Zero-Based Budgeting

As the venture capital market becomes more challenging, some experienced startup executives are turning to an aggressive approach to managing their company’s finances - zero-based budgeting. This is an approach that can help a company reduce burn rate and push out the cash-out date. As a firm that provides outsourced financial modeling help to our accounting clients, we’d like to share some information on this particular financial projections process.

HEALY JONES
VP OF FP&A AT KRUZE CONSULTING

What is Zero-Based Budgeting?

Zero-based budgeting is a method of budgeting in which all expenses must be justified for each new period. This means that, unlike traditional budgeting, where budgets are based on past spending levels, zero-based budgeting starts from a “zero base” and every function within an organization is analyzed for its needs and costs.

The goal of zero-based budgeting is to ensure that all activities and expenses are necessary and beneficial to the organization, and to allocate resources in the most effective and efficient manner. This can help startups to reduce waste and increase accountability for spending.

How to create a zero-based budget / run a zero-based budgeting process

budgeting process includes these steps:

  1. Identify the organization's objectives and goals

    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.)

  2. Identify all activities and expenses

    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.

  3. Assess the value of each activity and expense

    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!

  4. Find a financial model template

    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.

  5. Add your historical results into the template

    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

  6. Develop a budget

    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.

  7. Monitor and review the budget

    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.


Financial model template Historical results

All startups should have projections, but startups facing a difficult economic situation definitely need one!

A roadmap for controlling burn and getting back on track

Financial projections provide a roadmap for the startup’s future financial performance, and they can help to identify potential risks and opportunities. By regularly updating and reviewing the projections, the startup can assess its progress and make adjustments to control cash burn. 

In addition, financial projections can be an important tool for communicating with investors and other stakeholders. By providing a clear and detailed picture of the startup’s financial performance, the projections can help to build confidence and trust, and they can provide a basis for discussions about investment and collaboration. This is very important when a company is struggling, as investors will be watching closely to see how the management team responds and manages the company’s finances. 

Overall, having a detailed set of financial projections is an essential part of running a successful startup, and it can help to manage through turbulent times.

Other budgeting advice for startups in a downturn / facing difficult times

We’ve written about what startups can do when entering a recession, and many of those lessons apply to today’s startups as they navigate a difficult funding environment. Here is a summary of our advice:

  • Focus on what you can control. 
  • Quality revenue growth makes up for a lot of problems. 
  • Have a legit cash flow model. 
  • Set up spending milestones. 
  • Have a targeted burn rate. 
  • Outsource what you can. 
  • Keep a firm hand on what your employees spend on systems, food, etc. 
  • Focus on efficient operations. 
  • Raise capital when you can, not when you need to. 
  • If you have to cut, cut deeply enough so that you don’t have to do it again. 

Zero-based budgeting is a solid process to use when your startup is facing difficult times. But remember to use it wisely - your employees and executives won’t love the process of rejustifying all of your expenses repeatedly. And don’t forget the human aspect of cutting expenses!

About Us

A CPA Firm Specialized in Startup Accounting & Finance

A CPA Firm Specialized in Startup Accounting & Finance

Startups are our niche, and our passion. Our clients have raised over $10 billion in venture capital financing. We are one of only a few outsourced accounting firms that specialize in funded early-stage companies - we only offer financial and tax services to fast growing startups in the Seed, Series A, Series B and Series C stages.

The Right Accounting Partner for Your Startup’s Next Round

The Right Accounting Partner for Your Startup’s Next Round

We know how to de-risk your startup’s next venture capital round. Our team makes sure you are ready to fly through your next VC’s accounting, HR and tax due diligence. And when you use us as your bookkeeper, we set up and keep up-to-date a due diligence folder so you can get that next round of fundraising.

A Leader in Cloud Accounting Software

A Leader in Cloud Accounting Software

Our practice is built on best of breed cloud accounting software like QuickBooks, Xero, Netsuite, Gusto, Zenefits, Expensify, Avalara, Brex iand Bill.com. Technology makes us more efficient, saving our clients money and letting us offer higher value services like FP&A modeling, 409A valuation and venture debt consulting. Startups deserve to work with CPAs using modern software.

Trusted by Top Venture Investors

Trusted by Top Venture Investors

Top angel investors and VCs refer Kruze because they trust us to give the right advice. Our clients are portfolio companies of top technology and Silicon Valley investors, including Y-Combinator, Kleiner, Sequoia, Khsola, Launch, Techstars and more. With us, your books and taxes are in order when it’s time to raise another round of venture financing.

What types of startups does Kruze Consulting usually work with?

What types of startups does Kruze Consulting usually work with?

Kruze Consulting works with a variety of funded Delaware C-Corps, but the majority of our companies have secured Seed, Series A, Series B and Series C. We look to partner with our clients, going beyond the typical outsourced accounting relationship and seeking to provide a higher level advisory role. We feel honored to be a part of making the world a better place, even if it’s one debit and credit at a time.

Accounting, Finance, Taxes, & Payroll all in one solution

Accounting, Finance, Taxes, & Payroll all in one solution

Startup CFO services, startup accounting and bookkeeping services, startup annual taxes, expense reports, payroll, benefits: we've got you covered. Our software provides custom tailored dashboards that can be provided weekly or monthly, depending on your preference and plan. Founders are often so busy building their company that they don’t have time to take care of their finances. Traditionally, these companies have had to work with a basket of people to get their work done, including bookkeepers, accountants, AP clerks, CFOs, consultants, and tax accountants. At Kruze Consulting, our founders have one point person, saving time and money.

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Avochato has been growing rapidly in the past year – in fact, too quickly for us to keep up with books, taxes, and budgeting for growth. Partnering with Kruze Consulting has been fantastic to manage, track, and analyze our finances while we continue focusing on building our customer base. Kruze’s team knows what startups need.

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