5 steps to success with zero-based budgeting

5 steps, 5 piles of cash of increasing height

In the first article in this series I looked at the reasons why the new, more flexible form of zero-based budgeting (ZBB 2.0) is enjoying a renaissance; in the second piece, I explored what makes it different. In this, the final blog of the series, I’ll summarize the more important best practices that today’s practitioners attribute to their success.

1. Adopt a positive approach

ZBB is more than just slashing costs. It’s a necessary step for freeing up the resources and funds needed for business renewal and growth initiatives. Working with the business leaders, you can use internal and external benchmarking to illustrate profitability gaps that need to be closed and explain exactly what will happen to the savings.

2. Identify the quick wins

Initially focus your ZBB initiative either on the larger and more stable business units that are struggling with profitability or selected areas of overhead (such as sales, general, and administrative expenses), where there are large amounts of indirect cost that are not clearly understood. Not only will such choices help reinforce the rationale for undertaking ZBB, but they will also deliver the largest cost savings with minimal disruption to the rest of the organization.

3. Don’t do it alone

You should assemble a cross-functional project team with members from finance, IT, and other relevant business units, and preferably chaired by a C-level executive. The core of ZBB is the challenge and review process—scrutinizing every activity a department undertakes to see if it can be stopped or done more cheaply. It may be worth it to pay an experienced and objective third party to help negotiate the inevitable compromises.

4. Select the right planning platform

The success of ZBB depends on having detailed insight into the operational drivers of costs, such as activity volumes, productivity ratios, and input costs—none of which is contained in traditional planning and budgeting software. These older systems only contain highly aggregated, financial data and as a consequence, need to be supplemented with considerable amounts of data from elsewhere, such as spreadsheets. However, manipulating this data in ancillary spreadsheets increases both the complexity and workload involved in any ZBB initiative.

A better alternative is to hold all the detailed operational and financial data on a single planning platform, such as Anaplan—see how one CPG company did just this. Such a platform make it easy to model the causal relationship between activity volumes and the resulting resource requirements. In addition, Anaplan’s proprietary in-memory calculation engine provides the necessary power to process the large volumes of data involved.

5. Plan for sustainability

Once you have implemented a successful ZBB project, keep your skills fresh by moving on to other business units or expense categories and revisiting previous projects to ensure the savings stick. Don’t mothball your ZBB model either. Since it contains the causal relationships between different activities, resulting resource needs, and expenses of those needs, the ZBB model can easily be developed into a driver-based planning and budgeting model that could beneficially supplement or replace existing FP&A processes.

Any successful ZBB project should result in a heightened awareness of cost control. Keep in mind, however, that the awareness won’t happen if the organization returns to the traditional incremental approach for annual planning and budgeting once the implementation is over.

To prevent such an event, it may pay off to support a ZBB initiative with a planning platform that will allow you to evolve your core planning and budgeting processes in real time. Register for our free 30-minute live Finance demo to see just how easy it is to do this and much more with Anaplan.

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