We’ve all come across checkpoints in our personal lives where we commonly think about or use phrases such as “let’s take a few steps back”, “I need to reset things” and “let’s start all over again”. These reflections either run through our minds or perhaps receive advice from somebody who’s relatively close to us.

This normally happens during times of stress, when things seem to become overwhelmingly uncontrollable. It appears to be like an appropriate time to stop and reassess or rethink everything that revolves around us. We then go through the process of executing this stage, probably by taking a good long break to free ourselves from the environment causing the stress and start the process of ‘soul searching’ and end it with a plan to move forward and do things that are relevant and important. 

"Reset" in Finance

Ironically, as mentioned above, this entire conceptual process of ‘resetting’ is aligned with this idea called “Zero Based Budgeting (ZBB)” in the world of Finance. Organisations also go through similar life cycle stages and need to take a few steps back to recalibrate and reassess their current expenditures and targets occasionally. ZBB is generally the concept of budgeting from ‘ground zero’ where all components of the budget are somewhat zeroised, and new budgets are set based on cost or revenue drivers that are only relevant for the new budgeting period. Everything is assessed, to some extent, as though the business is starting up afresh, without any past year’s numbers as a guide (ideally). 

On the other hand, traditional budget setting basically adds an incremental growth over actual (or forecasted) expenses of the preceding year. It’s undoubtedly a much easier approach to budget setting, and not to mention still very relevant. Still, it carries some risk of over or under budgeting for the new year, which could somewhat negate growth or profitability if it’s not checked. In good times, organisations could live with this, but in tough times, especially in a competitive market, it can be the differentiating factor.

Institutionalisation of ZBB

It becomes imperative for organisations to know at which point of their business a reset or ZBB exercise will need to be conducted. Very commonly, most organisations do this when profits seem to be on a downward trend or have been stagnant for some time. This is difficult since, at this point, there is a risk of rushing a ZBB exercise, which could cause more harm than good, where cost-cutting initiatives may result in expenses that are critical in supporting growth is optimised, essential marketing expenses left out and even retrenchment of key personnel. 

Thus, it has become increasingly more important for an organisation to institutionalise ZBB by having a structured approach to detect faults early and execute ZBB and layout effective plans to manage the organisations’ performance keeping it aligned with its overall strategy. Early warning signals such as detailed performance ratios, which track expenditure against expense drivers such as units produced or sold, headcount, cost centres etc., need to be monitored and presented to Management frequently. There should also be limits set to these warning signals that will trigger a need to analyse further and probably initiate a ZBB exercise within the organisation. 

Hygiene in the organisation’s finances

ZBB can be a costly and time-consuming exercise if it’s done across the organisation. If it’s a small organisation, it’s probably much easier as compared to large corporates that could possibly have multiple business sectors, subsidiaries or even regional and global presence. Therefore, it is imperative for Management and the planning team to understand and to execute ZBB as a targeted exercise depending on the need to do so. Sound Management Reporting framework and processes come extremely handy here for such decisions to be made, especially in these large corporates. 

Notwithstanding this, there are areas within any organisation, be it a large or small one, where ZBB is worth doing on a yearly basis. Such expenditures related to capital and marketing expenditures need to be aligned to the flavours of the following year (and future); thus, having a fresh set of initiatives that is aligned to the overall corporate and business strategies is essential. This will allow all relevant parties to review their business objectives, reassess its alignment to the overall strategy and spend accordingly. A central team to evaluate these planned expenditures with the Management team is necessary so that only corporate-level expenses that are of priority are approved. 

Henceforth, it’s worthwhile for most organisations to have a blended budgeting exercise where traditional and ZBB is employed to achieve an optimal outcome. This entire exercise will need to be planned well by the planning team so that time is spent effectively. Organisations could also have plans to ensure all parts of the organisation go through a staggered ZBB exercise over a period of a few years to ensure there is some sort of hygiene in the organisation’s finances. This is extremely vital, especially with the current speed of changes organisations face in the world economy, particularly with the onset of the digital economy. 

Having said all the above, ZBB can only be effective if the organisation’s Management fully supports it. The entire exercise is tedious and time-consuming, and times create animosity among employees within the organisation. This needs to be managed and communicated effectively across the organisation, making it clear that such exercises are to benefit the organisation and employees, making it more sustainable. 

ZBB will also test the organisation’s Management’s commitment and determination to make tough but right decisions which could make them seem unpopular in the short term. Such decisions could range from exiting projects, contracts, shutting down operations and entertainment plans, venturing into new businesses and reallocating resources. 

Conclusions

In a nutshell, it is extremely healthy for organisations to incorporate ZBB into their budget setting cycle, as it gives them an opportunity to trim off unnecessary ‘fat’ expenses that could have been accumulating over the years and stay lean and toned. This entire exercise needs to be focused and aligned with the organisation’s strategic direction. It must be communicated well, and any changes dealt with appropriately through effective change management strategies. This will minimise resistance among employees, allowing energy to be channelled into much more productive activities within the organisation.