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Zero Budgeting for Fabricators

If you’re like most fabricators, you probably stumble into each financial year so focused on delivering great work for your customers that you never quite have the opportunity to sit down and review the thing that actually keeps your business alive – the numbers.

And if you do, let me guess – you probably begin by setting percentages based on your expenditure the previous year. Does that sound familiar?

Budgeting is built on status quo. On assuming that last year we did things in an informed and intelligent way, and therefore this year we should begin with that as a starting point and tweak from there.

This is utter nonsense.

Last year we will have made a bunch of bad decisions around expenditure, the worst ones we probably realised at the time, but the ones that were either just a bit misjudged, or only involved a small amount of cash, probably never found their way back onto our radar.

The trouble is that the bad decisions didn’t only happen last year. They happened the year before that, too. And the year before that.

The cost structures of fabricators vary wildly. Not because they’re all brilliant and unique. But because they’ve all made different mistakes and those mistakes, over time, have added up to define their budgeting models.

Thankfully, there is a solution.

Zero budgeting is a form of first principle thinking, a term used perhaps most famously by Elon Musk. First principle thinking is the antidote to lazy thought. Most of our lives are based on habits that we have developed over years, which in turn are usually determined more by what we are told than by what we learn first hand. First principle thinking is the antithesis of this, where everything is questioned and nothing is assumed.

This is the basis of zero budgeting.

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So last year you spent 6% of turnover on marketing – why? What was the rationale? What was the return? Perhaps it was too much. Perhaps it was far too little.
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Or perhaps you’ve got external accountancy fees of £20,000 a year. Is it a good deal? Maybe you could hire an experienced book keeper for 2 days a week and cut your costs in half?
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And what about those 97 direct debits that discretely slip out of your bank account each month? These are the sneaky bastards you really want to clamp down on. Your question for every single one needs to be “If I wasn’t signed up to this already, would I do so now?” I bet the answer is no for over half of them.

 

Needless to say that this is a time consuming process, but it’s going to lead to two things:

  • You will almost certainly strip out 5-10% of costs that were adding little or no value. That may not sound like a lot, but for most fabricators that will mean instantly doubling their profit, and isn’t that why you’re in business – to make a profit?
  • You will also identify areas where you are underinvesting. That could be in staff training, new software or a different advertising method – something that will deliver significant short and long term value into the business.

To be clear, this is absolutely not about slashing costs to the bone. On the contrary, there will be many areas where the outcome will be to increase your expenditure. The point is that it is removing waste and ensuring that every penny you invest in the business is being spent intelligently.

 

As the saying goes, never be afraid to spend, but spend every penny like it’s your last.

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