Finance

AI makes zero-based budgeting a practical finance tool

Published

7 months ago

May 14, 2024

AI makes zero-based budgeting a practical finance tool

Experts in the pursuit of harnessing nuclear fusion will assure you that the technology is coming — just 30 years away, according to their projections.

The joke is that if you wait three decades and ask them where it is— they’ll say the same thing.

In finance and procurement, the concept of zero-based budgeting has long been a bit like the pursuit of fusion power: more of an aspiration rather than something any real-world corporation can actually implement today.

Which is unfortunate. Like the idea of the world utilizing the free, non-polluting energy that a fusion plant would offer, on paper ZBB promises objective, data-based baselines for every budgeting phase that would allow decision-makers to only work with what’s real and current, not what happened last year, or even farther back.

The proposal with ZBB is that by mandating a comprehensive justification and validation of each expense, rather than relying on historical spending patterns, organizations can remove possible blockers within their procurement processes. This approach aims to ensure that what you’re doing is the numerically provable best case for the specific circumstances at hand.

This approach certainly holds immense appeal, so much so that Jimmy Carter tried and failed to make federal government adhere to this discipline in the second half of the 1970s. However, ZBB never really gained traction or widespread adoption, and so its aspirations were largely relegated to the realm of “theory taught in business schools but lacking practical viability.”

The factors putting ZBB back on the table

History and controversy aside, the core idea of ZBB is clear — it presents CFOs with an approach that mandated comprehensive justification and explicit approval for all expenditures during each new budgetary cycle, typically at the outset of the financial year. This process ostensibly offered CFOs a way to make relevant decisions against a true picture of the company’s cash flow.

But ZBB never truly went away. In fact, it is experiencing a resurgence. Consulting firms like McKinsey have reminded us that if we could weigh the value of every dollar and start afresh with every budget cycle we could mitigate the risks associated with operating on outdated information and boost overall performance outcomes.

ZBB idealism is also happening at the micro-level, with social media influencers hopping on the ZBB bandwagon. Influencers like Beth Fuller have attributed their ability to pay off credit card debts to following online content creators who advocate for ZBB principles.

The question then becomes how would we make ZBB, long an ideal but one that proved too difficult to implement, work at the enterprise level? It turns out, a viable way exists, or at least we can start the process to get there.

And you won’t be surprised to learn that the game-changer here is AI.

A way to open the door to ZBB

Currently, the spotlight within the artificial intelligence domain is on finding use cases for AI to solve real business problems. Organizations have been at the forefront of this endeavor for several years through an approach we term “autonomous sourcing.”

Specifically, organizations using an autonomous spend management approach source can purchase as many new services and vendors as they need within a given budgetary cycle. However, this process is underpinned by not just genuine and up-to-date market data, but also with the benefit of a corporate knowledge bank. This knowledge base facilitates multidimensional comparisons, enabling organizations to evaluate purchases not only longitudinally (against previous periods) but also orthogonally, meaning across different business units within the enterprise.

This may not be the precise dictionary definition of ZBB. But it represents a radical change from the lack of data and visibility CFOs have struggled with and a way to open the door to the underlying vision of ZBB: data-driven financial accuracy.

This autonomous spend management approach resonates with organizations seeking to rationalize and optimize their budgeting processes, often commencing with their procurement operations. These forward-thinking entities inherently grasp the transformative potential of leveraging machine learning and generative AI capabilities to tackle the sourcing problem.

And the convergence of machine learning, generative AI and autonomous sourcing platforms presents organizations with the ability to realize approximately 90% of the ZBB ideal in the present day. That’s happening via organizations using autonomous sourcing to consciously and strictly seek to rationalize every purchase and make data-driven decisions on every vendor relationship.

The commitment to data-driven evaluation of vendor relationships is actually super-important on the path to any form of zero-based decision-making basis. Why? Because it’s your best way of ensuring that you’re not locked into any partnerships or contractual arrangements that aren’t continuing to add value.

Even starting to explore this area of spend with proper data and analytical tools can move organizations off the proverbial sandbar of inefficiency. Last year, for instance, the Mays Business School published research that concluded the simple act of tracking a single category of expenditure can catalyze a reduction in overall spending.

The exciting prospect lies in the potential for modern businesses with diverse spending categories like marketing, HR, sales, IT, finance, and others to capitalize on significant cost-saving opportunities through AI-powered procurement solutions, e.g., accurate supplier sourcing and matching, e-negotiation and automated awarding capabilities.

ZBB’s future is now, not 30 years off

President Carter’s administration wanted to achieve such objectives and possibly on paper could have done — if they had all the time in the world, and exclusive access to the entire computing power of the United States at the time.

But even under those circumstances ZBB might not have worked — as without the efficiencies afforded by AI, ZBB would require manual sourcing, selecting, bidding, negotiating and awarding for every single purchase and vendor relationship in the business.

The truth is, fulfilling every aspect of ZBB manually, as envisioned by its originator, Pete Phyrr, is an insurmountable task for humans. However, using the power of AI to automate numerous processes, alongside giving individual business units the autonomy to source and complete their own purchases through autonomous sourcing, means ZBB becomes not just practicable, but essential in today’s dynamic business landscape.

Weighing it all up, maybe we can retire the notion that ZBB is the accounting industry’s version of fusion.

Instead, we can use the power of autonomous sourcing to perform the equivalent of fusion in the back office.

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Finance

Can AI Solve Your Personal Finance Problems? Well …

Published

5 hours ago

December 22, 2024

Press Room

Can AI Solve Your Personal Finance Problems? Well …

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Finance

5 smart ways to use a year-end bonus

Published

12 hours ago

December 21, 2024

Press Room

Are you expecting a year-end bonus? If so, you’re probably dreaming up all the ways you could spend that windfall.

The average bonus was $2,447 in December 2023, according to payroll company Gusto. That’s a sizeable chunk of change — one that could put you in a better place financially in 2025 with proper planning.

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If you expect a bonus to land in your account soon, it may be tempting to splurge. And that’s perfectly fine. After all, you deserve a reward after working hard all year.

However, before you make an impulsive purchase, consider a few ways you could use those funds to improve your financial situation.

In today’s high interest rate environment, it’s expensive to carry debt. And the higher the interest rates you’re paying, the faster that debt balance can grow.

So, consider using your end-of-year bonus to pay off some of your debts. Not only does this clear your balance faster, but it also saves you money in interest over time.

For example, say you have $3,000 in credit card debt at 21% APR. If you took 12 months to pay off that debt, you’d pay $279 per month and spend about $352 in interest (assuming you don’t make any new purchases on the card).

Now let’s say you receive a $2,000 bonus and use it to pay down your credit card balance to $1,000. In this case, you’d only need to pay $93 per month to eliminate your balance in one year. And you’d pay just $117 in interest — a savings of $235.

Read more: What’s more important: Saving money or paying off debt?

If you’re not sure what to do with your bonus money, you shouldn’t feel pressured to use it right away. You can set it aside in a bank account while you decide. However, if your money is going to sit in the bank, you should at least earn interest and help it grow without any work on your part.

Following the Federal Reserve’s recent rate cuts, deposit account rates are on the decline. Still, there are plenty of high-yield savings accounts, money market accounts, and certificates of deposit (CDs) that pay upwards of 4% APY (or even more). Take some time to compare today’s rates and account options and put your bonus in an account that will help it grow.

See our picks for the best account options today:

It’s important to have a financial safety net in the event of a financial emergency, such as a car repair or job loss. An emergency fund can help you keep your budget intact and avoid taking on new debt to cover a surprise expense.

It’s typically recommended that you keep enough money in your emergency fund to cover three to six months’ worth of living expenses, though you might need more in certain situations. If you don’t already have an adequate emergency fund in place, a year-end bonus could help you get started.

Read more: How much money should I have in an emergency savings account?

One of the best things you can do for Future You is invest for your golden years. In particular, retirement accounts such as 401(k)s and IRAs are a good option because you can contribute pre-tax dollars, which allows you to lower your tax bill in April (or get a bigger refund), as well as defer taxes until you make withdrawals.

For the 2024 tax year, you can contribute up to $23,000 in a 401(k), and an extra $7,000 if you’re age 50 or older. If you haven’t prioritized saving for retirement in the past, or you want to take full advantage of an employer match, you can ask your payroll department to direct some or all of your bonus to your account.

Read more: 401(k) vs. IRA: The differences and how to choose which is right for you

As we mentioned, there’s no harm in splurging once in a while, as long as your financial obligations are squared away.

If you don’t want to feel like you’re depriving yourself, set aside half of your bonus for a “responsible” purpose and use the other half however you’d like. This can give you the momentum you need to stay the course when it comes to your financial goals, while still enjoying the fruits of your labor.

Read more: How much of your paycheck should you save?

Finance

Financial Experts’ 2025 Predictions for Student Loan Debt Under President Trump

Published

20 hours ago

December 21, 2024

Press Room

Financial Experts’ 2025 Predictions for Student Loan Debt Under President Trump

Paying off student loans can seem like an impossible task, especially when high interest rates mean loan amounts keep increasing. But student loan relief can provide a lifeline for borrowers in need.

Learn More: I’m a Retirement Planner: 7 Ways I Am Guiding Clients Now That Trump Won

Discover More: How To Financially Plan for the New Year Under the New Trump Presidency

A 2024 survey by the Consumer Financial Protection Bureau revealed that nearly 61% of borrowers who received debt relief reported the relief gave them the opportunity to make a beneficial change in their life sooner than they otherwise could have.

But with President-elect Donald Trump poised to take office in January, existing student loan relief programs are in jeopardy, meaning borrowers could face substantial changes to their monthly payments and their student loan debt.

In August 2022, the Biden-Harris administration launched the Saving on a Valuable Education (SAVE) plan to help borrowers better manage their student loan payments. This income-driven repayment plan offers several benefits to borrowers:

Loan payments are calculated based on a borrower’s income and family size, rather than basing payments on their loan balance.
Qualifying borrowers’ remaining balances can also be forgiven after a certain number of years.
Many borrowers’ monthly payments are reduced, and some borrowers don’t owe monthly payments at all.
If borrowers keep up with their monthly payments, the Department of Education won’t charge monthly interest that isn’t covered by the payments, so borrowers’ balances will decrease, and they can more easily pay off the loans.

While on the campaign trail, Trump called President Joe Biden’s planned student loan forgiveness “vile,” blaming student loan relief for increasing the federal deficit.

Check Out: How To Financially Plan for the New Year Under the New Trump Presidency

Bill Townsend, founder and CEO of College Rover, predicted that Trump will end the SAVE plan as part of a concerted effort by many conservatives to change the appeal and direction of college education.

“Interestingly enough, there is a contractual law issue that will arise from public servants who were contractually bound to certain jobs in exchange for student loan forgiveness,” Townsend explained. “Assuming SAVE, which included this preexisting loan forgiveness contract, is voided, there will be the potential for a class action lawsuit against the U.S. government.”

However, Townsend predicted that Trump could void the lawsuit with an executive action.

According to Reilly Renwick, chief marketing officer at Pragmatic Mortgage Lending, ending the SAVE plan would disrupt income-driven repayment options that are essential to many borrowers, particularly those with lower incomes and larger student loan debt.

“A move to roll back these provisions could significantly affect [borrowers’] financial planning and repayment strategies,” he explained.

Renwick predicted that if the SAVE plan is terminated, many borrowers’ monthly payments would increase.

“Those enrolled in income-driven repayment programs would feel the brunt of the impact,” he explained. “This is especially prevalent for borrowers with a larger student loan balance but lower incomes who rely on reduced payments, as they soon would have to face quite the financial strain if the plan were dismantled.”

In November, the Biden administration began the process of implementing two student loan repayment options. Recognizing that Trump likely would end the SAVE plan, these new plans offer additional support to borrowers.

Income Based Repayment (IBR), an older program, allows borrowers to make monthly payments based on their incomes, but those rates are often higher than the rates provided by the SAVE plan.

The Pay As You Earn (PAYE) plan can give borrowers reasonable monthly payment amounts and features a 20-year student loan forgiveness term. To qualify, borrowers must have a financial hardship and must meet restrictions on when they took out federal student loans.

According to Renwick, it’s highly unlikely that any large-scale student loan forgiveness initiatives will be planned under the Trump administration.

“Given Trump’s prior opposition to broad forgiveness programs, it’s expected that any relief efforts would be narrower in scope,” he said, “potentially focusing on more targeted groups rather than sweeping cancellation policies.”

Townsend recommended that borrowers start planning for the potential implications of the student loan changes that Trump is likely to implement. He suggested that borrowers stop any frivolous spending, including curtailing vacations and eating out. Doing so can help borrowers to save money and better prepare for the larger loan payments they may face.

He recommended that individuals considering attending college reassess their college options. Local and community colleges may provide more affordable programs than out-of-state public or private schools. Even if you receive a scholarship from a school that’s far away, recognize that you will still be responsible for travel costs, and those can add up.

“Borrow as little as possible and realistically look at career choices and potential salaries to make sure you can afford the education you have chosen,” Townsend advised.

When it comes to taking out student loans, Townsend highlighted the importance of being sure that you fully understand the loan. Take the time to read every contract. If you don’t understand the terms, ask a family member, family friend or high school counselor for help understanding the loan so that you can make a well-informed decision.

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