Zero-based budgeting for Capex:
the post-pandemic view
Coming out of the worst of COVID, we’re all ready to wipe the slate clean and start fresh. Why not do the same with your budgeting process?
Zero-based budgeting (ZBB) has gained renewed interest post-pandemic as a way to ensure that expenses are aligned with organizational objectives. So, what’s changed in the last few years, and why are finance leaders increasingly turning to ZBB?
A fresh perspective for capital planners
In a nutshell, zero-based budgeting is a financial planning method that requires organizations to create budgets from the ground up for each fiscal year. Rather than basing this year’s budget on last year’s expenses, ZBB mandates a thorough justification for each expense, ensuring that costs are aligned with strategic goals. This approach aims to minimize unnecessary spending and cultivate a culture of continuous improvement.
The unprecedented challenges created by the pandemic forced organizations to adopt a more flexible and adaptable approach to budgeting. Like many other pandemic-driven behavior changes, companies are sticking with ZBB post-pandemic to continue making sure their spending is aligned with their goals on a continuous basis.
As Boston Consulting Group points out, “Although ZBB is not new, introducing a ZBB program could not be more timely. The pandemic has led to economic, health, and social devastation, but it has also created an unprecedented opportunity to reassess how businesses operate. The crisis has challenged many core beliefs, and employees have exhibited a newfound openness to fundamental changes in their ways of working.”
It’s important to note that ZBB isn’t merely a cost-cutting tool—it’s a “philosophy that infuses a culture of cost consciousness” throughout an organization that can also enhance agility.
Capital planners know that allocating resources to the highest risk-adjusted ROI projects is paramount to prudent portfolio management. ZBB essentially scales up that approach to the entire enterprise, ensuring that every dollar spent furthers its goals.
Thriving in the new normal with flexible budgeting
The post-pandemic business environment has underscored the importance of financial resilience and adaptability. Accenture is “seeing a lot of people starting with a clean sheet, because they can’t rely on their budgets from previous years due to the impact of the pandemic.” In this context, zero-based budgeting has re-emerged as an attractive budgeting method for several reasons:
Flexibility and agility
The dynamic nature of ZBB enables organizations to respond effectively to changing market conditions and capitalize on emerging opportunities. By linking budgets to strategic goals, ZBB allows companies to allocate resources where they can deliver the most value. For example, after applying ZBB, Hewlett Packard was able to drive meaningful margin improvement in 2022.
Better decision-making
ZBB fosters a deeper understanding of costs and their relationship to strategic objectives. This increased visibility into cost structures helps organizations make more informed resource allocation decisions, rather than relying on last year’s spend. During the pandemic, General Motors CFO Paul Jacobsen realized how quickly market conditions could change, and started rolling out ZBB in various areas of the business. This has helped the firm increase productivity while keeping costs in check.
Stronger accountability and ownership
The process of building budgets from scratch encourages managers to take greater ownership of their department’s financial performance. This heightened sense of accountability can lead to more effective cost management and better alignment with the organization’s strategic priorities.
Challenges and considerations with ZBB
While zero-based budgeting offers several advantages in the post-pandemic world, it’s not without its challenges. Implementing ZBB can be a time-consuming and resource-intensive process, as it requires detailed analysis and justification of each expense.
Fortunately, modern tools are helping finance teams overcome these obstacles. A renewed appreciation for ZBB is being driven by cutting-edge solutions, “including cloud-based platforms that can make it easier and cheaper to implement, scale and leverage all the benefits that ZBB offers.” Rather than needing to overhaul the entire company’s budgeting process, finance leaders can choose to initially apply ZBB to specific cost categories or business units. This targeted approach allows for a more gradual rollout across the rest of the enterprise.
Ultimately, companies have realized that the benefits of ZBB aren’t just useful in a crisis—they can help them reach their long-term goals more efficiently in any environment. In the past, this approach to budgeting has been overly cumbersome, but intelligent solutions like Finario are making the process a whole lot easier.
To learn more about why Capex is a great start to implementing ZBB, check out a recording of our webinar on the topic.