Is it time to manage cost strategically and radically through Zero-Based Budgeting?

Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general and administrative costs; marketing costs; variable distribution; or cost of goods sold. When successful, ZBB produces radical savings and liberates organisations from entrenched departments, unprofitable activities and worn-out assumptions.

Dream or nightmare?
Of course completing a full ZBB cycle would be both challenging and risky for most organisations where the thought of rebuilding the company budget from the ground up would be a nightmare. For most organisations, wiping the financial slate clean and starting from scratch would be a last resort in a worst-case scenario, not really an option to be considered under normal circumstances.

Still, the ZBB philosophy offers appealing possibilities for reducing costs while bringing additional value in the form of operational efficiency. ZBB may reduce SG&A costs by up to 25 percent within six months. ZBB can also help companies confront conventional thinking and resource allocations by challenging every line item and assumption, resulting in a budget that is much more aligned with the strategy and future ambitions.

Even just adapting some of the principles of ZBB can be a step towards eliminating wasted and unproductive spending while at the same time creating a cost-conscious culture that spans across departments. Here are four of the most obvious advantages:

1. When budgets are not connected to prior year, spending levels can be set based on necessary activities of a function rather than historical trends, thus preventing ‘embedding’ of existing spend in the cost base.
2. Similarly, spending targets can be much better aligned with the required activities and ‘mission’ of a function. ‘Do more with less’ can be replaced with ‘do the right things with the right amount’.
   
3. When spending cuts are not simply spread evenly across budgets, ‘sandbagging’ practices (lowering expectations to produce greater-than-anticipated results) can be replaced by strategic allocation.
   
4. And finally, when funding is methodically reviewed and re-assessed, a much better alignment of expenditure with overall strategy and departmental missions can be achieved – and much less of ‘this is what we’ve always done’.
   

Conclusion
Completing a full ZBB cycle can be challenging and risky for most organisations, especially for departments with intangible outputs. However, ZBB components and theory may be necessary under specific circumstances, especially in times of recession when both rapid and strategic cost reduction is needed. In reality, ZBB typically begins with defining savings or efficiency goals and mobilising decision makers and teams to tackle specific cost areas. Leaders then evaluate how different cost levers impact productivity, cost avoidance or other performance measurements. ROI guidelines are set for each category and validated with cost owners.

However, the compelling aspect of ZBB is its founding idea: a budgeting process that allocates funding based on efficiency and necessity rather than the budget history. More than a budgeting methodology, ZBB is a philosophy of cost justification and frequent monitoring that enables spend transparency at a granular level and gives companies the agility to adjust to market changes.

By forcing justification of every expenditure every year, companies can radically improve operational efficiency and accountability. In this sense, ZBB is not only a mechanism for reducing costs, but also a driving force in transforming a business into a more transparent, differentiated, agile, adaptable and results-oriented organisation.