted. 

This process requires you to invest more time at the beginning. But once you have the program in place, you will find your managers coming to the budgeting process more prepared as they have a process to update, rather than a blank piece of paper or a single number on an expense line.

Let a Fractional CFO guide you through zero-based budgeting

If this sounds overwhelming or outside your comfort zone as a business owner, don’t panic. Bringing a Fractional CFO to your team means you can lean on their expertise and decades of experience in navigating similar budgeting challenges. 

Our Fractional CFOs lead the financial operations Kansas City businesses across a range of industries and can use their deep, varied expertise to take some of the budgeting pressure off your shoulders. Contact Tommy James at tommy@crowncfo.com to learn more.