For our other blogs on the consultant's guide to raising children, see here.
Having children is expensive. They deliver a sustained (20+ year) shock to household finances.In response, parents need to look at household finances in a different way.
Businesses are in a very similar situation. For them the shock is digital: technology is redefining the rules of the game making some businesses redundant and others experience incredible growth. Think Blockbuster and Netflix. The response has been a renewed interest in zero based budgeting (ZBB), a technique of cost control developed in the 1960s and experiencing a comeback as modern data and analytics techniques make it a viable and effective approach.
The idea is that by getting a better handle on cost, businesses can free-up cash to position for new opportunities in the digital economy. These will be the growth engines of the future as the existing core business is disrupted and declines (potentially very quickly and with limited warning). You could say, this is just like having children – parents reduce spending upon themselves to position their children for the future.
How ZBB works
ZBB is nice and simple across three stages:
- Create visibility of spend
- Identify initiatives to cut costs and agree a budget based upon these initiatives
- Realise the savings with ongoing transparency, tracking and cost discipline
What makes ZBB different is a combination of granularity, rigour and a focus on value. Costs are assessed right down to a transactional level to make sure they are correctly classified and fully understood. And there is a lot of effort invested in ongoing tracking and control to make sure people do what they committed to. Finally, ZBB involves a shift in mindset so that everyone in the organisation is totally focused on the value realised from every dollar spent.
ZBB best practice for parents
There are three best practice approaches you can apply to household
- Make your spending transparent. You can’t control what you can’t measure. There are loads of apps available to help you get a handle on where your money is going (I use Money Dashboard, others in the team use Yolt). They are invaluable and will probably highlight hidden spending. They also allow you to track cost saving measures.
- Think strategically. ZBB is not just about slashing costs. It is about strategically re-positioning resources to focus on the things that really matter. We like Marie Kondo’s notion of sparking joy, it is a great basis to judge the value of the money you spend
- Implement independent control. This is probably the hardest one to get right. It cuts to the heart of the cost control challenge – people find it too easy to rationalise why spending money is a great idea. ZBB addresses this with a cost category owner who independently assesses their category of spend across the business. In a household this can be tricky. No one likes to be challenged on their coffee spend or prolific use of baby wipes, but it is a powerful technique to change behaviour.
And here are some common ideas for cost reduction in key categories:
- Baby products. This is a massive category. Have a ‘second child’ mindset for your first child i.e. everything second hand with only the essentials that you need. For example, a changing table is basically the same as the floor but higher-up and therefore more dangerous.
- Don’t teach your children how to access Amazon or any other pay-per-view platform. Until they are at least 15 you should pretend that we are still living in the 1990s with only four free to view channels
- Toys are another scarily big category especially once you factor in third party spend (purchases made by grandparents etc.). Stick with a simple principle: for each child and each year no more than five new toys. With two children up to the age of 10 this still means you will have accumulated 100 toys!
Obviously, this doesn't even scratch the surface. Food, holidays, excursions, activities, etc. all cost and can be examined in the same forensic detail.
Next time, we will look at design thinking.