Zero-based budgeting can be a powerful tool to engage and empower line managers, increase budget transparency and make sure your spending actually supports your business goals. Doing it purely as a cost-cutting exercise will undermine all the benefits, writes Kevin Pillips CA(SA), CEO of the IDU Group in Accountancy SA.
Zero-based budgeting is a good idea that unfortunately is usually promoted for all the wrong reasons. Many people think of it as a way to cut costs, slash everything to zero and make everyone justify their entire budget from-the-ground-up. There’s a certain swashbuckling appeal to the idea but the reality is more likely to be widespread fear, resentment and frantic attempts to protect pet projects. It also takes a lot longer to plan from scratch than to simply mark up last year’s numbers.
There’s another more healthy way to think about zero-based budgeting. It’s not just about costs, it’s about linking spending with strategy. .When a new business will project the starting from scratch the budget is the place where big dreams get their reality check. It means are asking questions: what do we actually need to get this off the ground? What can we do without? What’s the most efficient way to achieve our objectives? What are the best tools and people for the job?
In an established business the day-to-day routine can carry on for years without anyone ever stopping to reconsider whether the existing answers to his questions are still the right ones. At budget time everyone just slaps markup on last year’s budget and then, unless something is seriously wrong, keeps going in the same direction.
Zero based budgeting stops that mindless routine in its tracks and forces everyone to actually think about what they’re doing. It can be an immensely empowering process for line managers, creating an opportunity to reconnect with how their work fits into the bigger picture. it will almost certainly also create opportunities to cut some costs as some people see where they could be doing things more efficiently – but the cross-cutting is not the main point.
Of course this all takes a lot more time than the usual approach, which is why so few businesses do it. There are two ways to solve the problem. First, the whole organisation doesn’t have to start from scratch every year. The rolling four-year process where just 25% of the organisation does a zero-based budget every year will achieve all the same benefits without most of the disruption. Second, for the other 75%, a budget process that is fast and well supported by software and automation tools will free finance staff up to spend time where they are most needed.
It’s is not an easy path take – but the increases in flexibility and efficiency can have a massive impact on profitability.
What is zero-based budgeting? Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs.