The concept of Zero-Based Budgeting (ZBB) isn’t new, but many firms have yet to adopt it effectively. According to recent research by Deloitte
, “poorly designed tracking and reporting” was a key factor for the failure of ZBB in many cases – 43%, in fact. As a result, many companies still rely on the standard budgeting process, which takes the previous period’s figures as a baseline for the next one. But is it sustainable in the long term? Can traditional budgeting methods keep businesses agile and lean in markets where margins increasingly matter?
In this blog we take a look at the benefits of a ZBB approach and provide some top tips for a successful implementation.
What is the problem with a traditional approach to budgeting?
It’s easy for managers to become complacent when they receive an incremental budget change each year. Often finances will be allocated to the same cost centers under the expectation that a similar amount will be spent on the same activity again. The problem with this approach is that unless there’s a clear measure of the impact of these activities on the bottom line, and how they could be affected by various other internal and external factors, there is the potential that:
- Organizations will allocate more (or less) budget than necessary to specific activities
- Managers will not analyze what is actually required but base budget requests on gut feel, leading to inefficiencies in spending or unnecessary allocation of funding
- Company progression will be held back by the repetition of previous activity year after year, rather than consideration of a new approach
- Departments remain disconnected and unaware of the full impact of their activities on the wider business
What is Zero-Based Budgeting?
In contrast to a traditional budgeting approach, Zero-Based Budgeting is “a budgeting process that allocates funding based on program efficiency and necessity rather than budget history” (Deloitte). It works on a ‘start from scratch’ basis, where business departments do not automatically receive the same amount of budget as the previous period but must review their requirements during each budget cycle and justify a budget amount.
What are the advantages of Zero-Based Budgeting?
Implemented correctly, there are numerous benefits to taking a ZBB approach:
- Challenge the status quo: Rather than relying on a traditional budgeting approach, ZBB encourages the business to take a hard look at what’s working and what isn’t across various processes and business activities. Cost centers may be redefined and activities examined to ensure finances are allocated in the most effective way.
- Drive continuous improvement in activities: Instead of using previous budgets to form the basis of the next one, ZBB encourages managers to continually review the activities of their department and consider their relevance in next year’s plan. This approach can also encourage alignment between business strategy and deliverables.
- Reduce costs while increasing efficiency: ZBB takes the pressure off departments to do more with less, instead encouraging them to figure out how much is required for maximum impact and encouraging wiser spending.
Five top tips for implementing Zero-Based Budgeting
There are numerous benefits to be realized, but how do you actually implement a working ZBB process? Consider these top tips for Zero-Based Budgeting success:
- Be clear about what you want to achieve: Zero-Based Budgeting requires a complete re-think of the budgeting process. Before you start, do your research and speak to experts or peers to give yourself a clear idea about the extent of the change within your business.
- Ensure you have management buy-in: Changing to ZBB is going to have implications on business-wide activities and processes. Ensure senior leaders are on-board with the need to change, understand its benefits, and will drive the change across all departments.
- Carefully consider the extent of the change: Take time to evaluate the impact of the change in all business areas. Make sure you’ve thought about the implementation process, the end result, and how you will get there. Better still, involve a third party who can advise on a best practice approach and help you get there in the most efficient manner.
- Communicate from the beginning: Having management teams on board is one thing, but you also need to ensure that team members are involved in order to achieve their buy-in. Keep them informed, communicate the reasoning behind the change, and confirm that everyone understands the impact.
- Use Zero-Based Budgeting software to support the process: As we heard earlier, many ZBB implementations fail due to poorly designed tracking and reporting. Overcome this with a robust decision-making platform which can make light work of monitoring and managing the budgeting process. Having a solution which can inform budgeting decisions based on accurate data and simulations of the impact of activities across the business is not to be underestimated.
How can Zero-Based Budgeting Software help?
The process of ZBB can be time-consuming to realize; starting a budget from scratch every year rather than taking the previous year’s figures is already increasing the length of the process. Add to this the time required to evaluate the success of previous activities and work out how much should be allocated in the next budget based on these figures, and your management team is suddenly snowed under with the entire process and feeling highly unproductive.
A Zero-Based Budgeting solution combats these issues, taking much of the legwork out of the budgeting activities. A decent, unified system will give you a central source of data (improving accuracy), on which users and managers can perform analysis and simulation. In turn, this provides clarity on what has worked previously and allows for the modeling of different scenarios to see the impact of assigning different budget amounts to different cost centers.
Productivity is increased as managers can make a much more informed decision about the budget they are going to request and the effect of different budget allocations can be seen across different departments. This creates clarity over the impact that decisions will have on the bottom line, encourages managers to give greater consideration to their actions, and creates a culture of analysis and improvement.
Of course, on top of this, ZBB solutions provide control over the entire process with features such as workflow, task allocation, and write-back to source systems, removing the reliance on spreadsheets and ensuring budgeting is conducted accurately and efficiently.
The future of Zero-Based Budgeting
So what does the future hold for Zero-Based Budgeting? McKinsey refer us to the term Zero-Based Productivity
, a concept in which ZBB principles are applied to other areas of expenditure, encouraging a culture of rigorous evaluation, transparency, and improvement business-wide.
Much like Zero-Based Budgeting, ZBP requires clear visibility of business information in order to effectively evaluate, plan, and make decisions. This can only be delivered through a centralized platform which makes sense of inputs from across the business and can support the process from a strong foundation.
To learn more about ZBB, take a look at our recorded webinar
, in conjunction with EY, which explores how to drive strategy and sustain value through a Zero-Based Budgeting approach.