Zero-based budgeting: Zero or hero? Strategy & Operations

With a clear understanding, companies can leverage this tool to navigate uncertain times and emerge more robust out of it. The process can be time-consuming and expensive, as it requires a detailed justification for all expenses. ZBB may also create a combative environment, where departments compete for financial resources rather than collaborating on the organization’s unified goals. Furthermore, zero-based budgeting has the potential to significantly impact employee motivation. The process of justifying each dollar spent on the budget necessitates a profound understanding of the business, its goals, and strategies. Employees, therefore, are required to understand and justify their contribution to the overall organizational objective.

  • Zero-based budgeting (ZBB) and traditional budgeting are vastly different approaches to financial management.
  • The fourth element is a “preponderance of proof” standard, which means that managers have to justify their expenditures as reasonable and necessary.
  • Deployment of a range of CDR methods can also result in increased emissions of nitrous oxide and methane, two powerful greenhouse gases.
  • This could include workshops, training sessions, or even the creation of a comprehensive guide and resources.
  • When managers think about how each dollar is spent, the highest revenue-generating operations come into greater focus.

Zero-based budgeting encourages companies to evaluate every department’s funding, and their current needs rather than the momentum of the previous year’s budget or previous expenditure.[2] It can help remove redundant spending. Communication between departments can improve by involving employees in decision-making and budget prioritization. ZBB may be undertaken as a “rolling process” spread over several years so that only a limited number of departments or business functions are affected each year. Over time, companies can find themselves saddled with an organization that is misaligned with its business strategy. Organic growth and the pursuit of new opportunities can result in a lack of visibility across departments that hides unnecessary spending. Using zero-based principles to assess organizational spending can bring much-needed clarity while directing resources to where they can have the greatest impact.

What are the steps for a company to implement Zero-Based-Budgeting?

The attitudes and habits surrounding traditional budgeting and spending are deeply ingrained. Because companies that understand ZBB know that it is, above all, a philosophy, they recognize that changing hearts and minds is as critical to ZBB success as implementing the requisite processes, systems, and tools. Our experience tells us that change programs, regardless of their specific features, require stalwart, dedicated people to carry them out. As one CEO we work with said, “Put your strongest people in it, and you’ll create a snowball effect.” Enlist team players who support the program and its goals and who are comfortable challenging colleagues and being challenged themselves.

  • It requires a consistent taxonomy of costs that provides an organization-wide view of actual cost categories (such as travel, facility management, and marketing expenses).
  • Departments can have difficulties justifying their budgets, due to uncertainties of market fluctuations.
  • Accenture’s ZBx is a new way to drive profitability that emphasizes the future over the past and fuel growth.
  • For the reasons above, greenhouse gas accounting, and policies designed to offset greenhouse gas emissions, need to consider the full suite of climate effects of the proposed CDR to ensure intended climate goals are not compromised.
  • The result can be a more agile, responsive organization that is better positioned to pursue new opportunities.

This is because ZBB is an exacting and responsible approach to budgeting, one that evaluates every cost item from scratch. It inherently discourages wastefulness and encourages the efficient use of resources. The need to examine every expense ensures employees are actively involved in decision-making. They’re a part of the discussions, debates, and decisions revolving around the budgeting process. This involvement promotes engagement, resulting in increased commitment to the company’s vision and strategies.

What is Zero-based Budgeting?

Sometimes, budgets can get out of control, or in some years, may show significantly higher or lower costs, depending on the overall market outlook and other external factors. In such scenarios, it does not make sense to look at last year’s budget because significant changes in the company’s situation have taken place. Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.

Because it is so granular, a zero-based budget (ZBB) is a helpful tool that business owners can use to navigate to their goals. Ideally, the budget can be rolled each period after the initial set-up is complete, making the process more efficient with each subsequent budget period. While zero-based budgeting may provide flexibility and responsiveness, it’s essential to note that these benefits come with trade-offs. For one, the process can be time-consuming as it necessitates a thorough review of all expenses for each period.

Advantages of zero based budgeting

They also account for a small percentage increase to cover employee wage increases and inflation. While traditional budgeting is faster than ZBB, it can also leave gaps for business growth and savings. This budgeting method stands in contrast with traditional budgeting, which relies on past budgets and only justifies changes to historical budgets. Newco is a company that specializes in selling home appliances, and due to a boom in home construction, they have experienced significant growth over the last two years.

Moreover, these principles can ensure that the highest-value roles within the organization are clearly identified and staffed with the most qualified workers. Zero-basing organizations, which use zero-based principles as a lens to reshape organizational structure and operations, can unleash greater productivity. The resulting purpose-built enterprise ensures that staff and resources are allocated to the highest-value areas of the business.

To help you understand how this all works, you can use this budgeting example as inspiration in implementing zero-based budgeting in your own organization. A financial professional will offer guidance based on the information provided and offer a no-obligation call to better understand your situation. Ask a question about your financial situation providing as much detail as possible. This team of experts helps Finance Strategists maintain the highest level of accuracy and professionalism possible. For example, one famous multi-functional team in a leading European retail group discovered a mountain of unnecessary paperwork that created a chain of costly activity throughout the organization.

Importance of performance measures

Meanwhile, lowered costs may result as zero-based budgeting may prevent the misallocation of resources that may happen over time when a budget grows incrementally. Align on design principles to guide organizational decisions—including structure (the number of spans and layers in management), governance, people, and technology (such as automation). Using a core set of design principles and architecture, companies should create templates for specific functions while allowing organizations to scale up or down based on their needs. A discussion of these factors often leads companies to redesign the organizational chart to reflect greater clarity on management and direct reports as well as add a shared-services function.

However, zero-based budgeting doesn’t mean cutting costs on every corner—it’s about strategic cost management. Resources saved from redundant or less valuable activities can get reinvested into areas that foster growth and profitability, creating a leaner and more optimized business operation. As we’ve said, a successful ZBB program depends on there being a clear view of how much the company is spending on every given item, and by whom. As a result, financial tracking must reflect a cost-category perspective across organizational units, as well. And this, in turn, means that the organization must embed cost transparency in its systems and technology tools. Demonstrate that ZBB is more than just another cost-cutting program or tedious budgeting exercise.

Companies must verify that the new organization structure can function properly and support business operations. Once these exercises are conducted, business leaders should be prepared to communicate to employees how the approach will improve operations—as well as how their actions tie to the organization’s overarching goals. Business-unit leaders aren’t typically monitoring the growth of other departments or the roles of employees to identify redundant positions. Companies should focus on gaining visibility into where resources are allocated throughout the organization, determining staffing levels, and assessing role definitions. And by establishing governance processes, companies can monitor variances in staffing over time. Zero-based budgeting is a method of budgeting that starts each department’s budget at “zero” and requires each line of a business’s expenses to be justified.