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The Benefits (and Drawbacks) of Zero-Based Budgeting

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Zero. Zilch. Nada.

However you say it, it's not where most of us want to be. After all, who wants to begin from zero when you have a chance to start ahead of the game?

Yet, over the years, companies from Texas Instruments to 3M have made starting from scratch part of their ongoing corporate budgeting process. They've embedded zero-based budgeting (ZBB) into their company culture--embracing a new level of cost rationalization and allocation as a result.

Zero-based budgeting can be an effective alternative to traditional budgeting--helping you achieve your operational goals and contribute towards your strategic plan. However, it doesn't always make sense to replace your more traditional approach with ZBB. If you're thinking of introducing it into your business, consider the facts--and weigh the pros and cons of a process that makes "zero" your yearly starting line.

With that in mind, consider the following:

  1. What is zero-based budgeting?
  2. Zero-based budgeting vs. traditional budgeting
  3. The zero-based budgeting process
  4. Advantages and disadvantages of zero-based budgeting

What Is Zero-Based Budgeting?

ZBB wipes the slate clean every budgeting cycle, to ensure every budget remains in touch with current financial performance and priorities. In doing so, it offers something traditional budgeting doesn't: the chance to review and justify every expenditure, every time.

Invented in the 1970s--when it was still a paper-based process--ZBB has seen a recent resurgence as finance teams look for new solutions to better align their budgeting with company goals through cost cutting, resource reallocation and maximized investments. Now with data more accessible and modern digital solutions available, ZBB empowers teams to examine every initiative, employee and tool across all departments, asking if they're worth the cost--and whether they're still contributing to business goals. In doing so, it helps identify new levers to pull and costs to remove or renegotiate based on the value they bring to your organization.

That's particularly helpful in a low-growth landscape, where you need to save money wherever you can, but is equally applicable to a high-growth environment, where scaling your organization thoughtfully can require a process that lets you rationalize your growth roadmap. ZBB is also useful for companies that have gone through a series of mergers and acquisitions and have inherent complexities or overlapping expenditures as a result. In fact, with the right support, it can be used in any corporate environment. And when successful, it can prepare your organization for whatever comes next.

Alberta-based ATB Financial was able to transform budgeting and forecasting in just 3 months with Vena.

Zero-Based Budgeting vs. Traditional Budgeting

Traditionally, your budget from the current year will act as a starting point to the new year's budgeting cycle, with any necessary adjustments made based on actual income and expenditures. This means that certain expenses are usually "baked in" or fixed, and deeper analysis reserved for new expenses--making budgeting a relatively straight-forward process for your team. But because it does rely on the status quo, traditional budgeting can also miss out on changes to your business operations, including possible cost savings and potential investments that could help your organization evolve. It doesn't necessarily promote transparency or a holistic view of the organization in the same way ZBB does either, or give departments an incentive to look for cost cuts--not when those cuts are likely to affect their teams and initiatives.

And while it's true that a traditional budgeting approach based on your company's annual run rate might have felt necessary back when big data seemed daunting, modern tools have helped budgeting teams better understand historical spending and costs and have allowed them to track spending based on programs and initiatives. In doing so, the door has been unlocked for more organizations to embrace a ZBB process.

Instead of relying on historic spending to fuel your current budget, ZBB takes a more surgical approach where nothing is taken for granted. Rather, every expense is connected to ongoing financial performance and aligned to company goals. Reducing costs doesn't just mean turning down new expenses or cutting across the board--you start from nothing every time, examining new and ongoing expenses with the same level of scrutiny to see where funding should go.

That means if something isn't working or doesn't contribute to your company goals, it doesn't make the cut--no matter how long it's been part of the budget.

(Check out The Ultimate Guide to Workforce Planning to help you plan your team now and for the future.)

The Zero-Based Budgeting Process

A repeatable process, ZBB is detailed and interactive, fueled by communication between finance, leadership and managers. It makes resource management part of organizational culture, and builds cost visibility, cost governance and cost accountability into every employee's day-to-day routine. There are several steps to getting it right:

  • Step 1: Detailed reporting and performance management efforts determine what's been working and what's not--and what's contributing to your organizational objectives.
  • Step 2: A specialized team reviews every dollar, digging deep into costs and analyzing spending across business units, cost centers, cost categories and vendors.
  • Step 3: Starting from zero, the budget is set and cuts are made based on the goals, targets and improvements identified.
  • Step 4: With business benchmarks and goals top of mind, opportunities are identified for operational improvements across departments.

Setting up a zero-based budgeting process can take a full-time finance team months of work if manually based, with contributions from profit-and-loss and cost-category owners. But all of that work can pay off through deep visibility into cost drivers--and in targets that are aggressive, but achievable. Consider choosing a budgeting & forecasting software to help you in this process.

Learn how the fast-growing enterprise YES Communities reduced their budgeting time by 50% by using Vena.

Advantages and Disadvantages of Zero-Based Budgeting

ZBB can be used in certain areas of your business or throughout your organization. The key is to understand which areas of your business ZBB might most benefit.

While zero-based budgeting can empower companies to pivot quickly to new market changes, consumer needs or business goals, it also requires the right people, processes and tools. Without that--as well as full leadership buy-in--ZBB isn't likely to be as effective and could end up being a drain on your resources and team. To understand whether it's right for any areas of your business, consider both the benefits of zero-based budgeting and its potential drawbacks:

Pros of Zero Based Budgeting:

  • It can lead to significant cost savings, giving you new dollars to invest in other places while improving operational efficiency as a whole.
  • It gives your team true visibility into your organization--allowing you to provide stronger leadership and insights.
  • It can make for better collaboration organization wide, as you determine the programs that should be prioritized and how they'll work together to contribute to company goals.
  • It can make your company more agile, keeping teams on top of every expenditure and goal--and giving them the insight to pivot quickly when needed.

Cons of Zero Based Budgeting:

  • It can be more complex and costly--requiring more time from your team to complete.
  • It can take specialized training or operational acumen to do it right.
  • It requires complete organizational buy-in--otherwise, it may put other departments on the defensive as they try to justify their programs and initiatives.
  • Without the right metrics to analyze, it can potentially impact departments that offer less tangible results.

Knowing whether it's right for your business means understanding the goals you want to achieve and where ZBB might assist. But with the right organizational culture in place, zero-based budgeting can help you move your planning process and decision making forward--and help you understand the effects of those changes along the way.

Find out how Vena can help you build a better budget.


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About the Author

Evan Webster, Senior Area Sales Manager, Vena

Evan Webster is an experienced sales professional and storyteller with a passion for innovative technology. He currently serves as a Senior Area Sales Manager at Vena and previously worked as a Content Specialist. He continually strives to inspire finance professionals to become strategic business partners and is dedicated to helping them automate and streamline their planning processes so they can make better decisions with reliable, data-driven insights—enabling meaningful growth for organizations across the globe.

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