A guide to Zero-based Budgeting.

What is Zero-based Budgeting or ZBB? Zero-based Budgeting or ZBB is a methodology that helps align company spending with strategic goals. Its approach requires organizations to build their annual budget from zero each year to help verify that all components of the annual budget are cost-effective, relevant, and drive improved savings. ZBB is cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead. The five main steps in Zero-based Budgeting Businesses can develop or modify their own unique approaches to ZBB, and the following five steps can provide a baseline for implementation. Start. Begin at ground zero. Create a new annual budget from scratch without using last year’s actual as a baseline. Evaluate. Evaluate every cost area. Eliminate and reduce unnecessary activities or services. Justify. Account for all components of the budget. Identify areas that are cost-effective, relevant, and that drive cost savings. Streamline. Determine what activities should be performed and how. Automate and standardize processes where possible. Execute. Roll out comprehensive planning and execution processes. Communicate clear plans, roles and responsibilities. Every method/approach comes with it pros and cons. Here are some pros and cons. Pros of ZBB Better cost control One of the biggest advantages of ZBB is its ability to effectively control costs, create accountability surrounding the cost allocation process, and hone in on the most important initiatives to the company. ZBB can also challenge the organization to uncover more effective ways of adding value or accomplishing goals. Better alignment of company resources to goals By questioning old methods, ZBB can also improve the services themselves, which provides the end customer with a better overall experience. For example, management decides that a company priority for the coming year is to improve the customer experience. In order to do this, the marketing team decides to budget an additional $250,000 (an increase to the prior budget of 25%) to increase the user friendliness of the company’s web site. This type of expenditure would typically be difficult to justify, but due to management’s stated goal of improving the customer experience, it is more likely to gain approval. More focused discussions Additionally, budgeting becomes more focused and meaningful under ZBB. When managers have clear direction strategically and are tasked with crafting a budget from scratch, discussions stay focused on what the people responsible need to do to accomplish the objectives. Rather than simply increasing the budget by 5% over last year, more thoughtful conversations arise and those involved in the process feel more connected to the outcomes. Cons of ZBB So far, we have mostly discussed the various advantages of ZBB, but what are the disadvantages? 1. More time Zero-based budgeting takes time… lots of time. The process starts anew each cycle and each expense needs to be justified, which requires thought, collaboration, and communication, not only within each department, but first and foremost with senior management to make sure the goals of the organization are clearly defined and understood. 2. Buy-in ZBB necessitates employee/constituent buy-in. People are often resistant to change and learning how to do an old task in a new way is intimidating, especially when the new skill you are being asked to learn will increase your workload. Human cost Finally, due to the fact that the goal of ZBB is to reduce or eliminate inefficiencies and justify expenditures, layoffs may be deemed necessary as part of this newly adopted budgeting mantra. While it may make business sense to lay people off, there is a human cost involved and that must be weighed against the potential for savings. In a public company, layoffs may feel justified due to the company’s need to provide value for shareholders, but in an employee-owned private company, this type of decision is more difficult.