Zero Based Budgeting
Normal Budgeting
Over the past few months, you would have heard business leaders talk about the “new normal” countless times. The disruption caused by COVID-19 has been strongly felt across all sectors and the accompanying uncertainty has led to fear of entire businesses shutting down. In the wake of this disruption, as companies look to refine their business models and optimize their cost, there is merit in examining a tool that makes more sense now than ever before – Zero Based Budgeting (ZBB).
What is ZBB?
ZBB is a bottoms-up approach used to develop the budget of an organization in a structured way. Traditionally, budgets are prepared using historical costs as the baseline followed by forecasting revenues and costs on top of that. When using ZBB, expenses are grouped into cost categories of similar nature and spending levels are determined on the basis of cost drivers rather than historical trends. All expenses are justified and allocated based on necessity and relevance to company strategy and growth directions.
But ZBB is so much more than starting a budget process from “Zero”.
ZBB is not a one-time budgeting exercise, but a multi-year program which brings about a mind-set and a culture shift towards the way the business is done in the organization
multi-year program which brings about a mind-set and a culture shift towards the way the business is done in the organization. It is a tool which drives innovation and competitive advantage, while optimizing costs and providing capital for growth.
Though time consuming, if implemented properly, this multi -year process boosts the organisation’s growth and agility by eliminating wastes in the business processes and providing the opportunity to reinvest savings to fuel future growth. A world-class ZBB program can help organizations save around 5-15% of their total cost, if not more.
Example
Suppose you are in the food and beverage business and the owner of several restaurants. When estimating the budget for next year, you will take into account the plan for new restaurants opening up in different locations. For estimating the costs associated with these new restaurants, the traditional budgeting approach would look at historical costs associated with opening of new restaurants and replicating the same into the budget. When using the ZBB approach however, one would start from scratch and justify each and every expense, trying to optimize costs along the way. The new cost structure that is agreed upon through collaborative efforts of the key stakeholders involved in the budgeting process would then be replicated to the existing stores as well as part of the ZBB initiatives.
Benefits of Implementing ZBB: How does it help the organization?
Insights
Insights
The most visible benefits of a successful ZBB implementation are:
- Transforming organizational capabilities Successful completion of the ZBB exercise helps an organization achieves a sustainable cost management system, a culture of accountability and agile processes.
- Unlocking value to fuel growth in prioritized areas ZBB attacks wastes in business processes to reduce expenses from activities that are not relevant to the business. These freed up expenses form the ‘capital for growth’ that can be reinvested into important strategic initiatives
- Building a culture of value consciousness and spend awareness ZBB helps to achieve cost visibility at a granular level and build a culture of ownership with respect to spending. It enables employees to ask the questions “Is spending in this area necessary?” and “Am I getting the best return from my spending?”
ZBB v/s Traditional Budgeting: How do the two compare?
Base for creating the budget
Previous year expenses are considered as the starting point for budget creation
There is no baseline for budget creation, process starts from “zero”
Cost build-up
Only incaremental costs need to be justified
Every single cost needs to be justified
Time needed for implementation
Requires less time for completion as it is relatively easier to implement
Requires more time for completion as its implementation is complex
Cost optimization focus
The cost optimization focus is narrow and limited to specific departments/categories
The cost optimization focus is across the entire organization and every avenue for cost optimization is explored
Need for training
Little to no training is required as traditional budgeting is widely used across companies
Successful implementation of ZBB requires high levels of skill and experience and most companies would need to invest significantly in training employees
Keep an eye out for our next article on the ZBB Series: ‘Should your organization adopt ZBB?’ or reach out to one of our authors to know more.
Authors
Read our case study
The client is a major QSR franchisor in the Middle East region operating more than 1,800 retail stores across multiple brands. Acuvon supported in implementation of Zero-based budgeting at G&A expense level to help the client optimize their expenses
