Drive strategic growth in your SaaS business with zero-based budgeting

A penny saved is a penny earned. This is a fundamental truth for SaaS companies today. 

During difficult times, such as when funding is hard to come by or clients are looking to cut costs, or even the current economic situation globally, CFOs need to look into their budgets and evaluate how the company is using its resources. ZBB or zero-based budgeting is ideal for this kind of situation.

Zero-based budgeting often gets a bad name for being a purely cost-cutting approach to budgeting. In reality, though, it’s a lot more than that.

A zero-based approach helps you strategically reallocate the money “saved” to high-priority initiatives that will move the business forward. Think of zero-based budgeting as the catalyst that unlocks strategic reinvestment of financial resources to help you meet your company’s long-term goals and objectives.

What is zero-based budgeting?

Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. It’s like starting with a blank canvas and carefully selecting each budget item based on its value and contribution to your financial objectives. 

The four strategic budgeting methods—driver-based budgeting, activity-based budgeting, value proposition budgeting and zero-based budgeting—approach the task of determining resource allocations from different business perspectives. 

A common factor here is that in addition to helping companies reach their annual targets, the strategic budgeting methods are fully aligned with the company’s long-term goals and strategic vision. Choosing the right strategic budgeting approach can unlock a host of benefits for your SaaS businesses—in this case, zero-based budgeting. 

With traditional budgeting, the previous year’s budget is used as the starting point and each line item is adjusted as needed based on past performance and forecasts. 

With zero-based budgeting, every line item in the budget from the year before is “reset” to zero.  Starting with a “zero base” means that every team within the organization must start from scratch, analyzing each need and the related costs to build a budget. 

How to create a zero-based budget in six steps

Creating and implementing a zero-based budgeting in a Saas business involves careful planning and execution. Here are the six key steps to follow:

Step 1. Revisit your strategic plan

Given that the mandate is to start from zero, the first step in creating a zero-based budget is to determine the financial goals and performance goals—to figure out where to prioritize your resources in a manner that aligns with your company's strategic plan.

For example, your strategic priorities for the next three years might be to increase ARR from $5M to $15M, by either reducing churn rate by 25% or by decreasing your customer acquisition costs (CAC). 

Each of these goals would require somewhat different approaches and thus priorities in your budget.

Step 2. Gather the data you need to create a zero-based budget

Before getting into planning and budgeting, it’s important to have a thorough understanding of the trends in the market and gather the relevant financial data so that you can analyze your company’s past spending patterns. 

Step 3. Categorize your costs, setting each category to zero

In SaaS, common cost categories for zero-based budgeting are those associated with: 

• Delivery of the product or service
• Research and development (R&D)
• Sales and marketing (S&M)
• General and administrative (G&A)

Each expense category will start with a zero budget. As you create the new ZBB, you’ll justify and allocate funds based on the strategic priorities you identified in Step 1.

Step 4. Start with the non-negotiables

When doing a zero-based budgeting exercise, it is important to identify the non-negotiable costs across your categories. These include recurring expenses, such as cloud hosting, domain name, and SSL certificates, along with fixed costs, such as infrastructure, salaries, office rent, and utilities. 

Your non-negotiables don’t significantly change from month to month. However, they’re not always fixed either. For example, cloud hosting costs are variable while office rent, utilities, and salaries are more or less fixed but both are necessary to run the business. 

For these costs, the question isn’t whether these are justified. Rather, it’s how much you need to allocate. Historical data can be of value here. 

Step 5. Prioritize variable costs

After you have the fixed costs plugged into your budget, you can add in the variable costs. 

This is the most time-consuming step as it involves evaluations and requires collaboration between finance teams and business leaders in different departments. For example, department heads have to justify every expense within the context of the company's strategic goals and it must be weighed against all the other variable costs. 

The following questions need to be considered for each variable cost:

• Is this activity and associated expense justified (i.e. should it be in the budget)?  some textsome text
  • This is best answered in terms of their business value, ROI, and alignment with strategic objectives.   
• If so, how much should be allocated for it? some textsome text
  • This requires a great deal of collaboration with department heads to understand the individual cost drivers for each activity in order to arrive at the right allocation.

Make sure to build in the resources needed to support continued growth. Every SaaS business wants to grow and, hence, growth-related activities will always feature high priority in your budget.  

Step 6. Evaluate existing contracts

In this step, you’re looking for additional opportunities to optimize costs regarding existing vendors. In a zero-based approach, everything is on the table. The objective here is to eliminate waste and identify any savings that can be reallocated to high-priority initiatives. 

1. Begin by reviewing each and every contract 
2. Negotiate lower costs with your vendors
3. Replace multiple best-in-class software tools with a full-stack product (as allowed by your business strategy). It’s all too easy to rack up significant costs when you’re building a stack from different vendors, not to mention the additional time and effort needed to  ensure all of those work well together. 
4. Keep things as-is and plug that expense back into the budget at the same cost—if replacing a certain vendor has a significant negative impact on your company’s budget and planning. 

The point of this exercise isn’t necessarily to cut the number of vendors you use. Rather, it's to evaluate each vendor in terms of the value created and make an informed decision. 

Best practices for zero-based budgeting

Adopting a zero-based budgeting might seem like an extreme step, since it seems like you’re scrutinizing every dollar to stretch it as far as possible. However, CFOs and finance teams can implement the following best practices—in addition to leveraging technologies such as business budgeting software and other modern financial management tools—to help maximize the impact of a zero-based approach and limited resources.

1. Consider building in a line item for contingencies

Building in a contingency fund will help you respond more quickly to changes in the market, either to seize new opportunities or reduce spending to extend the runway, without drastically altering your budget.  

2. Create cost accountability across the entire organization

With zero-based budgeting, each business unit must be accountable for its own budget. 

Once the budget is finalized and after having weighed all the pros and cons of each variable cost, individual teams must take ownership of their departmental budgets and exercise fiscal discipline to control costs.   

3. Monitor and adjust as needed

Accountability is important but monitoring your budget vs. actuals is key to ensuring the cost control a zero-based budgeting approach can provide.

If you implement your budget as a rolling budget, the monitoring factor is essentially built-in, giving you the ability to adjust as frequently as you update the budget.

You can also use modern FP&A software to closely track the metrics. With easy access to all the data on a single platform, you can make any adjustments whenever necessary. 

4. Use the evaluation you did for your first budget to inform the next

If this is your first time doing a zero-based budgeting, you will find it time consuming. While your next budget will reset to zero, evaluating expenditures and prioritizing variable costs can help inform the process in the next budgeting cycle.  

This process becomes more manageable using a zero-based budgeting platform. Such software allows you to track, monitor, and adjust data at a very granular level, giving you all the information needed to make data-driven decisions that make every penny count.

In contrast, traditional methods of tracking using spreadsheets are tough to maintain, prone to manual errors, highly time consuming, and hard to scale.

The role of technology in zero-based budgeting

In an era where saving money is a necessity, following a zero-based approach for budgeting is an important way to create a culture of cost management that enables companies to reach their goals while keeping a keen eye on their spending. To do zero-based budgeting effectively, data is paramount and spreadsheets won’t cut it, especially if each team has its own spreadsheet.

Coupled with a modern strategic finance platform like Drivetrain, SaaS companies can use zero-based budgeting to not only eliminate inefficiencies, but also optimize costs and cash flow in ways that prioritize growth. 

Drivetrain is also a powerful scenario planning tool that makes it easier to run “what-if analyses” with different costs for variables to project how scenarios (external or internal) could play out, enabling you to make more informed decisions about your company’s growth.  

Learn more about Drivetrain and how it can make zero-based budgeting easy!