Why zero-based budgeting is making a comeback – BOARD International
Article by BOARD International Asia Pacific general manager Mark Sands
Heard about zero-based budgeting but not sure whether it’s an approach that would make sense for your enterprise?
Zero-based budgeting works on the premise that, instead of receiving an allocation of funds based on their previous year’s expenditure, departments and business units should begin each new year from scratch, financially.
It requires managers to justify why each and every dollar they ask for is necessary, rather than allowing them to operate on the presumption their new budget should be roughly the same as the previous year’s, with a percentage tacked on for inflation and contingencies.
First popular in the 1970s, zero-based budgeting has enjoyed a resurgence over the past decade, particularly in industries and sectors which have been buffeted by changes ushered in by the digital revolution.
In 2019, Australia has no shortage of these.
In its 2017 whitepaper, Digital Disruption: Short fuse, big bang?, management consultancy Deloitte identified 13 industries, comprising 65% of the Australian economy, that already faced significant disruption.
Many established businesses in affected sectors are having to rethink longstanding practices and processes and find significant savings in order to remain competitive.
Zero-based budgeting can be a powerful tool to help them do so.
It encourages – or demands – decision-makers demonstrate compelling business cases for the programs and initiatives they wish to pursue.
In doing so, it challenges the status quo, drives continuous improvement and pushes businesses to find ways to do things smarter and cheaper.
Zero-based budgeting can be an effective antidote to the sort of corporate culture which doesn’t reward management efforts to find efficiencies and savings but, rather, sees executives scrambling to exhaust their budgets each June, lest any economies be ‘rewarded’ by a lesser allocation the following year.
Despite the potential benefits, the announcement your enterprise will adopt zero-based budgeting may not be met with unalloyed enthusiasm, by management and staff.
Here are some tips for making a smooth switch.
Understand your objectives
It’s impossible to effect significant business change successfully if you don’t begin with a clear idea of what you’re setting out to achieve.
Defining your objectives – reducing operational costs, identifying and pursuing higher-margin revenue streams, et al – should be the first step in the process.
Get senior staff on side
Securing senior management buy-in should be the second.
A move to zero-based budgeting can have a significant impact on activities and processes across the enterprise.
That can meet with resistance from decision-makers if they’re not informed of the benefits and incentivised to adopt and promote the practice within the departments they oversee.
Involve the entire team
Zero-based budgeting doesn’t only affect employees who are in charge of the purse strings. How and where funds are allowed to be expended is also of interest to the teams that report to them.
Communicating the change and the rationale behind it can help ensure employees on the ground are behind the move, not pushing back against it.
Use software that supports the process
Effective zero-based budgeting relies on managers being able to make sound cases for the funds they need to run their departments and pursue initiatives which will generate an acceptable return on investment for the enterprise.
Access to accurate, up-to-date business data makes it easier to evaluate the options, plan for the upcoming year and make budgetary decisions which will support profitable growth.
A centralised business intelligence and performance platform which provides senior staff across the enterprise with a ‘single source of truth’ can create the visibility necessary to be able to do so, in a timely fashion.
Software which supports zero-based budgeting can also assist decision-makers to track and monitor their budgeting decisions across the course of the year.
Time to act
Digital disruption and an uncertain economic climate are making ‘business as usual’ a short-sighted and risky strategy for a growing number of Australian organisations.
Underpinned by the right tools, zero-based budgeting can help established enterprises rethink old ways, find unanticipated savings and focus their spending on projects and initiatives which will contribute to a better bottom line in the 2020 financial year and beyond.