Zero Based Budgeting (ZBB) is popularly known as a strategic financial tool. For most traditional budgeting tools, they require the need to base on historical data and adjustments are financially increase. In the case of ZBB, It requires you to start for each of the budget cycles, freshly or from scratch. ZBB makes many individuals or organizations to make an account for every money spent, no matter how small it might be. Let’s look at some of the key features to lookout for:

Understanding Zero-Based Budgeting (ZBB)

As said above, it is a financial management strategy whereby every income gets justified from scratch for each budget cycle.

Defining ZBB

This budgeting approach eliminates the idea behind the necessity of expenses that have existed from previous cycles. Instead, it ensures that the organization’s goal or an individual’s goal rightly aligns with money spent.

How ZBB works

Let’s look at the processes ZBB involves with;

1. Define organizational goals: The organization’s strategic objectives and priorities must be clearly articulated for.
2. Identify decision packages: The organization’s activities must be broken down into smaller parts called decision packages.
3. Rant decision packages: After these smaller parts called decision packages have been executed, the next thing is to carefully assess and evaluate these packages, see how important these decision packages can be to the organization.
4. Allocate Resources: Now that you’ve been able to know the importance of these decision packages, it’s time to allocate resources to them in order of their importance. Therefore, The highest-ranked decision packages should based on their strategic value and the cost-benefit analysis.
5. Implement and Monitor the Budget: Carefully monitor the approved budget, track sending against the approved budget and make sure you also make adjustments when needed and necessary.

Key Differences from Traditional Budgeting

Let’s look at ways in which the traditional budgeting differs from the ZBB

Starting from Zero: From it’s definition from above, the ZBB starts from zero or on a clean slate unlike the traditional budgeting that starts the new year with the budget of the previous year.

Justification of expenses: As discussed above, The justification of expenses must be done, so it’s a necessary way of life in every organization.

Prioritization of expenditures: Now, ZBB makes a priority of every expenditures which are clearly based on value and importance unlike traditional that makes this based on historic levels.

Flexibility and Adaptability: As the budget aren’t cumbersome, it’s makes it easy to be flexible around ZBB and also adapt to changing situations unlike the Traditional that can most likely be constrained by past spending patterns.

Organizations or an individual must have learnt one or two things from this, therefore, begin to explore the potentiality behind ZBB.

Benefits of Zero-Based Budgeting

Having discussed the leverage of ZBB over Traditional, let’s go into its importance. Here are the key advantages of ZBB

1. Improved Financial Efficiency: Since ZBB requires all its expenses to be justified and approved for each of its budgeting cycle or period, it brings about efficiency, making it rather simpler than carrying over historic expenses. This promotes effective use of funds and wasteful spending is being reduced.
2. Cost Savings: By starting from zero and eliminating redundant expenses, streamlines operations and makes cost savings significant.
3. Enhanced Strategic Alignment: ZBB makes it possible for an organization to divert resources to an area where growth is being encouraged, rather than drooling over historic expenses, Its spending aligns with the current goals and objectives of the business.
4. Greater Accountability and Transparency: Since it’s been established that ZBB allows justification on all expenses, it makes it possible for all managers and employees from each departments to be responsible for any deviate from the financial goals and objectives. This way, transparency is also being accounted for, making it easier to track spending and ensure funds are being used as it’s intended for it to be used.
5. Focus on Value-adding Activities: It is advisable for every organizations and individuals to focus on activities that add values whereby non-essential expenditures would be completely avoided and if there is, eliminated. This maintains culture efficiency, improved and continuous financial success.

Implementing Zero-Based Budgeting

ZBB requires careful and quality planning, commitment, and attention to detail. Let’s look at the step-by-step guide to implement ZBB efficiently:

Understand the Basics of ZBB Principles

This rule where, “Every expenses must be justified,” which is the core concept or backbone behind ZBB, must always be remembered and implemented. Make sure all expenses starts from Zero based for each cycles.

Assess Current Budgeting Practices

Have a list of practices that are not suitable for the business, also have a list of the best practices that are most suitable for the organization, review them with the current budgeting process to identify loopholes and how best to fill them or make it up. Implement them strategically.

Set up ZBB budgeting Framework

This is the time you divide your budget into categories that would interpret the different functions, departments and expense types. A framework is a very great necessity of every organization to keep going. Therefore, budget units must be created and justification must be made.

Involve Key Players

Ensure that all the relevant stakeholders or representatives of every departments have the understanding of ZBB and well involved in the process. Clearly communicate its advantages as their input is very crucial for actively justifying expenses.

Implement a Review Process

Regularly put a review process out to every departments. This involves, monthly, quarterly and annual reevaluation. Let everyone review the ZBB process or strategy and make sure stakeholders are well informed of the results in order to keep budgeting accurate and justification correct.

Case Studies and Success Stories

Below are few examples of how companies and individuals have successfully utilized the ZBB strategy to achieve financial goals:

Coca-Cola Global Cost-Saving Initiative Challenge

This period, they were faced with the pressure to control costs while at the same time maintain its global operations and brand presence.

Implementation: Zero-Based was adopted to re-evaluate its expenses. Each department was required to justify its budget.

Outcome: Through ZBB, Coca-Cola was able to identify the cost-savings techniques to be put in place, especially in areas such as marketing and general administration.

“Coca-Cola’s adoption of zero-based budgeting as part of its global cost-saving strategy has been documented in various business reports and financial analyses, highlighting how the company managed to streamline its operations and reduce expenses by requiring all departments to justify their budgets from scratch”

(Forbes, 2017)

Unilever’s Transformation Through ZBB Challenge

Challenge: Unilever is a global consumer goods company. They sought to find a way in improving profitability and cost efficiency.

Outcome: They adopted the use of ZBB by re-investing the savings into growth-driven initiatives. By doing this, their market position got strengthened and improved better, thereby, resulting into better deliverables.

“Unilever’s use of zero-based budgeting as a key element in its “Connected 4 Growth” strategy has been detailed in case studies and industry reports, showcasing the effectiveness of ZBB in driving cost efficiencies and improving profitability across the company’s global operations”

(McKinsey & Company, 2018)

Mondelez International’s Cost Leadership Strategy

Challenge: Mondelez is a multinational confectionary and snack company, they had the challenge in driving cost efficiency, therefore, they aimed to drive margin expansion in a competitive industry.

Outcome: After implementing ZBB across all units, they achieved a cornerstone around cost effectiveness, and justification within all expenses especially in procurement, logistics and marketing.

“Mondelez International’s implementation of zero-based budgeting is a well-documented example of how the approach can be used to achieve cost leadership. The company’s success with ZBB has been analyzed in various financial reviews, demonstrating significant savings and improved financial performance”

(Harvard Business Review, 2019)

Government Agency Achieves Budget Transparency

Challenge: A government agency was typically having struggles with fund allocation, budget inefficiency and lack of transparency.

Implementation: Adopted ZBB to increase financial accountability, justification from each department was ensured and budget delivered was from scratch.

Outcome: Successful identification of overspending areas and redirected funds to initiatives with higher priorities, Budget transparency was improved, and easy implementation of financial resources to the right places.

“A government agency’s adoption of zero-based budgeting to enhance budget transparency and accountability has been cited in public administration journals, where the focus has been on how ZBB helped the agency allocate resources more effectively and improve stakeholder trust”

(Public Administration Review, 2016)