The case for zero-based budgeting

Budgets can be an opportunity for reflection on strategy and alignment

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