Why Implement Zero Based Budgeting? - [CFO Weekly] Episode 19

We’re all familiar with the yearly rounds of budgeting within our companies. But how often are we really looking at the WAY that we are budgeting? Enter: Zero Based Budgeting. Are you doing it? If not, maybe you should start.

So often, the budgeting process simply involves looking at the prior year’s based budgeting process, adding a little bit of inflation room onto it, and moving forward -- never really stopping to sit back and ask ourselves why we allocate the budget where we do (and if this is the best use of funds).

And if the COVD-19 pandemic has taught us anything, it’s that we can likely make do with cutting costs without a lot of the things that we were spending an awful lot of money on before the pandemic hit. Things like travel, entertainment, even technology.

Which is why we focused on this very topic in this episode of CFO Weekly with a guest who is the perfect person to address what is known as “Zero Based Budgeting,” or ZBB. Adanma Akujieze is the Chief Financial Officer at Larson Design Group, and has been instrumental in implementing the ZBB method with her team. She was kind enough to sit down and discuss what ZBB is, its advantages, how it differs from traditional budgeting, and how you can make it work for you.

First Off, What is Zero Based Budgeting (ZBB)?

ZBB, or Zero Based Budgeting, is the idea that every dollar in your company’s budget should have a name, a purpose and a place that it is going. Compare that with the traditional mode of “last year we spent this much money on travel, so obviously we need to spend that much this year too," and you'll see why ZBB can be a bit of a revolution in the way we view yearly budgeting.

ZBB is a more thoughtful approach, and it seeks to closely tie spending to strategic objectives while eliminating waste and unneeded overhead costs. Remember that all expenses must be justified, so how does that apply to the environment today? Pretty spot on, actually, meaning that now may be the perfect time to get on the ZBB bandwagon.

Throughout this pandemic, we’ve noticed that there are a lot of things that we thought were crucial that we’re not necessarily missing in our budgets. Things like catering, entertainment, brick-and-mortar offices, and more. Akujieze keyed us into the fact that, maybe we never really needed them in the first place.

“How is it that we don’t miss these certain areas where we were spending money before?” Akujieze said.

This exercise that all CFOs are going through due to COVID is something that ZBB has always offered. And right now, it forces us to ask, “how can we retain the efficiency we’ve seen in costs due to COVID, and extend that beyond this pandemic. When this pandemic ends, will I go back to spending on this thing, or have we decided that it’s an unnecessary line item?”

Read More: Doing Busines Has Changed During the Pandemic. See How CFOs Are Adapting

Advantages of Zero Based Budgeting

Beyond the obvious advantages of dollars going where they’re needed, ZBB aligns spending, cost management, and business planning with strategic objectives in a way that most companies have never seen. So much thought goes into the planning process that it takes the focus away from the outcome of the budgeting process, and focuses on the process itself. It’s not about how based budgeting starts, or “getting to a number,” as much as it is about asking specific questions about the process.

ZBB also encourages collaboration among all departments, as it requires buy-in from all levels of the company. It requires you to be nimble, agile, and because questions are asked, you end up with the ability to switch course very quickly as the economic situation unfolds. You can shift costs to value-adding areas on the go.

“I think ultimately when we talk about shareholder return, and adding value for shareholders and owners of companies, zero based budgeting is a critical way, and a great tool to use for that," Akujieze said.

Listening Link: Opening Your Business? Don't Miss This Episode - 5 Things You Need to Consider Before Reopening

Will ZBB Work for Every Accounting Team?

If you ask Adanma, she’ll tell you that it does.

And the common criticism around ZBB, which is what this type of budgeting requires the most, is that it takes extra time. It takes far more time to sit back and think critically about each strategic objective and then assign a budget to it, versus throwing money in buckets and hoping for the best.

But Adanma says it’s all about short-term pain for long-term gain. Yes, it takes longer. Yes, it is a more time-consuming process. But after the first few rounds of the ZBB cycle, it becomes a part of the DNA for any organization. You start to wonder how you ever budgeted before.

A large number of organizations are already utilizing ZBB without realizing it. Any time a company sits back and asks questions about value addition and how it’s tied to spend, that’s a ZBB approach. It’s about thinking critically, not just copying over what was done last year. Every time you’ve done thoughtful planning, you’re flirting with the ZBB approach.

ZBB Makes a Comeback

Though ZBB is a relatively young concept, roughly 50 years or so, it’s making a bit of a resurgence today. Why? Because the economic uncertainty we’re living through has forced us to look at areas where we can conserve funds. We have to in order to keep companies afloat.

ZBB is a forward-thinking approach. It’s all about asking, “how will we look two years from now? What changes do we need to implement and promote now in order to ensure that we’re successful down the road? What lessons can we learn from this and what can we take away for a more successful future?”

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