Real Savings Comes From Small Savings

Having created hundreds of budgets for corporations and organizations, and consulted regarding finances to even more, I have observed that one of the most prevalent mindsets is that saving a little bit of money is insignificant, because of the overall size of the financial picture. However, merely because that is a prevalent attitude does not make it either correct or accurate, and in the cases of either reducing or closing deficits, or balancing budgets, is absolutely inaccurate.

It is quite rare, unless an organization decides upon "Draculean" cuts in a specific area, or discontinued certain limited time or one time expenditures, that most of the cost savings can be found by making large "cuts." In my experience, I have found that a large number of small reductions in numerous areas, while "counting nickels and dimes" is indeed the most effective way of developing a dramatically reduced amount of total expenditures.

In my more than three decades of involvement in this activity, I have almost routinely been able to save enormous sums merely by evaluating every expense, and seeing if there is a better way, a more effective way, and a less expensive way of achieving a goal. Many fiscal officers of organizations, because they are predominantly untrained or inadequately trained in the fiscal necessities of organizational management, appear to fail to grasp both the simplicity and methodology required.

I have been often asked if this is so simple, and it works, why don't more fiscal leaders utilize this technique? There is never a simple reason to explain why individuals do or do not do something in a specific way. I, however, tend to believe that the "small multiple cut" method requires more evaluation, more effort, and a greater amount of understanding than looking to just make big cuts. Many years ago, one of my bosses, who was the Executive Vice President of a financial services company, enjoyed using the adage, "You know how you eat the elephant? One bite at a time!"

I have written and spoken for many years about the dire need for organizations to prioritize and emphasize leadership training, development and qualification. As essential as overall leadership development is, it is far more dangerous when fiscal officers are ill-prepared than when others are. Organizations without control of their finances, and without financial and fiscal stability, rarely flourish.

The Importance Of Budgeting

Almost all well-run businesses and organizations prepare budgets at least annually. Unfortunately, very often, the budget process becomes more of a formality, required process, or activity, than a useful document. While budgets should be part of a careful and detailed process and analysis of a businesses or organizations needs, and how to get there, it is much more common that the budget is merely a "bunch of numbers" that "have to be" prepared, than anything useful. "Let's just prepare it and get it passed" is an often stated opinion. "It doesn't really matter, because we'll just change it if we need to anyway," is repeated ad nauseum, making the entire process little more than a waste of time and energy.

Dictionary.com defines "budget" as an "estimate of expected income and expenses, and when used as a "verb (used with object)," as "to allot (money, time, etc.). However, the definition does not detail the important functions that a properly prepared budget can and will provide. Budgets should not be merely a bunch of meaningless numbers that have been thrown together to prepare the document. Only if a budget has been prepared utilizing "zero based budgeting" does a budget reach its full potential.

When either preparing or reviewing a budget, first carefully review the income (or revenue) side. How has each line item been calculated? How does each number compared with the actual for each of the last three years? What methods, techniques, or "revenue growers" are to be used in this upcoming cycle? It is important to recognize, when one prepares a budget, to be very conservative with revenue or income estimates and projections, and very aggressive in calculating expenses.

Expense items need to be reviewed very carefully, item by item. Commonly, businesses or organizations use the "previous budget plus" concept, which means it simply takes what was spent (or even worse, projected to be spent) in the previous budget cycle, and a specified percentage is simply added across the board to most expense items. When budgets are prepared this way, they are truly the waste of time and effort mentioned above. However, when each item is analyzed on a "needs" and "effectiveness" basis, one often realizes that monies are expended in many areas that do not provide the required result, while in other areas, more funds may need to be spent. One then also develops the philosophy of "thinking outside the box," and developing creative methods to more effectively spend funds, or "get more bang for the buck." One using this method develops an important document that guides decision making, as well as provides direction. A properly prepared budget should not be revised during its cycle, unless there is some sort of emergency or other form of extraordinary circumstance.

Budgets should always include at least one realistic reserve fund. The reserve fund may be exclusively for unanticipated maintenance and repairs, or for some other unanticipated need. When budgets do not include reserves, they almost invariably need to be tweaked and readjusted during the cycle, thus weakening the intended and important purpose of a properly prepared budget.

Anyone who reviews a budget should ask a lot of questions, and request a detailed budget, as opposed to merely a summary budget. Some of these include; 1) What items make up that line item, and how are they broken down? 2) What alternatives were considered in this area? 3) Have we evaluated alternatives regarding utilities and telephone, etc.? 4) Which program worked the most effectively and why? 5) How do we market, and why do we market the way we do?

The above are simply a sample of some worthwhile questions. The most important thing to do is always ask questions about anything that you do not find clear. Do not be embarrassed - - chances are if you find something confusing, so will others.

Budgets can be the most important process used by a business or organization, or simply an exercise. Each of us owe it to anything we believe in, to explore all alternatives and possibilities. Many nay-sayers like to state that "It's only a small amount. It won't amount to anything- it's not large enough." Nothing could be further from the truth. Budgets are refined by making many small adjustments in multiple areas. You'd be amazed how much the total of all these adjustments add up to. Think of the adage, "You know how you eat an elephant - - one bite at a time!"

Zero Based Budgeting - Why To Use It And Why It's Important?

Most budgets are created by taking the previous budget, comparing it to the actual expenses, adding in anticipated new programs, and often merely adjusting the numbers by an estimated percentage, often based on the cost of living, or some other factor. While this is the prevalent method used in budget preparation, many people, including me, feel it is not the most effective way to create a budget. The use of the traditional budgeting method has also created a widespread attitude, by many, that the budgeting process is merely an exercise, rather than a valuable financial tool, that it should be.

Conventional budget preparation techniques often do not evaluate the value of programs, nor do they assist in the prioritization that organizations and other entities should perform to make them as effective as possible. Organizations need to plan on an ongoing and continuous basis, if they are to evolve as they must to strive and survive. They need to evaluate how they spend their money, on a regular basis, to assure that their organization is getting the most "bang for the buck." Often, it is not necessarily the amount of money that an organization spends, but rather how it spends its money. Generally, an evaluation of an organization's budget, as well as its Profit and Loss Statement, indicates that there are times when more should be spent on certain items, while there are also situations when there should be less monies spent on other specific items.

Zero-based budgets force its preparers to look more deeply into its budget. In following this technique and methodology, an organization will use a budget not only as a financial exercise and guideline, but also as a serious forecasting, planning and action/ result related document. Organizations that utilize zero-based budgeting must look at how they are presently spending money, line item by line item, and ask important questions. Doing this, organizations ask whether they are prioritizing their programs and expenditures in the most efficacious manner. They look at each of their programs, evaluate them, and determine if they should be continued. This causes the organization to discuss and decide whether more or less monies should be spent on each item than previously. This helps create a focus where organizations are better able to think about its future direction, and creates a form of "thinking outside the box."

When zero-based budgeting is not performed, organizations often continue spending money ("good money after bad") on programs that may no longer be relevant, or simply are not a "good fit" for the organization. Often, that money could be better spent in other areas, and since most organizations do not have unlimited revenue, they must carefully spend their funds. Evaluation of a budget via zero-based technique integrates an evaluation of finances and how they align with the organization's mission and purpose.

Zero-based budgeting is often misunderstood and misconstrued by untrained leaders, who may have simply heard that zero-based budgeting is good. These individuals often do not understand what it truly represents. The single biggest misconception that I have observed, on several occasions, is when an organization's treasurer or budget officer says he has prepared his budget using zero-based budgeting. Rather, what has often been done is that the treasurer takes it to mean that a specific amount is allocated in a specific area, and that whoever in the organization responsible for that area, then has the right to determine how to spend the money, within those budgeted constraints. However, zero-based does not mean that one must spend the monies in a specific area, if some cost savings is found, that accomplishes what needs to be done for less expense.

I urge all organizations to consider the use of zero-based budgeting. In order to do that effectively, effective usage of budgets, and fiscal responsibility should be part of the curriculum of the organization's leadership training.