Guide to Zero Based Budgeting
Zero Based Budgeting (ZBB) is a method of budgeting where all expenses are justified at the beginning of each new budget cycle and all assumptions documented.
So, what exactly is Zero Based Budgeting?
Budgets are not connected to prior year spend
Funding is allocated to activities aligned to strategy
Eliminates sandbagging practices - evenly distributing expense increases/reductions across business units
Requires comprehensive understanding of activities and cost structure
Budgets are allocated to necessary business activities and based on the levels of effort required
Requires analysing and prioritising activities and expenses
The Benefits of Zero Based Budgeting
Strategic priorities and focus areas can be achieved more successfully under zero-based budgeting
Business units are forced to link their spend to focus areas/initiatives that support the organisational
objectives
The annual review ensures no initiatives continue beyond their productive life
Efficient allocation of resources, as it is based on needs and benefits
Identifies and eliminates wastage and out-of-date operations
Drives managers to design and develop cost-effective techniques for improving processes
Detects inflated budgets
Promotes questioning and challenging attitudes
Increases staff motivation because it gives them more responsibility and the ability to contribute to the
decision-making process
Increases communication and coordination within the organisation
The Challenges of Zero Based Budgeting
TIME & RESOURCES
It is time consuming having to justify each expense in order to arrive at a solid foundation to support the requirement.
A lot of manpower is required to successfully build a ZBB.
BIAS TOWARDS SHORT-TERM PLANNING
ZBB can reward short term thinking.
Can limit investment in growth because short-term benefits may take precedence over long-term planning.
DETAILED KNOWLEDGE
It is necessary to train managers well as they are ultimately responsible for the management, decision-making and the communication of the entire process.
Difficulties associated with ranking functions that are qualitative in nature mean there is a risk of cutting non-core costs that support a customer’s or consumer’s experience. This ultimately puts into jeopardy brand value in the long-term.
AWARENESS FOR DETAILS
As the volume of the required data & forms is very large, no one is capable of knowing every detail of its content and decisions.
There is a risk to compressing information and details because this might remove critically important data.
BIAS TOWARDS SHORT-TERM PLANNING
Honesty and consistency of the managers must be reliable and uniform.
There could be possible manipulation by managers to get more resources into their department.
How to build a Zero Based Budget in 7 Steps
Determine Group Strategic Goals/ Priorities
Align investment and initiatives to Group Strategy
Communicate budget process, timeline and expectations
Provide key assumptions and templates for each P+L item
Create templates for CAPEX, Balance Sheet, Cash Flow, Treasury
Document all assumptions and supporting data to refer to during budget reviews
Be courageous and curious when reviewing business unit budgets
Need help to build your own Zero Based Budget? Reach out.
Whiteark is not your average consulting firm, we have first-hand experience in delivering transformation programs for private equity and other organisations with a focus on people just as much as financial outcomes.
We understand that execution is the hardest part, and so we roll our sleeves up and work with you to ensure we can deliver the required outcomes for the business. Our co-founders have a combined experience of over 50 years’ working as Executives in organisations delivering outcomes for shareholders. Reach out for a no obligation conversation on how we can help you. Contact us on whiteark@whiteark.com.au
