What Is Zero-Based Budgeting And Should Nonprofits Use It?

The Budgeting Process For Non-Profits
The budget process will vary every year, depending on your financial situation. Each year admission priorities may change, funding can change, and every year looks different, but the question remains: How should we do our budget?

First, you need to decide what approach to use. Typically, there are 2 approaches you can take.

1. Top-down leadership approach: Executive board tells the staff what's possible financially, and how much funds are available.
2. Bottom-Up staff approach: Staff is allowed to dream and create a budget, funding sources are solidified and then the budget is balanced.

A hybrid of the two is pretty common. 

The Philosophy That I Recommend

Now that we have discussed the approach, I want to talk about the philosophy and what I always recommend, which is a zero-based budgeting philosophy.

What Exactly Is The Zero-Based Budgeting Philosophy?

What does that mean? Well, it means that you start the account level detail prep work for a budget at zero. Example: You could ask yourself how much you’re going to spend on hospitality? If nothing comes to mind, take a step back and break things down a little further in order to prove how you plan on doing things.

Determining The Budget

A simple way to figure out the budget would be to determine the vision. Example: The vision is to host X number of meetings per year for a particular target audience.

With that, you would have the # of meetings per year, in addition to the number of targeted participants, and the per-meal cost. This would help you determine what the budget should be.

The Zero-Based Philosophy literally starts from zero and it calculates every dollar in the budget. You may be wondering, why is this valuable or what would the results be if i did this?

Here are 3 reasons why you should consider the zero-based budget method.

Reason #1: The fresh assessment of what it takes to actually operate a program comes when doing the Zero Based Budgeting method. Often times we rely on doing what we have always done, but in reality that doesn’t always work. With the zero-based budgeting philosophy, you assess what it takes to really operate a program or ministry.

Reason #2: With this method, you will actually have budgets that get spent. I know that may sound funny, but I've seen many financial reports where there's a budget and it's not being used. Believe it or not, this is a problem because there is revenue for every expense that’s budgeted, And the revenue is a goal being looked at and measured as to how it's being achieved.

If there are expenses that are not necessary or needed, then the revenue is overstated and could actually be reduced.

Reason #3: Lastly, my personal favorite and the main reason why I recommend Zero Based Budgeting, is that it creates a place for visionary planning. In order to make a plan that starts from zero, you have to think about the how-to’s, the vision, the why, the momentum, how to harness it, and how to accelerate it?

The zero-based budget is absolutely going to lead to a greater mission impact.