Zero-Based Budgeting: What, Why and How

Is your Finance team ready for anything and everything? Can you turn around a budget change in a single day? Can you reforecast earnings in under a week? Are your forecasts consistently accurate?

If not, what’s stopping you?

Finance of the future will require increasingly higher levels of accuracy and agility. But what will it take to be successful? According to our global survey of over 500 finance leaders, one key ingredient for many businesses is zero-based budgeting (ZBB).

Here’s a rundown of what ZBB is, why it matters, and how to get started.

What Is Zero-Based Budgeting?

ZBB is budgeting without baggage. It’s starting each annual budget from scratch and not carrying over the previous fiscal year’s assumptions about revenue. In practical terms, this means not using last year’s budget as a starting point. Instead, the budget is built from the ground up, based on the organization’s strategies and goals.

How ZBB Delivers Greater Accuracy

The primary benefit of ZBB can be summed up in one word: accuracy. Why are ZBB budgets usually right on the money? It comes down to two things — the process and the expectations.

Accuracy Through Process

The conventional budgeting process is efficient but not incredibly accurate. It’s not that surprising. If a budget builds on the assumptions of the last budget — and the dozens before — the validity of the numbers will inevitably take a hit.

Relics from budgets past almost always haunts the accuracy of conventional budgets. Like when that one department head can’t explain the line item “morepop” and why they need $25,000 for it. But since it’s been in the budget for the last eight years, it has to stay.

Since the ZBB process starts at ground zero, you’ll have budgets with fewer assumptions and less junk.

Accuracy Through Accountability

If department heads need to justify how each expense supports business goals, they will take a completely different approach toward budgeting. They won’t just tweak last year’s numbers up or down by a couple of percentage points but instead take more time before committing numbers to the budget. They’ll base their numbers on the most current and most comprehensive information — which means that the number will be more accurate when the budget is released and throughout the fiscal year.

How Does it Work?

Do you usually send out a budget template to department heads populated with numbers? Now imagine you send out the template with no numbers — only zeros — and tell people to take it from there.

So what might this look like? Say your company is planning a big product launch for the upcoming year. A marketing leader would budget out everything they’ll need to make the launch the best one ever — including staffing, funding for campaigns and agency support. Similarly, the head of operations would evaluate their expenses to support the product launch — such as the need to retool equipment or add new staff — and build the budget for that.

But building the budget is only the first step. Then comes getting buy-in on the budget. Budget approval is nothing new, of course. But with ZBB, the approval process can be a bit more intense. There’s no rubber stamping just because a departmental budget is within the expected cost range. Instead, reviewers really look at each item and the associated cost. And, usually, there are a lot more questions, resulting in more communication, collaboration, and rounds of review.

If all of this sounds like more work… that’s because it is. But putting in that extra effort at the beginning will pay dividends throughout the year.

How ZBB Strengthens the Entire FP&A Process

It’s probably not surprising that companies that use ZBB can roll out budget changes extremely quickly — usually in less than a half-day. But it turns out that ZBB has a bonus benefit. According to the 2021 finance leader survey results, ZBB also increases a company’s agility in other aspects of FP&A.

Eighty-four percent of companies using ZBB can reforecast earnings in less than one week, compared to 51% of companies that do not. Those using ZBB were also about twice as likely to forecast revenue and earnings within +/- 5%.

How Do I Know If My Business Should Do It?

Your organization will need to answer this big question: Is having a significantly more accurate budget worth the time and energy required to roll out ZBB across the organization?

For some companies, the answer is an unequivocal yes. Enterprise and large businesses with budgets that are consistently off by more than 5% should absolutely start exploring ZBB as an option. For smaller organizations with fewer resources to commit to the process, it may not be a good fit.

What do I Need to Get Started?

If you think ZBB makes sense for your organization, take a measured approach toward implementation and ensure you have buy-in and support before you kick things off.

Engagement from Business Leaders

One thing that’s critical for ZBB success is engagement and support at the highest levels of the organization. A successful ZBB process requires the input and involvement of everyone — especially from senior leaders.

ZBB is a fundamental shift from budgeting as usual — and one that requires a lot more from a lot of people. Even if your department heads currently participate in budgeting, the process doesn’t typically require a deep dive into costing out strategies and tactics. And let’s be honest, not everyone is eager to provide granular details to justify the costs of each line item. And it’s not just department leaders — the ZBB process requires more involvement from all the reviewers. Is top brass interested in taking time to review all the budgets in detail and question expenses that don’t seem to align with business strategies?

If your organization pursues ZBB, consider rolling it out as a top-down corporate initiative — and make sure to clearly outline what’s in it for the organization and everyone involved.

New Process and Training

In rolling out a ZBB, you may need to upskill your Finance team and those participating in the budgeting process. Business leaders will need to learn how to use the tools. Finance professionals will need to have a high-level vision of how things roll up from a company-wide perspective — and how the various departments work.

An Assist From Technology

While it’s theoretically possible to implement ZBB with spreadsheets it’s a lot easier with technology on your side. A corporate performance management (CPM) system can streamline and automate the budgeting and reporting process, drastically reducing the manual work for the Finance Team. For example, you can configure the CPM system so changes to departmental budgets automatically roll up into the organizational budget.

A CPM also supports improved collaboration and communication, helping to keep budgets moving through the review process without all those 5 a.m. meetings. The CPM is a centrally located system, so people can access a budget at any time to see where it’s at in review — and make changes as appropriate. You can even roll back to previous versions of the budget if need be.

Learn More About Achieving Greater Accuracy and Agility

ZBB can be a powerful benefit to any company, but its ultimate strength lies in the symbiotic relationship between ZBB, rolling forecasts, and scenario planning. While your company may be able to adopt one of these techniques using manual processes, to master these techniques — and all of FP&A — you’re likely going to need to bring on new technology to simplify the process through automation.

Learn more about how you can improve the agility and accuracy of your FP&A process: check out the 2021 Agility in Planning, Budgeting and Forecasting Survey.

Wayne Slater

For more than 25 years, Wayne has been helping organizations solve their product and businesses growth challenges. Described as an innovative marketer and results-driven business development specialist.