Can you handle the cultural and organisational issues associated with zero-based budgeting? If you can, the rewards are there in uncertain times, explains Ian Stone managing director, UK & Ireland, Anaplan
THE NUMBER of M&As in the UK and Ireland fell to a record low around the EU Referendum, symptomatic of widespread business uncertainty. Companies across all sectors are navigating today’s economic minefield cautiously, a state that has evolved but endured since 24 June, as businesses wait to see what fortunes post-Brexit Britain will bring them.
Often associated with preparing for sale or acquisition, zero-based budgeting (ZBB) is an approach adopted by many businesses to reduce costs, increase profits, and maximise shareholder value.
Despite this connection, strategies such as ZBB are not only applicable when acquisition is on the table, but also in climates of broader business uncertainty. If CFOs avoid focussing purely on the bottom line and instil ZBB more broadly across the business, it has the potential to boost growth and increase brand investment.
In the precarious post-Brexit economy, industry leaders are waking up to the potential of ZBB. Many have spoken publicly about how it has helped them save on overhead costs, funds which can be reinvested elsewhere or returned to the shareholder.
This efficiency cannot always be realised through traditional budgeting processes because they fail to provide the detailed insight needed. ZBB can – and that’s what’s driving adoption during these volatile economic times.
The devil’s in the detail
Planning is central to reaping the full benefits of ZBB. All organisational activities — order fulfilment, to individual marketing campaigns, to IT and legal – are rigorously reviewed so funding can be recalibrated. Inevitably, this is a large undertaking. However, here are five ways businesses can effectively apply ZBB for the benefit of the wider organisation:
- Integrate ZBB with core financial planning and analysis(FP&A) processes: ZBB should not be seen as an alternative to planning and budgeting cycles, but as an auxiliary process carried out every couple of years to refocus on strategically important initiatives.
- Focus ZBB initiatives for maximum returns: many companies limit ZBB to selling, general and administrative expenses, where there are large numbers of indirect costs. This allows them to target specific parts of their organisation and gain major benefits for a limited investment, without overly disrupting customer-facing business functions.
- Unify operational and financial data on a single platform: the success of ZBB depends on managers having both a deep understanding and visibility of the operational drivers of costs. Therefore, a more granular level of information is required, as well as easy access to data around activity volumes, productivity, and resource consumption.
- Make modelling easy: the ability to model the relationship between activity volumes and the resulting resource and headcount requirements is critically important. Directors need to make informed decisions about the impact of these changes on costs. If leaders cannot easily forecast this, a ZBB initiative will be swamped by an overabundance of disconnected spreadsheets.
- Re-use ZBB models for routine FP&A processes: organisations with integrated planning processes already have a strong foundation for ZBB. However, for those using an incremental approach to budgeting based on the previous year’s figures, ZBB could be the first enterprise-wide model to link different business functions. FP&A teams should adapt the model to support annual budgeting and rolling reforecasts, which will become more efficient and deliver greater insight.
Although ZBB is less likely to have a negative impact on employee morale than regular cost-cutting, businesses need well-planned internal communication and a collaborative infrastructure to underpin the technology, before directors embrace this new approach.
With your employees on board and improved results or savings beginning to show, the true potential of ZBB will begin to materialise, helping firms navigate the choppy seas of economic instability.
Ian Stone is managing director, UK & Ireland, of Anaplan