zero-based budgeting in the next normal

Budgeting, Planning & Forecasting

- 4 min read

Taking zero-based budgeting as the first step in FP&A transformation

With ongoing issues around the pandemic, changing markets in unpredictable ways, businesses have been given an opportunity to hit the reset button on many of their activities. For a considerable number of organizations, this opportunity is perhaps an unseen benefit from what was otherwise a race to reassess operations. For others, it is the means to ensure they can come through a global crisis whole. Whatever the case, 2021 offers the chance to review existing processes and strive towards a more confident future in the Next Normal.

One such review comes in the shape of zero-based budgeting (ZBB), a method of building new budgets from scratch (or “zero based”) by examining each cost and justifying whether it is essential for the business year. While this is not a new concept, having found its roots around 50 years ago, we are seeing a resurgence of ZBB as the underlying principle, especially when combined with a driver-based approach, for many Financial Planning & Analytics (FP&A) related activities.

The evolution of zero-based budgeting

In recent years, ZBB has evolved significantly to be a utility that goes beyond standard cost base analysis. Instead, it now has applications in FP&A to impact business drivers at all levels of the organization, offering transformation across planning and analytics. Of course, its use as the core budgeting tool is highly justifiable too – but this can be regarded as just the first step in designing a brand-new planning model to take into the Next Normal.

Taking this model into the Next Normal aligns neatly with the growing importance we are seeing with modern approaches to Integrated Business Planning (IBP) – an approach (considered to be best practice) that incorporates financial and operational data from across the organization. IBP brings the benefit of creating a transparent, 360-degree view between and across the different departments within a business. One shared view of data – when utilized through an all-in-one digital solution such as Board – offers a single, accurate, up-to-date point of truth to derive intelligent decision-making from. Additionally, IBP – and the software powering it – adds further ability to conduct scenario planning which, among other things, allows for financial simulation so users can best determine the impact of strategic initiatives around spend and budgeting.

So, why is now the right time to consider a zero-based budgeting approach? In short, we have no accurate way to know what will happen from one year to the next. It keeps getting mentioned but who, realistically, could have predicted something as detrimental to the business world as the pandemic we are still experiencing? There was simply no way for organizations at the end of 2019 to make accurate budgets for 2020. By freeing up as many resources as they can, through a zero-based budgeting approach, companies can therefore create a model of agility, capable of adapting to outside circumstances (no matter how large or small).

The zero-based budgeting mindset

ZBB goes beyond spending cuts, it’s a different way of thinking. Take this example, from a leading beverage provider based in the US, as a case in point. The company had five major warehouse hubs that stored concentrate syrup destined to be shipped to bottles around the country. After implementing a ZBB mindset, a simple question was raised around these warehouses: “If there were no warehouses today, anywhere in the country, how many would be recommended to establish and where precisely would they go?”

To answer this, a cross-functional team was put together that consisted of finance, logistics, and operations. Data from across a few years was brought in to look at volumes, costs, and locations of bottlers. Using linear programming, the team was able to crunch the numbers and identify the ideal location and an optimum number of warehouses. Surprisingly, the optimum number of warehouses was just one, based in Louisville, KY (incidentally, the exact someplace that FedEx owned a major hub).

The result of this was an ultimate saving of millions of dollars over a five-year period and increased customer satisfaction (in this case, a bottler for the company).

This simply would never have happened if a ZBB mindset had not been applied to raise that key view: “If we started with a blank sheet of paper today…”

Since ZBB looks to start with a blank canvas, having IBP underpin it with scenario planning capability adds a powerful tool to the organization. With it, businesses can model the impact of different expenditure on both the financial bottom line as well as other key operational KPIs, and determine what is likely to improve profitability (and likewise negatively impact budgeting) so that more informed decisions can be made.

What to consider with zero-based budgeting

Implementing ZBB can be a beneficial undertaking for companies. However, as with any major decision of this nature, there are pros and cons to consider.

On the one hand, ZBB will offer a new level of robustness to deal with unexpected change, at all levels of severity, while setting up a more future-proof model to take from month-to-month, year-to-year. This model is led by expense management, a proven method for cost ownership and accountability across every department in the business, not just finance. In turn, expense management is a great way to challenge the status quo of what is working and what isn’t – to justify where budgets should be best apportioned across the various departments and business areas.

ZBB, looking at costs in this manner, moves companies towards greater efficiency. Since all aspects of the budget are assessed or reassessed, businesses gain more control over their spending. Costs are reduced as ineffective spending is identified and more resources can be attributed as needed to boost the right activities undertaken by departments.

On the other hand, implementing ZBB can be a lengthy process. Without the right enabling software to facilitate it further, the constraints are felt even more keenly. In addition, the actual implementation process is not as simple as just starting and stopping resources across the business. There are factors such as employment contracts, office leases, subscription licenses, and more to consider – they all affect the budgeting process in some way. The benefit of this, however, with a model such as ZBB that builds towards futureproofing, is that all these considerations can be built into plans further down the line. ZBB, in this sense, encourages initiative and agility – department heads need to take a creative approach to gain the most from ZBB.

While there are many, highly advantageous benefits to be seen with ZBB, the implementation process does present challenges; a plan is needed for ZBB to be truly realized, as well as the right software to effectively manage the demands it creates. Consider these tips for launching a successful zero-based budgeting approach.

FP&A led planning models with zero-based budgeting

With the right zero-based budgeting software in place, businesses have essential capabilities added to their FP&A processes. For example, with Board, users can:

  • automate the Office of Finance: finance teams can automate processes like planning & control, management reporting, financial closing, consolidation, and disclosure to free up more time for meaningful data analysis rather than time-consuming data collation and preparation
  • improve scenario planning: align finance, strategy, and operations to model the potential impact of different strategies (both short and longer-term) on financial results and identify which path(s) present the most beneficial and profitable way forward
  • combine zero-based and driver-based planning: embrace both approaches in a holistic solution to drive enhanced strategy management, cost transformation, and re-investment optimization – resulting in sustained savings and better growth
  • implement the Digital Boardroom: shift from a historical perspective to a forward-looking approach with the Digital Boardroom – a single source of truth that can transform decision-making by offering real-time insights into both past performances and forecasted/predicted future results
  • increase control over collaboration and governance: improve the alignment of organization-wide goals through an approach that promotes and supports collaboration in an effective, standardized way.

Ultimately, however, the right software, with FP&A capability, allows users to entirely redesign their (or even implement an entirely new) planning model for budgeting and finances. Having a more intimate understanding of internal business drivers and being able to better analyze external factors (such as the COVID-19 pandemic, as an extreme example, or how the UK leaving the EU will affect markets globally) will come together to forecast budgets for the coming year and beyond.

It is through this consideration, that nothing is fixed and everything is fluid, that organizations have the best possible plans in place to make the most of the current situation; staying ahead of the curve and reacting to change the fastest.

This leads to an overarching driver-based forecasting and planning model, formed from intelligent analysis, that gives organizations the best tools to make informed decisions. These are no longer based on static and potentially outdated budgets – for, as we know, things can change dramatically in a brief period – but instead on agile processes and budgets justified from the ground up and robust enough to change with a rapidly evolving business environment.

A New Age of Zero-Based Budgeting

In partnership with FP&A Trends Group, Board discusses the evolution of zero-based budgeting: from ZBB to zero-based FP&A.  Join the industry experts and watch the on-demand webinar.

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A New Age of Zero-Based Budgeting

Watch this webinar to discover more about the zero-based budgeting evolution: from ZBB to zero-based FP&A