Very often when I’m speaking to clients about budgeting and planning they instinctively suggest the first step is to look at last year’s figures. Wrong!

          Using previous years as acceptable bench marks in your planning process makes the dangerous assumption that what you did last year was just fine, or that last year you reached your full potential.

          Using what accountants call ‘zero-based budgeting’ allows you to think creatively about what could be, rather than compounding the mistakes or shortcomings caused by focusing on what was.

          Zero-based budgeting and planning involves starting with a clean piece of paper, not encumbering your thoughts with past practices nor entitlement mentalities, and building the perfect company or department from the ground up.

          We often under-estimate the negative compounding effects of using historical figures as our bench marks. One of my clients, for example, suffered from a lack of rate integrity about five years ago. He allowed a rep to sell a client who should have had $100 rate for only $60. My client thought he would dig himself out of the low-rate hole by demanding his sales reps increase each account’s rate by 10% per year.

          Now, five years later, the account that was at $60 is at $96 and the one who was at $100 is now at $161. The discrepancy between those accounts was only $40.five years ago, but by increasing last year’s rate by 10% each year,  the rate differential between the accounts has grown to $65!     Zero-based planning and budgeting opens a whole new world of possibilities, shaking up processes and targets which may have gone stale or become complacent over time. Zero-basing also forces you to develop a strategic plan designed to achieve your zero-based objectives.

          You know your audience, and your market. You also know what a client should invest with you each year and that should be your target, not a meager inflationary increase over what an under-performing account has done historically.

          The same holds true on the expense side of the scale. To remove entitlement mentalities, raises should be based upon merit, performance and productivity. If someone really needs a raise, give them more responsibilities along with it.  

          Budgeting and planning becomes a much more meaningful and thought-provoking process when you replace boring mathematical extrapolations with a zero-based process. Zero-basing opens the door to creativity and innovation as we explore the what-ifs versus believing what-was, is all we can achieve.

          Chicago’s visionary architect, Daniel H. Burnham, said “Make no little plans; they have no magic to stir men’s blood…..make big plans, aim high in hope and work.”

P.S. After completing your zero-based plan you may want to check it against your historicals to ensure you did not under-estimate an account’s potential.