Is Zero-Based Budgeting Back in Vogue?

Over the past few years, the zero-based budgeting (ZBB) approach has gained renewed interest and is being adopted by a growing number of organizations.

Why the renewed interest?  How has this impacted organizations?  And what are some of the pros and cons about the approach?

A recent article published by McKinsey & Company highlights ten myths and realities that illustrate the power and practicalities of zero-based budgeting for the consumer-packaged-goods industry.

While zero-based budgeting (ZBB), is capturing the imagination of investors, analysts, boards of directors, and executives across industries, some skepticism remains.  Some organizations have seen limited impact of the approach, while others have actually seen negative impacts through under-investment.  As a result, many executives still wonder whether ZBB is an appropriate discipline for their organization—whether the results would justify the effort they envision.

In the article, McKinsey recognizes the potential power of the methodology to unlock shareholder value, especially in the consumer-goods industry.  And by contrasting ten myths and realities of ZBB, they aim to clarify what the methodology is all about, what changes it requires, and what actions are necessary for successful implementation.

McKinsey concludes,

“When done well, zero-based budgeting can drive significant, sustainable savings and is a machine for efficient resource reallocation. But getting it right requires leadership stamina to see through initial resistance. World-class ZBB programs build a culture of cost management through unprecedented cost visibility, a unique governance model, accountability at all levels of the organization, aligned incentives, and a rigorous and routine process. When these elements are in place, ZBB lets organizations free up unproductive costs and redirect those resources toward profitable growth.”

To learn more, check out the article: “The truth about zero-based budgeting: ZBB for consumer-goods players.

The Host Analytics Point of View

At Host Analytics, we view zero-based budgeting (ZBB) as one of many viable budgeting and planning techniques – including traditional budgeting, and rolling forecasts.  One size doesn’t fit all, so organizations need to implement the approach that works best for their size, culture, maturity and economic situation.

For smaller companies, that aren’t growing rapidly, the traditional budgeting approach is often sufficient. For fast-growing, dynamic organizations, rolling forecasts can be leveraged to more accurately allocate future funds, providing the versatility businesses need to respond to changes quickly. And zero-based budgeting can be leveraged in public sector organizations, or private sector companies looking to make sure all departmental costs are completely justified before funds are allocated.

Whichever approach you choose, make sure your budgeting software is flexible enough to handle multiple approaches. With cloud-based enterprise performance management (EPM) software, your business can support standard or zero-based budgeting, with the flexibility to augment the budget with rolling forecasts on a quarterly or monthly basis, as needed.

To learn more, check out our Planning and Forecasting Best Practices white paper.

Get the Best Practices Guide

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