With ongoing challenges surrounding the pandemic, which are shifting markets in unanticipated ways, firms have been given the chance to reset many of their activities.

This opportunity may be an unnoticed gain from what was otherwise a scramble to review operations for a significant number of firms.

Others see it as a way to ensure they can survive a global catastrophe unscathed.

In any event, 2021 provides an opportunity to examine current procedures and aim for a more confident future in the Next Normal. 

Zero-based budgeting (ZBB) is one such evaluation. It is a way of creating fresh budgets from start (or “zero based”) by reviewing each item and determining whether it is necessary for the business year.

While this is not a new idea, having its beginnings roughly 50 years ago, we are seeing a comeback of ZBB as the basic principle for many Financial Planning & Analytics (FP&A) related operations, especially when paired with a driver-based approach. 

The advancement of zero-based budgeting 

zero-based budgeting has progressed greatly in recent years to become a utility that goes beyond traditional cost basis analysis. Instead, it now offers FP&A systems that affect business drivers at all levels of the company, providing change across planning and analytics.

Of course, its use as the primary budgeting tool is legitimate as well – but this is only the first step in developing a whole new planning model  

Bringing this model fits in nicely with the rising relevance of current methods to Integrated Business Planning (IBP) – a technique (considered best practice) that includes financial and operational data from throughout the business. IBP provides the benefit of establishing a transparent, 360-degree perspective across and across a company’s departments. When used in conjunction with an all-in-one digital solution, one shared view of data provides a single, accurate, up-to-date point of truth from which to draw intelligent decision-making. Furthermore, IBP – and the software that powers it – offers the capacity to undertake scenario planning, which allows for financial simulation, among other things, so users may effectively estimate the impact of strategic efforts around expenditure and budgeting. 

So, why is it this time to think about a zero-based budgeting approach? In fact, we have no means of knowing what will happen from year to year.

It keeps coming up, but who could have imagined anything as damaging to the economic sector as the epidemic we are presently experiencing?

There was just no way for companies to prepare realistic budgets for 2020 at the end of 2019.

Companies may establish an agile model capable of adjusting to external conditions by freeing up as many resources as possible using a zero-based budgeting method (no matter how large or small). 

The mindset of zero-based budgeting 

Zero-based budgeting is more than just a budget cut; it is a new way of thinking. Consider this example from a prominent beverage company situated in the United States.

The corporation has five key storage hubs where concentrate syrup was kept before being distributed to bottles around the country. Following the implementation of a zero-based budgeting mentality, a simple question about these warehouses was raised: “If there were no warehouses today, anywhere in the country, how many would be advised to create, and where exactly would they go?” 

To address this, a cross-functional team comprised of finance, logistics, and operations was formed.

Data from several years was used to examine bottler volumes, expenses, and locations.

Using linear programming, the team was able to crunch the figures and determine the best location and quantity of warehouses. Surprisingly, the optimal number of warehouses was one, located in Louisville, Kentucky (incidentally, the exact someplace that FedEx owned a major hub). 

As a consequence, the firm saved millions of dollars over a five-year period and boosted customer satisfaction (in this case, a bottler for the company). 

This would simply not have happened if a Zero-based budgeting attitude had not been used to make that critical point: “If we started with a blank piece of paper today…” 

Because Zero-based budgeting is designed to be a blank canvas, having IBP undergird it with scenario planning capacity gives a tremendous tool to the business.

Businesses may use it to simulate the impact of various expenditures on both the financial bottom line and other important operational KPIs, and identify what is likely to increase profitability

(and equally negatively impact budgets) so that better decisions can be made. 

What to Think About When Using a Zero-Based Budget 

Implementing a Zero-Based Budget may be a profitable venture for businesses. However, like with any important choice of this magnitude, there are advantages and disadvantages to consider. 

On the one hand, Zero-Based Budget will provide a new degree of resilience to deal with unanticipated change at all levels of severity, while also establishing a more future-proof model to use month after month, year after year.

This strategy is driven by expenditure management, a tried-and-true mechanism for cost ownership and responsibility across all departments in the organization, not just finance.

As a result, spending management is a wonderful tool to question the status quo of what is working and what isn’t – to argue where resources should be best allocated across departments and business sectors. 

By looking at costs in this way, a Zero-Based Budget helps businesses become more efficient.

Businesses get better control over their expenditure since all areas of the budget are examined or reassessed.

Costs are lowered when inefficient expenditure is recognized, and more resources may be allocated as needed to strengthen the proper activities carried out by departments. 

Implementing Zero-Based Budget, on the other hand, might be a time-consuming operation.

The limits are felt much more acutely in the absence of the appropriate enabling software to facilitate it further. Furthermore, the real implementation process is not as straightforward as just beginning and stopping resources across the organization.

Employment contracts, office leases, subscription licenses, and other considerations must all be considered – they all have an impact on the budgeting process in some manner.

The upside of this, however, with a model like ZBB that is designed to be futureproof, is that all of these concerns can be included in future designs.

In this way, ZBB fosters initiative and agility – department heads must be innovative to get the most out of ZBB.

Models of FP&A-led planning with zero-based budgeting 

Businesses may improve their FP&A procedures by implementing the correct zero-based budgeting software. Users, for example, can do the following with the Board: 

• Finance teams may automate operations like as planning and control, management reporting, financial close, consolidation, and disclosure to free up more time for meaningful data analysis rather than time-consuming data gathering and preparation. 

• enhance scenario planning: connect finance, strategy, and operations to predict the possible impact of various strategies (both short and long-term) on financial outcomes and find which path(s) provide the most advantageous and lucrative path ahead. 

• combine zero-based and driver-based planning: use both techniques in a holistic solution to promote improved strategy management, cost transformation, and re-investment optimization – resulting in long-term savings and improved growth. 
• Implement the Digital Boardroom: With the Digital Boardroom, you can shift from a historical perspective to a forward-looking approach, providing a single source of truth that can transform decision-making by providing real-time insights into both past performance and forecasted/predicted future results. 
• enhance control over collaboration and governance: improve alignment of organization-wide goals through a strategy that fosters and supports cooperation in an effective, standardized manner. 

Finally, the correct software with FP&A capacity enables users to completely restructure or build an altogether new budgeting and financial planning strategy ,moreover, it allows them to adjust their plans accordingly as the market conditions change.

Having a better grasp of internal business drivers and being able to better evaluate external issues

(for example, the COVID-19 pandemic or how the UK exiting the EU will effect markets internationally) can help anticipate budgets for the future year and beyond. 

Because nothing is fixed and everything is fluid, businesses have the best possible strategies in place to make the most of the present circumstance; staying ahead of the curve and adapting to change as quickly as possible. 

This results in an overall driver-based forecasting and planning model based on intelligent analysis, providing companies with the greatest tools to make educated decisions.

These are no longer based on static and potentially obsolete budgets – as we all know, things may change radically in a short period of time – but on agile procedures and budgets justified from the ground up and strong enough to alter with a quickly expanding business environment. 

Diamond Professional Consultants specializes in Business Intelligence softwares that give you instant reports to speed up the decision-making process. 

Read more about our Business Intelligence services.

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