Budgets can be an opportunity for reflection on strategy and alignment
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Have you ever noticed departments in your organisation
rushing frantically to spend their budgets at the end of the financial year? Have
you ever seen someone commission a service they didn’t really need to avoid having
their budget cut? Have you ever done it yourself?
I’m willing to bet that most of my readers have either
participated in that year-end spending panic, or seen it happen. It’s all too
common – and an unmistakeable sign that an organisation’s budget has come
seriously adrift from its strategy. If an activity is genuinely important, nobody
should be scrambling to get it done just before the deadline. But after years
of creating budgets based on what you spent last year plus X, the instinct to
hold onto what you have can become deeply entrenched. Zero-based budgeting is
an exceptionally powerful tool to avoid that lethal complacency.
Zero-based budgeting stops mindless routine in its
tracks and forces everyone to actually think about what they’re doing. It can
be an immensely empowering process for line managers, creating an opportunity
to reconnect with how their work fits into the bigger picture. It will almost
certainly also create opportunities to cut costs, as people see where they
could be doing things more efficiently – but the cost cutting is not the main
point. Indeed, if zero-based budgeting is done right, it should also identify
areas where the organisation is under-spending, or where you could get more
value for the same spending.
Over-emphasis on cost cutting is one reason, I
suspect, why zero-based budgeting isn’t more widely used. There’s a certain
swashbuckling appeal to the idea of burning everything to the ground and making
everyone justify their entire budget from the ground up. The reality of that
approach, however, is more likely to be widespread fear, resentment and frantic
attempts to protect pet projects.
There’s a healthier way to approach zero-based
budgeting. It’s not just about costs, it’s about linking spending with
strategy. When a new business or project is starting from scratch, the budget
is the place where big dreams get their reality check. It means asking
questions: What do we actually need to get this off the ground? What can we do
without? What’s the most efficient way to achieve our objectives? What are the
best tools and people for the job?
In an established business, the day-to-day routine can
carry on for years without anyone ever stopping to reconsider whether the
existing answers to these questions are still the right ones. Taking time out
to review them can be invigorating, identifying opportunities for change,
growth and new investment as well
as for pruning.
This can be particularly terrifying for areas of the
business which are essential but whose value is intangible, like marketing or
customer service. A zero-based budget process should provide ways to
demonstrate value that aren’t directly linked to revenue—but also, if someone
can’t make a convincing argument for their existence then they probably need to
be thinking harder about it. Finding and honing the arguments can contribute to
a renewed sense of purpose and alignment with overall strategic goals.
Of course this all takes a lot more time than the
usual approach, which is why so few businesses do it. There are two ways to
solve the problem. First, the whole organisation doesn’t have to start from
scratch every year. A rolling four-year process where just 25% of the
organisation does a zero-based budget every year will achieve all the same
benefits without most of the disruption. Second, for the other 75%, a budget
process that is fast and well-supported by software and automation tools will
free finance staff up to spend time where they are most needed.
It’s not an easy path to take – but if implemented
correctly, zero-based budgeting can be a powerful tool to engage and empower
line managers, increase budget transparency and make sure spending actually
supports business goals.
As published in AccountingWeb - 27 November 2019
