Zero-based budgeting (ZBB) was first introduced in 1970 in Harvard Business Review. It’s a repeatable process to review every dollar in the annual budget, manage monthly financial performance, and build a culture of cost management. ZBB looks for the most efficient return on spending. It aims to eliminate unproductive costs, often as much as 10-25% of selling, general and administrative expenses (SG&A) in the first six months of deployment, according to statistical analysis from McKinsey & Co. ZBB is a popular technique deployed frequently by organizations experiencing changing business conditions.
The five steps to approach ZBB are:
1. Map out your governance model. Keep your model simple and linear to the extent possible. Don’t over complicate the reporting relationships for review and approval of the zero-based budgets.
2. Create alignment between your strategic plan and ZBB. We call it integrated strategic and financial planning. The strategic plan should set forth the vision, strategic initiatives, and targets for the upcoming year(s). All levels of the organization should be kept abreast of the plan in order to prepare a thoughtful zero-based budget. The budget preparers and reviewers will need to be privy to the strategic plan information in order to align their budget build-ups with the plan and ensure they are supported by the plan.
3. Develop matrix of costs by type and ownership (see below). Create a matrix of your expense types and who owns each level in accordance with the previously defined governance model. A matrix of costs (as depicted below) will allow you to refine your expenses for value-add analysis within CPM.
5. Support ZBB with a dedicated CPM tool. Building, analyzing, and tracking budgets in Excel is common for mid-sized companies, but it’s fraught with error and risk. Spreadsheets exist in different formats with different assumptions across different departments, and they often have formula and link errors. Those errors require Finance to spend their time fixing the spreadsheets rather than analyzing their contents, and left undetected, errors could cause executives to make decisions based on faulty information. Dedicated CPM tools ensure all managers are using the same system, format, and assumptions, and they make consolidating and tracking budgets automated and less cumbersome.