When profit margins get tight, where do the FP&As turn? To cost-cutting, which often unfortunately backfires and sometimes can even hurt the company, additionally, often these programs get abandoned the moment business reaches their financial performance objective.
This is where zero-based budgeting, ZBB, can be an excellent solution for businesses looking to reset their business financial strategy and sustain long-term change in that department.
ZBB technique is inherently based on the fact that the financial department cannot achieve sustained change by itself, it needs help from the whole organisation, working with finance towards the same goals.
What is Zero-Based Budgeting?
Zero-based budgeting (or ZZB) is a method of budgeting within the business, in which all expenses must be justified for each period as if it was a new budgeting period. The process of zero-based budgeting starts from a “zero-base” and everything is analysed for its needs, cost, and returns. Based on these calculations, budgets are then built around the needs for the upcoming period, regardless of whether previous budgets were higher or lower. It is, however, a time-consuming process that takes much longer than traditional, cost-based budgeting. But the burden of such budgeting technique can be alleviated by using available technologies for an automated budgeting and forecasting software.
What are the Benefits of Zero-Based Budgeting?
There are many benefits of zero-based budgeting that allow a business to reach their strategic goals at an increased rate. While individual changes that ZZB accommodate might seem small in the business per budgeting period, collectively they will have a big impact long term and help to achieve major saving and fuel growth through increased visibility and better alignment of financial performance to strategic objectives.
Because of the detailed nature of zero-based budgeting, it helps businesses avoid blanket increases or decreases in costs. This type of budgeting helps to cut cost drivers by providing absolute visibility on spending. With a better oversight of business spending, decision makers can set better financial productivity objectives that are more optimised than just “cut x budget by 20 per cent.” And because this type of budget needs to be reviewed often to maintain its productivity, it allows leaders to reassess much more frequently. This is particularly useful when it comes to reassessing new marketing and advertising budgets, as their seasonality and demand can be particularly volatile, and correlation to ROI can change monthly in some instances.
Some individual changes that are enabled by zero-based budgeting might seem small at first, but collectively they will have a big impact on a business, especially long term. ZBB allows businesses to continually drive savings and efficiency through their financial planning and fuel growth. ZBB helps firms to rethink how they operate and redeploy capital to directly align with their strategic priorities.