Hello Reader,

I bet you are now busy with the budget.

You have been asked to find savings.

But you don't know which methods to use.

I am going to share with you my experience on how to deal with this situation.

I even added a video tutorial to today's email!

Let's get on with it!

Enjoy!
Nicolas

P.S. I just opened the enrollment for my advanced ChatGPT course. This is where I show the secret formula to use the power of ChatGPT analysis on your confidential data.
If you want to know more, check it here.

If you need to find savings, I suggest you use the ZBB method.

ZBB stands for Zero-Based Budgeting.

Let's dive into it:

What Is Zero-Based Budgeting?

It‘s a method that starts from scratch each year.
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It requires all expenses to be justified, regardless of whether they were incurred in the previous year.
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It can be more time-consuming and complex than historical budgeting, but it can lead to more accurate and realistic budgets.

Pros

• More accurate and realistic budgets
• It can lead to cost savings
• Forces managers to think critically about expenses
• Can help to identify areas for improvement
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Cons

• More time-consuming
• Not suitable for all organizations
• Can be difficult to implement
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Here are my practical tips for using ZBB

1. Include All Departments:​
   Involve every department in justifying each expense.
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2. Educate Staff:
   ​Train your colleagues in the ZBB process and its implementation.
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3. Rank Expenses:​
   Prioritize expenses based on organizational goals.
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4. Establish Evaluation Criteria:​
   Define specific criteria for assessing each budget item (see my video below).
   Here is what you should look at:
   - Staffing levels (check the management layers and span)
   - Challenge vendors' pricing
   - Delay projects that are not critical
   - Look for licenses not used
   - Give a challenge to your stakeholder
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5. Allocate for Contingencies:​
   Set aside funds for unforeseen expenses (but don't be conservative).

Learn more by watching one of the lesson of my video course:
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Another alternative: the Historical Budgeting

It uses the previous year's budget as a starting point for the current year's budget.
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This method is simple to use and can be quick to prepare, but it can lead to budget complacency and inefficiencies.
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Pros

• Simple to use
• Quick to prepare
• It can be used to track budget performance over time
• It can be used for all departments in an organization

Cons

• It can lead to budget complacency
• It can lead to inefficiencies
• It can be difficult to adjust to changes in the business environment

Practical Tips for Historical Budgeting

1. Begin Early:​
   Initiate the budgeting process ahead of the fiscal year.
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2. Analyze Past Budgets:​
   Review previous budgets to detect inefficiencies: this is where you can identify savings (actuals vs. budget, history of one-off topics which cumulate, increase of costs not justified...).
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3. Engage Department Heads:
   ​Seek insights from different departments: this is where you will need to use your soft skills to understand how you can work together with the department head to find savings but also justify additional costs if needed.
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4. Maintain Flexibility:​
   Allow room for unexpected changes or expenses (but don't be conservative).
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5. Monitor Continuously:​
   Regularly review and adjust the budget.

Which Method is Better for you?

Which method should you use?
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Here is my take:

When Should You Use ZBB Budgeting?

1. Organizational Reset:​
Your company is undergoing major restructuring or a shift in strategic direction.
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​2. Cost Control:​
Your management has identified a need to critically assess and justify all expenses.
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​3. Dynamic Environment:​
Rapid changes in your industry demand a fresh look at budget allocations.
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When Should You Use Historical Budgeting?

1. Stable Environment:​
Your company has had consistent operations with few changes year over year.
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​2. Limited Resources:​
Your organization lacks the time or expertise to conduct a thorough zero-based analysis.
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​3. Predictable Costs:​
Costs are relatively fixed and can be anticipated based on past data.

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How can you make your choice?

• Understand Needs: Evaluate your organization’s specific needs and constraints.
• Assess Resources: Examine the availability of time, expertise, and resources.
• Weigh Benefits and Challenges: Consider the impact of a new budgeting method.
• Conduct a Pilot Test: Try the new budgeting method in one department first.

What Have We Learned Today?

1. Zero-Based budgeting is your first chance to find savings:​
   It requires justifying every expense, fostering accuracy and cost savings, especially beneficial in dynamic environments.
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2. Historical Budgeting is Practical:​
   It’s simple and quick, and suits environments with stable and predictable costs, making it a go-to for many organizations. But to find savings, it will be less helpful than the ZBB approach.
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3. Stakeholder Input is Key:​
   Involving department heads and key stakeholders ensures insights are gathered and goals are aligned with the budget.

Free template of the week:

Here is the free ZBB file I used to illustrate my course.

​ZBB Template​

I also included in this file the Risks and Opportunities method as a bonus.

How did you find today's email?

If you could send me a short feedback by replying to this email this would mean a lot to me.

Nicolas

P.S.: Here is how I can help you:

1. Learn ChatGPT to boost your productivity and stay ahead of the competition. Take my 2 hours course.

2. Master Powerpoint and impress your boss with my Powerpoint guide for Finance professionals.

3. Do you want to move to FP&A? Learn all the technical and soft skills you need here. (this is where the video from above is from)