Zero-based budgeting is a financial planning strategy that involves preparing the budget from scratch to help companies align spending with strategic goals. ZBB requires the company to re-evaluate all items in the cash flow statement and justify all the department's expenditures. Centrally to the ordinary budgeting, where sales/expenditure trends are projected to persist, zero-based budgeting assumes no balances will be carried forward, or no expenses are pre-committed.
Zero-based budgeting requires collaboration throughout the departments, challenging managers to justify costs, expenditures and revenue in regards to the strategic goals.
The following are the advantages of zero-based budgeting:
- It Results from Cost-Benefit Analysis
Since every line item must be justified, it is easier for an organization to identify and eliminate items generating an inadequate return on investment (ROI). This analysis is incorporated into a larger budget to provide meaningful insights. Thus, although zero-based budgeting is performed monthly, it provides data for detailed analysis.
- It Enhances Resource Allocation
Zero-based budgeting allows an organization to use resources more efficiently due to prioritization. Zero-based budgeting allows you to allocate resources to line items based on their revenue generation capacity. Items that generate higher ROI should get more resources.
- It Optimizes Business Management
Streamlining the workflow and focusing on items that provide more value, greater efficiency, and cost reductions to your business helps sustain improvement. A streamlined workflow and controlled expenditure enhance strategic decision-making, cash flow management, financial forecasting, and growth opportunities.
- It Enhances Strategic Growth and Transparency
The emphasis on justified expenses and integrating expenditure into organizational goals allows managers to present clear goals, compelling goals, and transparency of financial reports. Additionally, zero-based budgeting promotes innovation and reduces resource wastage and unnecessary scope that would increase the budget.
When it comes to ZBB, it’s important to have a system and efficient process in place to evaluate all expenses. By using a collaborative planning tool, like Anaplan, line items, justifications and scenarios can all be run within the tool. Managers and departments can all access the data, making reporting easy and efficient. If you’re company is looking to add a Zero Based Budgeting process, visit wwww.accelytics.com to learn more.