Zero-Based Budgeting (ZBB) is a comprehensive process for reviewing a company's budget, assuming that all allocations are zero. This means that all funding requests must be evaluated based on the same criteria for all future programs and projects. In other words, ZBB involves reviewing and evaluating both existing projects and future plans in a systematic way, based on actual costs. This allows companies to re-engineer their cost structures and improve their competitiveness.
When analyzing a Zero-Based Budget, activities must be carried out at multiple levels. It is important to examine how performance can be optimized through simplification, standardization of metrics, outsourcing, or automation. This approach is useful for aligning resource allocation with strategic objectives, although it can be difficult to measure the return on some expenditures, such as time-consuming basic research.
Steps for Implementing Zero-Based Budgeting and Why Companies Use It
To apply Zero-Based Budgeting, companies should take the following steps:
Comprehensive Reimagination of the Business: Understand what activities and resources are necessary to remain competitive in future market conditions, and then create a clear strategic vision and targeted cost plan.
Build a Solid Foundation of Current Offerings and Expenses: Establish a realistic base for existing operations and expenses.
Use a Clean Slate to Create an Ideal Entity: This involves identifying vital initiatives and building an optimal entity from scratch.
Develop the Future Entity Bottom-Up: Justify what activities need to be implemented.
Reassign Budgets and Full-Time Employee Levels: Redesign organizational structures and plans for implementation.
Why Do Companies Use Zero-Based Budgeting?
Companies use Zero-Based Budgeting for several reasons:
Optimal Use of Available Financial Resources: It helps companies allocate their financial resources in the most efficient way.
Support for Large, Complex Organizations: Especially after mergers or acquisitions, ZBB can simplify and streamline operations.
Funding Strategic Necessities While Removing Ineffective Costs: ZBB helps companies focus on essential activities while eliminating wasteful expenses.
Aligning Resources with Specific Projects or Functions: Ensures that resources are directly aligned with the most important projects and functions.
Justifying Proposed Activities and Resources: Allows businesses to justify every activity and resource based on its relevance to the organization’s goals.
The British Academy for Training and Development offers specialized courses in all areas of management, including a course on preparing and monitoring budgets and analyzing variances, aimed at enhancing job performance.