Budget Smarter: Blend Zero-Based Budgeting with History’s Lessons

Introduction

Budgeting. What emotion does this stir for you simply hearing the word? For many business owners the word stirs emotions of fear much like the spooky vibes of Halloween in October.

But here's a fun Halloween challenge for you! Let's tackle your business budget with creativity this month. Think about how you want 2025 to look and feel. Rather than engaging in the fears of the season, Challenge yourself to solve your business puzzles. There is always a solution and many times it starts with going back to the basics in budgeting.

In this blog we mix the best of two techniques – historical based budgeting and zero-based budgeting. Creating a budget based on past data is often the easiest route for business owners, but the problem is it allows for mistakes from the prior year to be repeated. This is why bringing in Zero-Based Budgeting is ideal. It allows you, the business owner, a chance to take the creative pause and reflect on what worked and didn’t work in the prior year. And more specifically, it helps you pinpoint the areas you are ready to operationally change and improve!

1. Start with a Blank Slate Using Zero-Based Budgeting (ZBB)

Zero-based budgeting flips traditional budgeting on its head by starting from scratch each year, instead of just adding a percentage increase over last year’s numbers. In ZBB, every expense must be justified based on current needs and value to the business, regardless of prior year spending. This forces businesses to:

• Identify Essential Costs: Look critically at all expenditures and ask, “Is this necessary?” or “Is there a more cost-effective alternative?”
  
  
• Align with Current Goals: ZBB helps businesses prioritize spending based on current operational and strategic objectives. If your company is shifting focus (e.g., from growth to profitability), ZBB ensures that resources are allocated to areas that will support this change.

2. Leverage Historical Numbers to Inform Key Trends

While ZBB forces a fresh look, historical financial data is still vital for context. Analyzing past numbers provides valuable insights into spending patterns and trends. The prior year was not a waste. There are always improvements to be made but lessons learned, and numbers achieved should not be entirely thrown out. You can use this data to:

• Spot Trends and Seasonality: Look at revenue patterns, seasonal fluctuations, and cost trends. This ensures that your ZBB plan aligns with reality—if revenue spikes during a certain quarter, your budget should reflect the resources needed to support that growth.
  
  
• Identify Inefficiencies: By comparing past spending with current needs, you can easily identify areas where money has been wasted and ensure they aren’t repeated.
  
  

3. Combine Both Approaches for a Balanced Budget

Combine Both Approaches for a Balanced Budget

Combining ZBB with historical analysis creates a comprehensive approach to budgeting. Here’s how:

• Step 1: Analyze Historical Data. Review the past 2-3 years to understand where money has been spent, how it impacted the business, and where inefficiencies lie.
  
  
• Step 2: Start from Zero. Using ZBB, rebuild your budget, line by line, justifying each expense. Ask, “Does this align with our current goals and market conditions?”.
  
  
• Step 3: Use Trends to Guide Allocations. Based on historical trends, adjust your ZBB plan to account for seasonality, economic shifts, or industry changes. Historical numbers provide the necessary guardrails for setting realistic spending limits while ZBB ensures only essential expenses are included.
  
  

The beauty of combining ZBB and historical analysis is flexibility. ZBB enables you to strip away waste and direct funds to growth areas, while historical data helps you predict and adjust for potential market changes. This proactive approach ensures your business remains agile, spending efficiently without losing sight of the bigger picture.

Conclusion

Zero-based budgeting ensures each dollar is spent purposefully, while historical financial data provides critical insights into spending trends and market conditions. By combining these methods, your business can create a well-rounded, efficient budget for the upcoming year—one that prioritizes essential costs, eliminates waste, and prepares for future growth or economic shifts.

At Tentho, we are here to support you with any phase of the budgeting process you need. As a business owner you have a choice. You can bring us into your first budgeting session with our advisory and strategy experts, or you can hand the budgeting project to us entirely. We’ll create a series of interactive planning and goal sessions with you where we take your business goals and turn them into numbers that create the path for your 2025 operational success.

We are here to support you in all phases of your business owner journey!