Imagine you’re a CFO and don’t have to worry about the company’s costs.
Instead, you focus your energy on value-driving investments and strategic goals because each individual in the organization feels compelled and accountable for controlling costs within their respective domains. Every activity in the financial planning and budgeting process becomes immensely streamlined and productive.
Doing so delivers continuous cost control, an effective lever for any organization in any economic environment. Fortunately, achieving this level of expense discipline and budget ownership is possible through zero-based budgeting, a budgeting method growing in popularity due in part to rising inflation and market uncertainty.
In simple terms, the zero-based budgeting process requires companies to build a cost budget from scratch rather than editing a previous budget from the last quarter or year. With a budget fully aligned to the realities and goals of the business, every employee from executives, directors, and managers on down becomes a steward of strategic savings goals and effective cost management at a level of granularity traditional budgeting and budget owners can’t achieve.
Though it might represent a learning curve relative to building a traditional budget – in this case, find a working middle ground through “near” zero-based budgeting – there are critical benefits derived from the zero-based budgeting method that leading organizations are now leveraging for competitive differentiation and organizational agility.
Below are five advantages that unlock greater cash flow and cost reduction:
1. Materially Lowers Costs
More than 40% of companies using zero-based budgeting improved headcount and cost of goods sold (COGS) by greater than 40%. Attaining cost savings of this kind begins with blank-sheet exercises, the foundation of zero-based budgeting.
Similar to the scarcely used or forgotten junk in your house that somehow takes up more and more space over time, unnecessary expenses creep into companies, and many of those costs go unnoticed if you don’t start over. The biggest difference from traditional methods is that zero-based budgeting removes entire line items, whereas traditional methods typically just change the numbers of existing line items. By removing wholesale budget items or categories, the path to material cost improvement is much more accessible.
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2. Enables Company Strategy
Zero-based budgeting is an opportunity to build a cost structure that aligns to the company strategy. There are good costs and bad (or less valuable) costs. Good costs drive value and support the company’s strategy. For example, a products company needs to invest in sales and marketing capabilities to sell its products to consumers.
But, like any company, that same products company also needs to do payroll. The payroll needs to be completed on time and accurately, but it can typically be completed at a lower cost and service level. Once appropriate prioritization is given to strategic areas of the business, the processes that aren’t as value-add are good starting points for cost savings.
3. Increases Transparency and Accountability for Continuous Improvement
Zero-based budgeting can be a catalyst to Enterprise Performance Management, in which planning is integrated across the company. The zero-basing process requires all functions to collaborate toward building the right budget – it’s not just the finance department’s job to go it alone.
Traditional budgeting methods often put employees on autopilot, prompting them to make slight changes to the numbers from a previous period. This shallow, top-down approach results in companies not having visibility into even basic general ledger cost transactions. Companies that zero-base their budgets, however, empower employees with more ownership and accountability for their individual and teamwide spend – because these employees, by extension, helped build the corporate budget.
Companies that continuously zero-base their budgets are more likely to create cultures of practical spending, meaning every expenditure is rightly justified and meaningful to the business.
4. Is More Time Effective Than Traditional Methods
Adopting zero-based budgeting often prompts two concerns: 1) It takes more time and 2) Companies don’t have the resources on hand to spend even more time on budget planning. These are fair but spurious claims.
Yes, the approach can be more time intensive. But many organizations still take several weeks – if not months – to finalize budgets the traditional way due to numerous reviews and hierarchal approval structures. Why not spend this time more effectively building the right budget from the ground up rather than discussing and incrementally updating a bad budget? It’s really a matter of time spent versus time well spent. The latter is clearly preferable.
Further, implementing enterprise planning systems like OneStream can also make a zero-basing process more efficient so there isn’t wasteful drain on time or resources at any point.
5. Scales Beyond Budgeting
The methodology of zero-basing can be applied to multiple facets of the business. In particular, the organization structure itself can be zero-based.
What does that mean? It means you build a blank-sheet organization structure to increase labor cost efficiency. This approach, just like zero-based budgeting, focuses spend on what you need to run your business, not what you have today, and it yields materially better results than optimizing labor costs top-down. Once the company masters zero-based budgeting, expanding the concept into other parts of your business is not only easier but also incredibly healthy for each business function on its own right and the total corporate infrastructure in aggegrate.
Contact CrossCountry Consulting today to optimize your cost structure.