A secret weapon for the savvy CEO

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(MoneyWatch) Keep your business agile, relevant, adaptable, and profitable.

There's a way available to you and it's courtesy of our friends in finance. Seriously? You might be thinking, "What on Earth could the accounting folks offer that could deliver all that?"

It's called Zero Based Budgeting and it can be one of the biggest guns in your arsenal defending your business against shrinking margins, bloat, obsolescence, and irrelevance.

Recently, we discussed traditional budgeting and its importance. Zero Based Budgeting or ZBB, as we affectionately refer to it, elevates financial forecasting to another level. It's a gun brought to a knife fight, so to speak.

The fundamental difference from traditional forecasting is the approach: ZBB is goal based and not history based. It analyzes future needs independently of the past.

The numerical presentation won't look much different, except you'll be creating projections based on future actions instead of prior history. There will still be numbers plugged in the usual spots on your budget. What will be the BIG difference is how you arrive at those numbers. In ZBB, assumptions will be primarily based on the targets and needs of the upcoming period, with little concern for the prior period.

There is a great parable from the heydays of Total Quality Management (TQM) that says it all.

Every Easter, a woman baked a ham. Before putting it into the oven, she slices off the end. One year, her husband asked her why. She replied, "Because my mother always did it." She then calls her mother and asked her why she sliced off the end of the ham before baking it. Her mother gave her the same reply - "Because my mother did it." So, they both called the grandmother and asked her the same question. Her grandmother's answer? "Because my pan was too small."

Social Scientists call this Path Dependence. It explains how the set of decisions one faces for any given circumstance is limited by the decisions one has made in the past, even though past circumstances may no longer be relevant.

ZBB cuts to the core of this and is exactly why we champion it. It looks at our expenses in terms of what we need, why we need it, and what the alternatives are. So, here's the basic format for you to begin. For sure, it is an oversimplification but it offers a good launching pad.

- What is it?
- Why do I need it?
- Will it make or save money?
- Is it necessary or discretionary?
- What would be the result of not having it?

Now, for the most important ZBB question of all - drum roll please...
- What are the alternatives?

And if you want to add a layer or 6 of sophistication:
- What are the alternatives at varying budget levels?

A few things to keep in mind if you make the move from standard budgeting to ZBB:

- Wholesale changes to financial reporting are a lot like introducing the emperor to a new tailor. There are a lot of opportunities for "exposure." Don't jump into zero-based budgeting for every department at once. Think of it as eating an elephant: The best way to do it is one bite at a time.

- The success of any change is largely dependent on a leadership who is dedicated to it.

Never lose sight of your values, core competencies, or brand promise. The purpose of any type of financial forecasting is to prioritize your goals not become a goal on it's own.

Now, for the fine print:
Neither Rich nor I are CPAs or accountants. Our expertise is in business and financial strategy not in GAAP. When we offer financial reporting advice, it is for strategic and managerial purposes. Please consult with your CPA firm.