Effectively manage your financial and impact performance
There are two financial techniques to help you effectively manage your financial and impact performance. Cost Allocation and Unit Costing and Zero-based budgeting.
Cost Allocation and Unit Costing
Combining cost allocation and unit costing brings unique insights into how the organisation is run and enables better operational management and decision-making.
Cost allocation ensures that costs are allocated fairly among different departments or activities based on their usage of resources. This allocation helps to prevent one department from bearing an unfair burden of costs. It also creates a positive dialogue between departments about the quality and value of the services delivered.
Combined with unit costing, cost allocation provides accurate information about the cost of different activities, products or services. Unit costing can help managers make informed decisions regarding resource allocation, costing, operational metrics and impact metrics using methods such as social return on investment or economic modelling.
Identifying the cost of each activity or product makes tracking and controlling expenses easier, which helps organisations avoid waste and optimise their resources.
Finally, by using unit costing, organisations can compare the costs of delivering different activities and services. This benchmarking can help them identify areas where they can improve efficiency and reduce costs.
Zero-Based Budgeting
Zero-based budgeting (ZBB) is an approach that requires organisations to justify all expenses for each new period, starting from zero. All expenses are evaluated and prioritised based on their relevance and cost-effectiveness.
Here are some of the benefits of zero-based budgeting:
Improved cost management: ZBB helps organisations identify unnecessary expenses and allocate resources more efficiently. By starting from zero, companies can eliminate expenses that are no longer necessary or relevant.
Increased accountability: With ZBB, each expense item must be justified based on its relevance and cost-effectiveness. This ensures that managers are accountable for their spending decisions and must provide a clear rationale for all expenses.
More accurate forecasting: Since ZBB requires a thorough evaluation of expenses, it provides a more accurate picture of how much money will be needed for each period. This helps organisations avoid surprises and adjust their spending accordingly.
Encourages innovation: ZBB forces managers to question their assumptions and think creatively about how to allocate resources. This can lead to new ideas and innovations that improve the efficiency of operations and increase profitability.
Aligns resources with priorities: ZBB ensures that resources are allocated based on the organisation's priorities (including impact outcomes). This helps ensure that funds are directed to areas that will have the most significant impact on achieving the company's purpose.
Zero-based budgeting is a valuable tool for organisations looking to optimise their resource allocation towards impact areas and improve cost management. It encourages managers to be more accountable and innovative in their spending decisions, leading to more efficient operations and improved outcomes.