What is zero-based budgeting?
At the risk of over–simplifying, traditional budgeting relies on historical spending to project spending. Zero–based budgeting (ZBB) instead takes a different approach. It requires department heads to base their budgets on business need and achievement of business strategy and goals. This ‘start from scratch’ basis delivers a more disciplined and strategic approach to allocating resources and can be of considerable value in markets where margins are tight and increasingly matter.
While the concept of zero-based budgeting isn’t exactly new, the adoption rate has been slower than you might think (given the upside). In fact, many companies rely on traditional budgeting in part because the more rigorous ZBB approach appears too daunting. That may be true for those companies still relying primarily on Excel, but let’s explore why it’s worth evaluating.
Benefits of zero-based budgeting
There are a range of potent advantages to the zero-based budgeting approach. With the right implementation ZBB will enable your organization to:
- Manage expenses more effectively: The challenging economic climate we are in requires every organization to manage their expenses more effectively. ZBB drives cost management and accountability in every department in the organization.
- Challenge the status quo: Zero-based budgeting 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.
- Increase accountability and understanding of the cost structure: The discipline of ZBB requires that department heads understand their cost structure and what drives it.
- Reduce costs while increasing efficiency: ZBB encourages department heads to actively seek how to be more efficient so increasing workloads do not drive increased spending – effectively determining how do more with less.
- Maintain control over the budget: Unlike traditional budgeting where many budget holders simply roll over or inflate the previous year’s budget without justifying why – ZBB encourages departments to relook at all aspects of their budget before submitting it. This gives greater control over budgets across the organization, while potentially also helping to reduce ineffective spending.
- Drive continuous improvement in activities: Instead of using previous budgets to form the basis of the next one, zero-based budgeting encourages managers to continually review the activities of their department and determine where improvements can be made.
- Encourage initiative and agility: To meet the demands of ZBB department heads will need to be creative, agile, and take responsibility.
Choosing the right zero-based budgeting enabling software
With potential advantages as significant as the ones illustrated above, you need to ensure that your zero-based budgeting approach is delivered effectively. This implies that the process itself is well designed and that the organization has the right technology enablers to support it.
The right solution supports the process and helps overcome the key challenges associated with implementing ZBB. Without the right technology the process itself becomes unwieldy and can collapse under its own weight; especially true if trying to execute ZBB with little more than a series of linked spreadsheets. It is often the case that budget holders receive very little training in ZBB. Providing just a blank template, in this case, is a recipe for disaster. The time and effort required to build a zero-based budget can be significant from a budget holder’s perspective, so short cutting the process, while tempting, will surely diminish the results. There can be a lot of push back from budget holders who don’t want to see things change and this resistance can undermine the overall effectiveness of ZBB.
The solution needs to be designed to address these shortcomings and roadblocks effectively. That means, for example, that the technology makes the process simple for users to follow and implement. It means enabling an approval workflow to ensure quality. It means reporting capabilities to drive transparency and accountability throughout the process. It means providing what-if and scenario analysis to drive the best outcomes. It means chat features to encourage collaboration and automated reporting to alert management to potential problems. In short, it means understanding what challenges your organization will face in rolling out ZBB and providing the enablers to overcome them.
One last point, a single unified platform for budgeting, forecasting, reporting, and analysis is critical for improved decision–making: the ultimate business objective. This is as true for ZBB as it is for any other traditional budget approach, or for Financial Planning & Analysis (FP&A) in general.
Eight tips for successful zero-based budgeting implementation
While there are numerous, highly advantageous benefits to be realized with ZBB, the implementation process does present challenges. It necessitates a careful, well-planned approach. Consider these top tips for zero-based budgeting success:
- Be clear about what you want to achieve: ZBB requires a complete redesign of the traditional budgeting process. Before you start, do your research and speak to experts or peers to provide a clear idea about what improvement you want to bring to the process and to the business.
- Use enabling technology to drive your ZBB process: As discussed above, Excel can undermine a successful rollout of a ZBB program. Find technology that enables your new process in a way that makes it easy for your budget holders to use and embrace the process.
- Develop thresholds for materiality: Not every expense in every department needs to go through the rigor or time investment of ZBB. For example, a $37 expense budget for the marketing department for office supplies does not require the same scrutiny as a $37 million expense budget for the IT department’s consulting fees. The right enabling technology should make it easy for an administrator to flag the accounts that need ZBB rigor and those that don’t. Likewise, the system should make it easy for a department head to develop the budget for each account (ZBB based or otherwise).
- Know your drivers: Justifying spending in a ZBB process involves tying that spending to drivers. For example, headcount in Accounts Payable may be tied to the number of invoices processed (and the productivity of employees in that departments). The right enabling system should make it easy for budget holders to choose the right drivers from a drop-down menu and apply them as needed.
- Train your budget holders: A new process, especially one that reflects the rigor of ZBB, requires training and education. Training should involve an understanding of the new approach and the system used to support it. Of course, with the right enabling technology the process should appear more intuitive and require less intensive training.
- Develop your change management plan: Expect some resistance to ZBB, especially from budget holders who may not embrace increased visibility and scrutiny. Training, as discussed above, can be a key component to change management, in addition to visible senior level support, clear communication around expectations, and a willingness to listen.
- Ensure you have management buy-in: As mentioned above, this can be critical from a change management perspective and to your ultimate success in rolling out ZBB. Ensure senior leaders are onboard with the need to change, understand its benefits, and have backing to drive change across all departments.
- Consider using an outside advisor: They say experience is the best teacher, but why not learn from other people’s experience and mistakes before making your own? Make no mistake about it, ZBB touches every area of the organization (because budgeting itself does) and it requires some fundamental changes. That’s a lot to take on without help unless you have prior experience.
To learn more about zero-based budgeting, 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.