When thinking about Zero-Based Budgeting (ZBB), one may think it is an “evergreen” topic in the finance domain. Indeed, it has never left the radar of professionals for the last decade or so. Let’s explore together what the reasons for this phenomenon might be and if they are justified reasonably.
In the following article, you will discover the author’s view on why Zero-Based Budgeting continues to be as important as it has always been.
In today’s extremely challenging and dynamic economic and geopolitical environment, flexibility and adaptability are key to keeping the competitive advantage of any business. Organisational goals may vary significantly from one financial year to another, depending on the current state of the global economy, geopolitical developments, and stock market sentiments. It is where we can find one of the greatest advantages of Zero-Based Budgeting: it can not only provide a great variety of opportunities for improving efficiency but also reset the setup of all the functions to re-align them to the core business needs and support the current company goals more adequately.
The post-COVID era poses a continued challenge to global enterprises. Following the uncertain consumer demand, rising interest rates, and market pressure for constant cost optimisations in the background of shareholders’ expectations for increasing returns, all global businesses need to profoundly reset their operational models and organisational setups to stay competitive. Zero-Based Budgeting seems to offer an adequate response to the current challenges. However, it comes at a certain price.
Understanding Zero-Based Budgeting
Zero-Based Budgeting is a strategic forecasting approach when a company re-evaluates its resource allocation and the budget attributed to each function or process from scratch, using only their current organisational business goals and priorities. Its key characteristic is the lack of references or comparisons to the previous period spendings or allocations. This is the best approach to prevent inefficiencies cumulating over time and to re-focus the organisational financial activities towards more adequate business contribution. The process could be summarised as “Reset, Review, Restart”.
Key Prerequisites
Complete organisational support
ZBB is a profound organisational re-alignment that can only happen if there is full support from the top management. It applies not only to ensuring sufficient resource allocation for the ZBB cycle itself but also to implementing the new organisational setup and steering the Change Management during the transition period.
Adequate resource allocation
ZBB cycle requires a significant time investment to review the current business processes and reshape their setup to re-align them to current organisational challenges. Simultaneously, the process should not last too long to avoid losing traction and motivation and diminishing its positive effects. To attain these goals, the whole organisation needs to be informed and engaged.
Core business insights
To achieve an adequate process reset, the FP&A professionals need to work much closer with the business to understand, discuss, and reshape all core processes adequately, not only from budgeting but also from strategic and operational perspectives. This is a key distinction of ZBB compared to traditional budgeting, where FP&A professionals usually spearhead the incremental adjustment of figures.
Adequate frequency
ZBB entails a profound reshaping of the organisational setup, and it is rightfully perceived to be a heavy and expensive process. It is extremely important to perform it with the right frequency to avoid missing out on the benefits of a costly, lengthy process and losing adequacy of implemented changes and motivation of the stakeholders. On the contrary, each organisation shall perform a new ZBB cycle occasionally when the market environment and competitive landscape necessitate a business setup reset.
Major Benefits
Unique organisational review
ZBB provides an excellent reason for profoundly reviewing and reorganising the business on occasion of the budgeting cycle. As such, change is quite complex, and there will be a natural resistance. Therefore, performing a periodical ZBB offers an unavoidable need to conduct the organisation-wide revision and reshaping.
Reinstatement of genuine business support
FP&A approach is often based on managing increments. When performing periodic budgeting activities, the finance professionals would adjust various financial lines based on the latest changes in the main economic indicators such as inflation, Gross Domestic Product growth, currency rates, etc. By doing so repeatedly, budget figures become more detached from the underlying business needs of a particular company. Here, ZBB offers a great opportunity to restart the setup, reestablish the main needs for supporting the core business and refocus the FP&A function to support it in the best way.
Retaining flexibility and accountability
ZBB as a process can offer greater organisational benefits, spanning beyond the purely financial aspect. While remapping the organisation's processes, it is quite natural that the new design would restore the agility and flexibility of the company. It would allow faster adaptation to the challenges and a better grasp of the newly arising opportunities. In addition, it reinstates accountability of the respective budget holders towards ownership of each process, including its financials.
Main Challenges
“Winners and losers” game
ZBB could have a very polarised perception and support among organisations depending on its outcome. If a department gets a smaller budget allocation than in the previous period, it may not support the transition and execution.
Complexity
As noted above, Zero Based Budgeting is a very resource-heavy process. It requires a significant investment of time, financial resources, as well as organisational focus and attention. This might also be coupled with a mixed historical experience from performing previous ZBB cycles. Altogether, this usually increases the reluctance of the companies to perform a new iteration of the process despite urgent situational needs.
One of the solutions to this challenge could be planning a Rolling Zero-Based Budgeting. This would allow the incorporation of the lessons learned from another popular budgeting approach, Rolling Forecast, while ensuring a smoother process. In such cases, the organisation may consider performing a review of functions in stages, starting with the core business ones first. The secondary and support functions can follow their ZBB cycles later after the transitioning phase for core ones is finished. It would allow greater alignment and better synchronisation of the support functions, eventually increasing the overall efficiency of the organisation.
Transitioning
Switching from the current to the future state is easier said than done. It requires special efforts, time, and commitment from the whole organisation during the transition phase to implement the new ways of working while still maintaining the old operational model until the new setup is fully usable. Careful Change Management needs to be planned and executed throughout the process.
Going Forward
One might wonder whether it is worth performing Zero-Based Budgeting in today’s challenging times, given the current turbulent environment and increasing scarcity of available resources. Following the above reflections and arguments, I am convinced that global organisations do not have much choice.
ZBB has proven itself as one of the strategic tools of the FP&A function to adequately support the organisational transformation towards more adequate market positioning and greater competitive advantage. Hence, the key is to be proactive and use the benefits offered by Zero-Based Budgeting on time, reinstate the organisations’ competitive advantage, and emerge stronger to respond to the ongoing economic challenges.
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