Zero-based budgeting - Enabling a cultural shift

The CFO world has completely metamorphosed over the last few years. On the one hand, technology combined with people and processes has transformed the way financial planning or forecasting is done. On the other hand, the duties of the CFO have moved beyond traditional accounting to taking on lead roles in digital transformation, cross-functional collaborations, and talent initiatives. For example, a recent Accenture survey suggests that approximately 72% of CFOs have the final say on the technology direction of their enterprises.

 Amid evolving business models, increased competition (from companies of all sizes and vintage), complex regulations, cross-border business demands, and ever-changing customer needs, it has become imperative for CFOs to have access to information that is not just real-time but provides insights into the future. In fact, budgeting exercises that relied on historical trends and extrapolating for the future are now becoming more about looking at the business ground up every year and building it from scratch. Essentially, it is a Zero-Based Budgeting (ZBB) approach, where we start from a “zero base”, analyze every function’s needs and costs, and build a budget for each new period, regardless of whether it is higher or lower than the previous period’s budget. With a clean sheet that requires justifying each line item from the bottom up, ZBB is helping CFOs surgically cut costs and plan better for the longer term.  

Zero-Based Budgeting – A Bold and Strategic Approach to Budgeting

While large global corporations, such as General Motors, Guess, and Unilever have used ZBB even before the pandemic, a 2020 Gartner report, indicates that nearly 26% of 300 global finance leaders plan to use the ZBB approach against the backdrop of the covid-19 pandemic and its related disruptions. On a side note, the Government of India also uses ZBB for expenditure budgets and since 1986 it is mandatory for all ministries to use the ZBB approach for preparing their expenditure estimates.

ZBB has many benefits, including more agility in resource allocation, better working capital management, and deeper insights that can unlock more value for the business and drive the business transformation agenda. Justifying each line item ensures a flexible budget that lowers the costs, keeps legacy expenses in check and optimizes value-based spending to drive strategic business outcomes. With deep thought and strategic intent going into every dollar or rupee spent, the zero-based budgeting approach provides more bang for the buck, enables a solid business continuity plan, and ensures improved financial status in this highly volatile and competitive environment.  

Zero-Based Budgeting – A Culture Shift and Not a Cost-Cutting Tool

ZBB technique is not about aggressively slashing costs, but about identifying unproductive or irrelevant expenses and redirecting them towards the business strategy and organizational growth initiatives. However, the success of Zero-Based Budgeting rests on three key aspects:

A Mindset Change: The ZBB technique needs the finance teams to become real co-pilots of the business, going beyond the costs and budgets to measuring and driving business performance and influencing its future direction. That means being on a constant quest to understand the “core” of the business, building relevant insights through extensive analysis, and connecting the dots across the entire value chain.

Investment in Technology: Relying on spreadsheets alone would be a sure-shot way of getting bogged down by the vast amounts of financial and operational data needed for a thorough analysis of every single line item in each unit’s budget. Adopting holistic ERP, BI, and analytics solutions will allow detailed insights into the cost drivers and greater visibility into real-time information, which in turn will enable smart budgeting and value-driven allocation of funds. There are several examples where companies could make 10 to 15% cost savings by automating their zero-based budgeting and system-based budgetary controls.

Upgradation of FP&A skills: CFOs will need to equip their F&A teams with the right tools and competencies in order to go beyond the traditional financial capabilities – into the areas of project management, complex data mining, forecasting, storytelling, and influencing.

ZBB is Here to Stay…

Since the beginning of the COVID-19 pandemic, many businesses were forced to reallocate resources from areas that were once considered untouchable and also build a clearer overview of opportunities, risks, and fixed and variable costs. In reality, many CFOs may not realize that they have been using zero-based budgeting principles or approaches to determine what levels of spending are truly necessary to keep the lights on, or to support recovery efforts or contingencies.