Zero-based budgeting
Zero or hero?
For many organisations, the thought of rebuilding the company budget from the ground up can be nightmare-inducing. Wiping the financial slate clean and starting from scratch would be a last resort in a worst-case scenario, never an option to be considered under normal circumstances. Yet an increasing number of organisations choose to do exactly that, an extreme method of budgeting known as 'Zero-based Budgeting.'
What is ZBB?
Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history.[1] As opposed to traditional budgeting, no item is automatically included in the next budget.[2] In ZBB, budgeters review every programme and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding. 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.[3] When successful, ZBB produces radical savings and liberates organisations from entrenched departments and methodologies.[4] When unsuccessful, the costs to an organisation can be considerable.
[1] Perspective on considering a Zero Based Budgeting (ZBB) planning approach, Deloitte Analysis.
[2] Baseline Budgeting vs. Zero Based Budgeting: Americans for Prosperity, 2012. http://americansforprosperityfoundation.com/wp-content/uploads/2014/06/BaselineBudgeting_NtK.pdf
[3] Callaghan, Shaun; Hawke, K; Mignerey, C. Five myths (and realities) about Zero-based budgeting, October 2014. http://www.mckinsey.com/insights/corporate_finance/Five_myths_and_realities_about_zero_based_budgeting?cid=other-eml-alt-mip-mck-oth-1410
[4] Save to Grow- Deloitte’s Third Biennial Cost Survey: Cost Improvement Practices and Trends in the Fortune 1000. Deloitte POV/Article. March 2013.
Advantages and disadvantages
Advantages
- Resulting budget is well justified and aligned to strategy
- Catalyses broader collaboration across the organisation
- Supports cost reduction by avoiding automatic budget increases, often resulting in savings
- Improves operational efficiency by rigorous challenging of assumptions
Disadvantages
- Costly, complex, and time consuming as budget is rebuilt from scratch annually, whereas simpler and faster traditional budgeting requires justification only for incremental changes
- May be cost-prohibitive for organisations with limited funding
- Risky when potential savings are uncertain
- Execution challenged by budget cycle timing constraints
- Typically requires specialised training or personnel to accomplish, and requires more resources in general
- May be disruptive to the organisation’s operations
- Could harm organisational culture or brand
Download the PDF to explore more of the potential benefits, challenges, and risk associated with ZBB, and whether ZBB components and theory or more practical and less costly budgeting alternatives are suitable for your company.
Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on programme efficiency and necessity rather than budget history
Global macroeconomic factors are having a major impact on cost management efforts at large US companies. While the domestic economy has gained significant strength, other parts of the world are still struggling. This has created a cost/growth paradox we call “thriving in uncertainty,” where companies are simultaneously pursuing the seemingly conflicting goals of aggressive cost improvement and aggressive growth. Deloitte’s fourth biennial survey of cost management and cost improvement trends explores how companies are managing costs in this challenging environment. For details and practical insights on tackling the cost/growth paradox, download the full report—or read on for some highlights
