Zero-Based Budgeting

Just like with any budgeting exercise, the first step in zero-based budgeting is to clearly define the organization’s objectives and goals. This will provide a framework for the rest of the budgeting process and help to ensure that all activities and expenses align with the organization’s overall strategic direction. For VC backed startups, this is typically to reach a point where another round of financing is possible, or to achieve cash-flow breakeven (or in many cases in today’s economic environment, make it through a year long possible recession where it will be hard to raise capital at attractive terms.)

The next step is to identify all of the activities and expenses that are necessary to achieve the organization’s objectives. This may involve conducting a thorough review of the organization’s operations and consulting with relevant stakeholders. This is where an experienced accounting firm like Kruze can be helpful; our bookkeepers can produce a download of all GL expenses.

Once all of the necessary activities and expenses have been identified, the next step is to assess the value of each one. This will involve evaluating how well each activity or expense contributes to the startup’s objectives, and determining whether it is worth the cost. A sub-component of this step is to understand how you can cancel or modify your relationship with the vendor; for many of our clients who are involved in year-long subscriptions, it’s not necessarily easy to stop an expense. In this case, we recommend keeping the expense in the budget until you can cancel it - and also setting reminders so you don’t forget to cancel the service or subscription when the contract allows!

If your startup doesn’t already have a financial model template, find a free one. Kruze has several free financial model templates available for download on our site. Don’t waste time recreating an excel file - manipulating spreadsheet formulas are not value-add for most startup founders, especially ones who need to focus on cutting costs and hitting difficult targets. Either use one of our free templates, or find another one that you like better.

The best budgets have a basis in reality, so the first step is to drop in your historical actual results into the budget template. While we don’t generally recommend having a ‘break’ or big jump in between historical results and the first month of projections, zero-based budgeting is the exception. Seeing a big difference from the previous month to the projected month is a sign that the budget discovery process is working, and is identifying opportunities to reduce burn rate

Based on the assessment of the value of each activity and expense, a budget can be developed that allocates resources in the most effective and efficient manner. This budget should include all necessary activities and expenses, and should be designed to help the startup achieve its goals and objectives.

The final step in building these types of projections is to monitor and review the budget on an ongoing basis. This will involve tracking actual spending against the budget, and making any necessary adjustments to ensure that the organization remains on track to achieve its goals. We strongly recommend doing budget vs actuals on a monthly basis if you are tightly managing your cash flow.