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• Identifies and eliminates wastage and out-of-date operations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.

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How to build a Zero Based Budget in 7 Steps

1. Determine Group Strategic Goals/ Priorities

2. Align investment and initiatives to Group Strategy 

3. Communicate budget process, timeline and expectations

4. Provide key assumptions and templates for each P+L item

5. Create templates for CAPEX, Balance Sheet, Cash Flow, Treasury

6. Document all assumptions and supporting data to refer to during budget reviews

7. 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