Zero-based budgeting (ZBB) is no longer just your average budgeting technique. ZBB means all expenses must justified for all functions and analyzed for company needs and costs.
Many companies began using it in 1970 to help reduce expenses and cost-effectively apportion resources. But over the decades, ZBB went out of vogue.
In recent years ZBB has been gaining favor with companies. For them, it’s no longer business as usual. Why?
They know they experience improved cash flow for sustained growth by consistently aligning their business priorities. How?
Such companies take full advantage of the advances in technology, society’s increased awareness of human nature, and the desire for long-term strong financial results.
Instead of staying stuck using the same old budgeting approach, ZBB can change a company’s culture and managers’ mindsets – for more transparency and awareness to enhance discussions about managing costs and cost-effectively apportioning resources.
In essence, ZBB brings a new culture of continuous improvement with enhanced visibility in spending and cost discipline.
That’s easier said than done. Many companies have found their managers and department heads are reluctant to change. They’re somewhat territorial and want to maintain autonomous control over their budgets.
ZBB has been criticized for being labor intensive and too complex.
On the contrary, companies that have made the switch realize that with ZBB, profit and loss statements can be simpler in all cost categories – from manufacturing to marketing – as a result of new software or cloud-based solution approaches.
This also means financial recordkeeping and planning are much simpler to implement and to significantly reduce costs.
With ZBB, there’s more accountability as department heads are incentivized to justify expenditures. So, it’s all about governance of policies, costs and pursuing business goals.
ZBB doesn’t have to focus entirely an anticipating negativity. Some businesses are fortunate to have employees open to change.
Changing to ZBB
For success, there has to be a commitment at the leadership level and in role modeling for the ZBB approach. Leaders must lead by example with decisive action.
Senior management must commit to altering everyone’s mindsets and changing how things are done.
In this way, lower-level managers are more apt to adhere to planning in keeping with the companies’ culture and goals.
Managers become more sophisticated cost-containment and investment in initiatives. They take a balanced look at expenses and setting targets.
For long-term success, there has to be a new infrastructure. Leaders must continually reinforce and communicate the ZBB message.
So then, employees’ behaviors change in order to make every dollar count.
Checklist for lasting change
- For the desirable outcome, you must diligently reinforce the new ZBB method on budgeting and funding decisions.
- Again, as it can’t be overemphasized, constant communication of your convictions is paramount.
- Forget using the reams of spreadsheets. For real-time data in decision-making, make sure to choose the right tools of technology either in software or cloud-based solutions.
- Make training of your staff a priority to use the new tools.
- Be certain that everyone understands there are no sacred cows. You might need a cultural change. Don’t allow obstinance.
- Some employees will be tempted to call for exceptions claiming ZBB is too complex. Don’t allow them to submit cost leaks. Hold discussions about how to utilize ZBB and set limits on how they can qualify exceptions.
- Stop all the pain. Use uniform standards and require burden of proof from your employees.
- Evaluate every aspect and detail. Make sure you assess every cost driver. As a result, you’ll be more likely to identify growth opportunities.
- Keep an open mind. Don’t limit your thinking. Visualize the future using all feasible digital tools.
You might need to make significant changes in your culture. Your ZBB process must be consistent. Use unassailable analysis and insights. Make certain you maintain a strong governance structure and make decisions on facts not irrational emotion.
From the Coach’s Corner, here additional relevant tips:
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“The budget is not just a collection of numbers, but an expression of our values and aspirations. “
Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.