Make Efficiency and Zero-Based Budgeting Your Company's 2019 New Years Resolution
by Vince Huth, on Nov 27, 2018
Whatever industry your company serves, it’s easy to justify why using traditional budgeting is best for your organization for one overarching reason: it’s fairly simple compared to alternatives.
In a traditional budgeting framework, you already have a baseline to build out your budget for the next fiscal year from the current year’s budget. And, in a world where time equals money, traditional budget easily wins out over the tedious additional steps it would take to get your company in the zero-based budgeting mindset.
Sure, allocating time toward other ventures might save you money in the short-term, but, looking ahead, companies would be wise to expose their inefficiencies now through zero-based budgeting, similar thinking that’s been seen by large companies in recent years that are adapting to ever-changing market dynamics.
Companies that have seen success with zero-based budgeting
Unilever made the switch to zero-based budgeting in 2016, a decision the company made even though its sales were up year-over-year. From Marketing Week:
“The [zero-based budgeting] move comes after Unilever reported better than expected results for 2015, with underlying sales up 4.1% for the full year. … Unilever’s CEO Paul Polman warned of ‘tougher market conditions’ in 2016 and said the company is braced for ‘high volatility’, making cost discipline vital.”
Similarly, Kraft Heinz implemented zero-based budgeting, and, according to CNBC, “[t]he company slashed $1.7 billion in costs after the 2015 merger of Kraft and Heinz.”
And, it’s not just legacy consumer brands that are hopping on the zero-based budgeting train.
Zero-based budgeting for the middle-market company, whatever the industry
The central tenet of zero-based budgeting–efficiency–seems to be attracting more and more large companies each year, but authors of this Accenture study in early 2018 warn that there’s a misperception that “ZBB is only suited for global consumer packaged goods companies with strong top-down cultures.”
“This could not be further from the truth,” the authors wrote. “It is an equal opportunity way of working that applies no matter a company’s size or industry.” Aside from consumer goods, financial services, life sciences, technology, retail and chemical and natural resource companies have joined in implementing zero-based budgeting.
So, if middle-market companies can benefit, what’s preventing any company from adopting zero-based budgeting?
What can zero-based budgeting solve for your company?
Freeing up capital
Most importantly, implementing zero-based budget aims to save your business money.
Large companies that implemented zero-based budgeting saw average cost reductions of 15 percent, the new budget process paying for itself within the first year.
By eliminating inefficiencies and waste in your company through zero-based budgeting, you’re thereby freeing up monies that you could use as drivers of profitability, investment, growth – essentially, any initiative that you feel would best suit for the betterment of your company.
Shifting new-found capital to other parts of your company
Let’s say your middle-market pharmaceutical company, Dailzes, is trying to take the next steps to someday compete with the likes of Eli Lilly or Merck. But, lacking a digital framework to effectively target doctors across the country, as well as the ability to properly track trial testing, Dailzes is behind the digital curve.
If Dailzes implemented zero-based budgeting, it would join the other one-third of large companies who have used savings from ZBB to reinvest into digital growth. And, though the implementation could be a costly or time-consuming endeavor initially, savings from zero-based budgeting would justify such an investment that could create growth going forward.
How can you start implementing zero-based budgeting?
First, acknowledge the difficulties of zero-based budgeting...
For the countless upsides of making the switch to zero-based budgeting, there’s some obvious downsides, most notably that it is not an easy process. With the introduction of zero-based budgeting in the 1970s, it has long suffered a stigma, until recently, of being quite a difficult process.
Employees might be the most affected by the budgeting switch, especially from a staffing perspective if departments experience downsizing. From a cultural perspective, a sense of frugality and cost control might seem constricting and demoralizing to employees who have to justify their department’s expenses and work behavior.
And, as mentioned previously, zero-based budgeting takes a lot of time. With every department needing to create a new baseline budget, and then coordinating with the finance team to finalize the budget, this process is a complete 180 from traditional budgeting.
Then, start the implementation process. But, you still may be wondering...
How do I roll it out?
Like any overhaul, implementing zero-based budgeting will look different depending on your company. The jury is still out on the best method: A blend of proprietary implementation processes and simple check-the-boxes processes are all considered to work.
Across all schools of thought, the first step is undeniably treating your company like a blank slate. From there, every step along the way–from the first stages of examining departmental expenditures to finalizing a budget–should ask the question: How will these expenses help our company reach its goals?
When should I start?
For companies that rolled out zero-based budgeting, implementing zero-based budgeting wasn’t typically a department-by-department basis, but either through a soft roll-out or an all-at-once roll-out.
If employees in your company are expected to make drastic changes to the way their department operates and don’t see the same behaviors reciprocated by other departments, they’ll feel as if the company is haphazardly applying zero-based budgeting.
Once you start zero-based budgeting, what will keep you going?
According to the Accenture study cited above, the 300 large companies that implemented zero-based budgeting saw an average of $280 million in savings due in part to the process.
The amount of money you’ll find and save through zero-based budgeting has been enough for companies to make ZBB a tried-and-tested part of their business. With the implementation of zero-based budgeting, the doors it opens might be more than enough to convince your company to make ZBB its sole budget practice.