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Tips, advice, and information for South African business owners

11 Mar

Re-Inventing The Wheel Can Save Costs

Years ago, as a project office manager for software development projects, part of my job was to implement and refine our project management systems. One of the easier techniques was to develop project plan templates, like a set of containers. Each time a new project was started, we’d open a project plan “shell” and the project manager would fill in the template plan with the project’s specific details.

As a foundation technique for systemising any business process, this approach is now naturally a go-to practice when I mentor or consult with business owners. Just two of the many benefits of working with templates are increased productivity (by reducing the start-up effort and timeframe of any new project) and assuring the quality of the output (by following a repeatable process).

But there’s no free lunch! Something I noticed after a dozen or so projects run by my project office was that some projects’ schedules were more stressed than they should have been. Being labour intense, this also stressed their budgets. Finding the root cause of this trend really baffled me for a long time. It seemed the more we developed the project templates and methods, the worse the problems got. It just didn’t make sense that improving our project systems would make delivering projects on time and within budget harder!

But what I eventually discovered was counter-intuitive.

In reviewing the project planning process with two of my project managers, I noticed how they diligently went through the entire project plan template, applying best practice of allocating people and costs to each task to work out their overall project schedules and cost estimates. It struck me that for the smaller projects, in applying the detailed project plan, up to one-fifth of the work was unnecessary. This extra work was “planned” only because they followed the template.

Fortunately, solving this problem was as easy as giving my project managers the discretion to not follow the template, merely to be guided by it. I know, it’s blindingly obvious now, but when you’re in the moment, there’s no hindsight yet!

The interesting news for you as a small business entrepreneur is that I’ve noticed the same problems in “regular” businesses. So along with my go-to practice of using templates to systemise business processes, I also take along my learning of when to ignore the templates. When we start from a zero base, we might be re-inventing the wheel, but it forces us to plan for only the tasks we need and nothing extra.

For example, one of our clients, who had no finance background, had used his accountant’s budget and simply added a percent to it each year when forecasting his business budget. This might have worked well initially, but after a few years, his budget became bloated. As his business slowly evolved, some “hidden” costs lingered. The business was doing tasks that weren’t essential to its operations. If we didn’t interrogate the budget and challenge the necessity of each task, those costs would have remained hidden.

This method of building a budget from scratch is known as the zero-base budget (ZBB) approach. Literally, a ZBB is created from a starting point of zero and only the essential costs are added to it.

After seeing the inefficiencies in the hidden costs, we helped our client develop a new budget from scratch, first identifying only the tasks necessary to achieve strategic and operational success, then costing them to build up the full monthly and annual budgets. Tasks that weren’t essential were eliminated from the business. After our intervention, our client increased his net profit margin by 10% within just twelve months.

What’s your approach to budgeting? If you use the traditional method of adding a few percent each year, isn’t it time your next round of budget planning used the ZBB method?

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