“If the company’s problem did not lie in revenues, it could only stem from expenses.”
-Carlos Brito, AB InBev
Simply put, Zero-Based Budgeting (ZBB) is a radical cost-control program that foresees a complete annual revision of all the company’s spending.
In zero-based budgeting, managers are responsible for creating their budget from “zero costs” every year, assigning costs only to the activities they forecast to take place for the upcoming year instead of starting out with the previous years’ costs as a benchmark. This forces the management to go over every expense, line item by line item, leading to conscious and responsible spending decisions. As a result, using ZBB can dramatically increase the financial efficiency of a given project, or the entire organization, as every dollar being spent is properly planned and justified.
Once installed, zero-based budgeting serves as a tool not only utilized by senior management but by all layers of management throughout the organization. Empowering junior managers by allowing them to create their own budget with associated costs for each project from scratch instead of providing them with a template containing benchmark costs, leads to them taking more accountability for their respective departments. A simplified and systematic concept like ZBB also gives them a clearer economic picture of each project, leading to increased margins. Lastly, it sets up an invaluable culture of cost management throughout the organization, starting from the bottom up.
Some good examples of zero-based budgeting in today’s environment can be travel costs, office expenses, and commercial real estate. While under ordinary circumstances, costs in each of these categories might stay similar year over year, given today’s special circumstances they would be budgeted down dramatically. The point of using ZBB, however, is that costs in each category are recreated from scratch with every budgetary period regardless of the circumstances.
While zero-based budgeting is largely useful in most circumstances, possible short-sightedness due to being intensely focused solely on costs and rigidity due to having a strictly defined budget are some drawbacks to stay mindful of.
For more information or to request a Zero-Based Budgeting template, please email us at info@BridgeCapConsulting.com
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