When it comes to cooking, everything is better when it’s made from scratch. From pie crusts to bread dough, recipes made from the ground up make all the difference. When it comes to budgeting however, that isn’t always the case.
Zero-based budgets are built on the idea of in-depth scrutiny of every aspect of an organization. The budget is created “from scratch” by starting at zero, then increasing only based on need and analyses of expenditures.
Many nonprofits think this is the way to go, but just because you aren’t making a profit doesn’t mean that you shouldn’t have safeguards in place. Here’s why.
At first glance, zero-based budgeting seems to have a lot to offer. In theory, ZBB aims to guarantee that each piece of your budget is necessary and rationalized. It oversees every part of your organization, ensuring that each and every resource is being used efficiently.
Rationalizing every single expense isn’t a realistic goal for many nonprofits, however. Building an annual budget from the ground up has its shortfalls. These are some challenges that are associated with zero-based budgeting strategies:
- Your staff has to be able to justify every purchase decision; in order to effectively implement zero-based budgeting, this requires proper training.
- It can shift your thinking into a short-term perspective. With a zero budget, your sights will be more focused on goals that can be accomplished within the year. Some investments have long-term returns which may not be justifiable right off the bat.
- Employees have to maintain uniform standards of justification for expenditures. If those standards aren’t consistent, then funding can become weighted toward one area over another.
- Zero-based budgeting requires extensive resources. Developing a brand-new budget every year takes a lot. Both time and effort can be saved by adapting your current budget rather than scrapping it.
Just because you aren’t utilizing zero-based budgeting doesn’t mean you should let your budget go stagnant. Stay up-to-date with your budget by knowing about your financial landscape. This will give you a good idea of what to expect for the coming year. It’s also helpful for relating your overall budget back to your organization’s mission and for communicating plans to your constituents.
With that being said, nonprofit budgets should also have a cushion. If you end up at the end of the year and realize that something didn’t go right, it provides security to your organization for the future. Not using a zero-based budget isn’t an excuse to get lazy about planning, though. Determine a feasible cushion for your nonprofit. Make sure you have a good understanding about why you have the funds that you do so that you can fully explain it to your auditors.
There are useful things to learn from zero-based budgeting. You need to be knowledgeable about where your money is going and how it contributes to the bigger picture. Be wary of taking it a step too far, though; you should have a cushion in order to create a flexible budget that can adjust to changes in your nonprofit.
Consider updating a budget that works instead of trying to make it from scratch—it just might make all the difference.