You Need a Budget is probably the most well-known, and it’s based on zero-based budgeting principles. It also teaches you to live on last month’s income, which is great for people who have a variable income or are self-employed. Zero-based budgeting encourages you to create a budget that incorporates spending and saving. You’ll have some expenses that are fixed, like your mortgage or rent or car payment. But when it comes to variable expenses, like your grocery bill or your clothing budget, you’re more likely to think about what you really need and can afford. While it takes time to embed a new cost-management culture into any organization, the setup and rollout of a new ZBB program has much more limited requirements.
While there are other tools available for zero-based budgeting, IBM Planning Analytics stands out due to its powerful and flexible platform that allows for comprehensive functionality, AI-infused capabilities and user-friendly interfaces. These factors make IBM Planning Analytics a preferred choice for organizations seeking to implement ZBB effectively and achieve cost optimization and accountability throughout the budgeting cycle. Leaders cannot treat the ZBB implementation as merely a project to be managed. Instead, they must consistently and rigorously demonstrate the appropriate behaviors. Freeing up costs often involves some pain, so leaders should set an example by publicly making their own sacrifice.
- If you overemphasize the cost-reduction or the target-setting aspect, you have the risk of losing the organization along the way and having them believe that you’ve gone too far and you’ve swung the pendulum and you’ve forgotten about growth.
- Zero-based budgeting is a powerful tool for any company, whatever its orientation.
- This could potentially hurt a company because these areas are often the keys to remaining competitive over the long term but they won’t be generating revenue in the near term.
- You Need a Budget is probably the most well-known, and it’s based on zero-based budgeting principles.
- Business owners might want to do a trial run on paper first, at least for a little while, before jumping in with both feet and committing to the process.
- Over time, as defending costs on the basis of return and value becomes ingrained behavior, decision making becomes faster and more efficient.
A zero-based budget is a budget where you assign every single dollar a job, even if you have “leftover money” after paying bills. With this budget, every single dollar you earn goes toward a purpose. The traditional budgeting method, in contrast to ZBB, takes the current level of operations as the starting point for developing the future year’s budget.
Advantages of Zero-Based Budgeting
McKinsey partner Wigbert Böhm sat down with the editorial board of McKinsey on Finance to discuss just these questions. Here, he outlines the digital and organizational enablers required to implement ZBB. Now it’s time to think about your family’s long-term financial goals.
All businesses use budgets to keep track of spending and improve ways to minimize costs and maximize profit. Budget planning for the current/next year is usually based on budgets from previous years. In fact, traditional budgeting begins with the previous year’s budget and usually implements incremental percentage increases or decreases to meet new goals. The decision about whether to roll ZBB out company-wide versus in individual business units or regions is mostly driven by specific business needs. One global food producer did a country-by-country rollout because it had four or five different business units, with a lot of synergies, that had never really been integrated or captured.
The attitudes and habits surrounding traditional budgeting and spending are deeply ingrained. Because companies that understand ZBB know that it is, above all, a philosophy, they recognize that changing hearts and minds is as critical to ZBB success as implementing the requisite processes, systems, and tools. Our experience tells us that change programs, regardless of their specific features, require stalwart, dedicated people to carry them out. As one CEO we work with said, “Put your strongest people in it, and you’ll create a snowball effect.” Enlist team players who support the program and its goals and who are comfortable challenging colleagues and being challenged themselves. It’s important to position key ZBB roles—the program leader, methodology champions, and workshop participants—in the right light, touting the opportunities that these roles present, such as exposure to senior management. Demonstrate that ZBB is more than just another cost-cutting program or tedious budgeting exercise.
Regardless of their specific features, change programs like ZBB require stalwart, dedicated people to carry them out.
In addition to explaining how the ZBB program serves the company’s overall strategy, leaders should explain how and where they intend to reinvest the money. By openly communicating what benefits ZBB will deliver and how it will advance the organization’s vision and agenda, leaders can build critical support for it. Effective change flows from the top, and this truth zero based budgeting forces managers to applies with full force to ZBB programs. Leaders must personally advocate for ZBB and explain what ZBB is and why the company is adopting it. They must convey the necessary changes in mindset and the new rules and guidelines to promote more efficient spending. Informal meetings and gatherings are effective venues for CEOs and CFOs to communicate these points.
Organization Strategy
You have to engage not just the senior leadership but also these influencers who are not necessarily at the top levels of the organization. On the far left, you have this individual playing the role of a coach. And on the far right, you have this individual playing the role of a co-owner. A co-owner is designed to do all that but also to have joint accountability for, and a say in, the spend decisions in that area. These long-term investments can include research and development or worker training.
Traditional budgeting also only analyzes only new expenditures, while ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses and aims to drive value for an organization by optimizing costs and not just revenue. Zero-based budgeting effectively creates a new, start-over budget for each accounting period. A focus like this can keep costs and expenses under a microscope and it can give managers more control. Opponents argue that this type of budgeting doesn’t keep an adequate eye on future needs.