Zero-Based Budgeting (ZBB) - Revision history

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 '''Zero-Based Budgeting (ZBB)''' is a methodology that helps align company spending with strategic goals. Its approach requires organizations to build their annual budget from zero each year to help verify that all components of the annual budget are cost-effective, relevant, and drive improved savings.
-Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.<ref>What Does Zero-Based Budgeting (ZBB) Mean? [https://www.anaplan.com/blog/zbb-zero-based-budgeting-guide/ Anaplan]</ref> Zero-Based Budgeting in management accounting involves preparing the budget from scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department.
+Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.<ref>[https://www.anaplan.com/blog/zbb-zero-based-budgeting-guide/ What Does Zero-Based Budgeting (ZBB) Mean?]</ref> Zero-Based Budgeting in management accounting involves preparing the budget from scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department.
-__TOC__
+==Definition of Zero-Based Budgeting<ref>[https://www2.deloitte.com/global/en/pages/operations/articles/gx-zero-based-budgeting.html What is Zero-Based Budgeting?]</ref> ==
 Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history. As opposed to traditional budgeting, no item is automatically included in the next budget.2 In ZBB, budgeters review every program and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding. Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general, and administrative costs; marketing costs; variable distribution; or cost of goods sold.3 When successful, ZBB produces radical savings and liberates organizations from entrenched departments and methodologies.4 When unsuccessful, the costs to an organization can be considerable.
@@ Line 15: / Line 12: @@
-== Zero-Based Budgeting vs. Traditional Budgeting<ref>Zero-Based Budgeting vs. Traditional Budgeting [https://www.investopedia.com/terms/z/zbb.asp Invetopedia]</ref> ==
+== Zero-Based Budgeting vs. Traditional Budgeting<ref>[https://www.investopedia.com/terms/z/zbb.asp Zero-Based Budgeting vs. Traditional Budgeting]</ref> ==
 Traditional budgeting calls for incremental increases over previous budgets, such as a 2% increase in spending, as opposed to a justification of both old and new expenses, as called for with zero-based budgeting. Traditional budgeting analyzes only new expenditures, while ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses, and aims to drive value for an organization by optimizing costs and not just revenue.
-== Zero Based Budgeting Example<ref>Zero Based Budgeting Example [https://efinancemanagement.com/budgeting/zero-based eFinance Management]</ref> ==
+== Zero Based Budgeting Example<ref>[https://efinancemanagement.com/budgeting/zero-based Zero Based Budgeting Example]</ref> ==
 Let us take an example of a manufacturing department of a company ABC that spent $ 10 million last year. The problem is to budget the expenditure for the current year. There are multiple ways of doing so:
 *The board of directors of the company decides to increase/decrease the expenditure of the department by 10 percent. So the manufacturing department of ABC Ltd will get $ 11 million or $ 9 million depending on the management’s decision.
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-== Zero-Based Budgeting Implementation Process<ref>5-step process for ZBB implementation [https://www.gartner.com/smarterwithgartner/use-zero-based-budgeting-to-rightsize-tight-budgets/ Gartner]</ref> ==
+== Zero-Based Budgeting Implementation Process<ref>[https://www.gartner.com/smarterwithgartner/use-zero-based-budgeting-to-rightsize-tight-budgets/ 5-step process for ZBB implementation]</ref> ==
 The Gartner approach to ZBB incorporates five prerequisites and follow-on activities to ensure the principles of ZBB are implemented successfully — and operationalized on an ongoing basis.
 *Ensure financial transparency: You need visibility into:
@@ Line 48: / Line 45: @@
-== Use of Zero-Based Budgeting in Public and Private Sectors<ref>Use of Zero-Based Budgeting in Public and Private Sectors [https://en.wikipedia.org/wiki/Zero-based_budgeting Wikipedia]</ref> ==
+== Use of Zero-Based Budgeting in Public and Private Sectors<ref>[https://en.wikipedia.org/wiki/Zero-based_budgeting Use of Zero-Based Budgeting in Public and Private Sectors ]</ref> ==
 Zero-based budgeting in the public sector versus the private sector is a different process. "The use of ZBB in the private sector has been limited primarily to administrative overhead activities (i.e. administrative expenses needed to maintain the organization).:51 In the United States Zero-based budgeting was developed in 1969 at Texas Instrument Inc. Jimmy Carter, then Governor of Georgia, was the first to adopt the process of zero-base into the government for the preparation of the fiscal of 1973 budget. Three years later, sponsored by the President and Congress the federal government for the first time implemented zero-base budgeting in The Government Economy and Spending Reform act of 1976.
@@ Line 101: / Line 98: @@
 '''Impact on Government Operations'''<br />
-According to the GAO, "Agencies believed that inadequate time had been allowed to implement the new initiative. The requirement to compress planning and budgeting functions within the time frames of the budget cycle had proven especially difficult, affecting program managers' ability to identify alternative approaches to accomplishing agency objectives. Some agency officials also believed that the performance information needed for ZBB analysis was lacking."[5]:50–51
+According to the GAO, "Agencies believed that inadequate time had been allowed to implement the new initiative. The requirement to compress planning and budgeting functions within the time frames of the budget cycle had proven especially difficult, affecting program managers' ability to identify alternative approaches to accomplishing agency objectives. Some agency officials also believed that the performance information needed for ZBB analysis was lacking."
 Also, according to the National Conference of State Legislatures:, In its original sense, ZBB meant that no past decisions are taken for granted. Every previous budget decision is up for review. Existing and proposed programs are on an equal footing, and the traditional state practice of altering almost all existing budget lines by small amounts every year or two would be swept away. No state government has ever found this feasible. Even Georgia, where Governor Jimmy Carter introduced ZBB to state budgeting in 1971, employed a much-modified form.
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-== From Zero-Based Budgeting to Zero-Based Everything<ref>From Zero-Based Budgeting to Zero-Based Everything [https://fpa-trends.com/article/zero-based-budgeting-zero-based-fpa FP&A Trends]</ref> ==
+== From Zero-Based Budgeting to Zero-Based Everything<ref>[https://fpa-trends.com/article/zero-based-budgeting-zero-based-fpa From Zero-Based Budgeting to Zero-Based Everything]</ref> ==
 During times of great change and uncertainty, traditional budgeting has become increasingly less “fit for purpose”. When, in March 2020, the COVID-19 outbreak closed international borders and economies, the world was left with many dead budgets and unrealistic forecasts. At times like this, it has become even more clear that planning and forecasting should be much more adaptable and agile than before.
@@ Line 143: / Line 140: @@
 Implementing ZB FP&A involves both analytical and business partnering techniques, namely:
-*Interviewing and collaborating with key business stakeholders (cost centres and profit centre owners.)
+*Interviewing and collaborating with key business stakeholders (cost centers and profit center owners.)
 *Researching the key business drivers using analytical methods.
 *Educating key business stakeholders on key drivers, models, and forecasting techniques.
@@ Line 149: / Line 146: @@
-== Zero-Based Budgeting Myths and Realities<ref>Five myths (and realities) about zero-based budgeting [https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-myths-and-realities-about-zero-based-budgeting McKinsey]</ref> ==
+== Zero-Based Budgeting Myths and Realities<ref>[https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/five-myths-and-realities-about-zero-based-budgeting Five myths (and realities) about zero-based budgeting]</ref> ==
 *Myth one: ZBB simply means building your budget from zero
 **Reality: ZBB is a repeatable process to build a sustainable culture of cost management<br />Zero-based budgeting is much more than building a budget from zero. World-class ZBB efforts successfully build cultures of cost management throughout the organization by using a structured approach to facilitate cost visibility, cost governance, cost accountability, and aligned incentives. Fortunately the culture shift isn’t left to chance. We believe that there is a proven, step-by-step approach to implementing successful ZBB programs, and when this implementation is done well, ZBB makes cost management a part of the way every employee works on a daily basis.
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-== Advantages and Disadvantages of Zero-based Budgeting<ref>Advantages and Disadvantages of Zero-based Budgeting [https://corporatefinanceinstitute.com/resources/knowledge/accounting/zero-based-budgeting/ CFI]</ref> ==
+== Advantages and Disadvantages of Zero-based Budgeting<ref>[https://corporatefinanceinstitute.com/resources/knowledge/accounting/zero-based-budgeting/ Advantages and Disadvantages of Zero-based Budgeting]</ref> ==
 '''Advantages of Zero-based Budgeting'''<br />
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 == See also ==
 *[[Budget]]
 ==References ==
 <references/>

@@ Line 1: / Line 1: @@
 '''Zero-Based Budgeting (ZBB)''' is a methodology that helps align company spending with strategic goals. Its approach requires organizations to build their annual budget from zero each year to help verify that all components of the annual budget are cost-effective, relevant, and drive improved savings.
-Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.<ref>What Does Zero-Based Budgeting (ZBB) Mean? [https://www.anaplan.com/blog/zbb-zero-based-budgeting-guide/ Anaplan]</ref> Zero-Based Budgeting in [[Management Accounting|management accounting]] involves preparing the [[Budget|budget]] from scratch with a zero-base. It involves re-evaluating every line item of [[Cash Flow|cash flow]] statement and justifying all the expenditure that is to be incurred by the department.
+Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.<ref>What Does Zero-Based Budgeting (ZBB) Mean? [https://www.anaplan.com/blog/zbb-zero-based-budgeting-guide/ Anaplan]</ref> Zero-Based Budgeting in management accounting involves preparing the budget from scratch with a zero-base. It involves re-evaluating every line item of cash flow statement and justifying all the expenditure that is to be incurred by the department.
@@ Line 181: / Line 181: @@
 == See also ==
 <div style="column-count:2;-moz-column-count:4;-webkit-column-count:4">
-[[Budget]]<br />
+*[[Budget]]
 </div>
 ==References ==
 <references/>

← Older revision		Revision as of 17:07, 6 May 2021
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	*The senior management of the company may decide to give the department the same amount as it got in the previous year without hiring more people in the department, or increasing the production etc. This way, the department ends up getting $ 10 million.[adsense]		*The senior management of the company may decide to give the department the same amount as it got in the previous year without hiring more people in the department, or increasing the production etc. This way, the department ends up getting $ 10 million.[adsense]
	*Another way is, as, against the traditional method, management may use zero-based budgeting in which the previous year’s number of $ 10 million is not used for calculation. Zero-based budgeting application involves calculating all the expenses of the department and justifying each of these. This reflects the actual requirement of the manufacturing department of company ABC which may be $ 10.6 million.		*Another way is, as, against the traditional method, management may use zero-based budgeting in which the previous year’s number of $ 10 million is not used for calculation. Zero-based budgeting application involves calculating all the expenses of the department and justifying each of these. This reflects the actual requirement of the manufacturing department of company ABC which may be $ 10.6 million.
		+
		+
		+	== Zero-Based Budgeting Implementation Process<ref>5-step process for ZBB implementation [https://www.gartner.com/smarterwithgartner/use-zero-based-budgeting-to-rightsize-tight-budgets/ Gartner]</ref> ==
		+	The Gartner approach to ZBB incorporates five prerequisites and follow-on activities to ensure the principles of ZBB are implemented successfully — and operationalized on an ongoing basis.
		+	*Ensure financial transparency: You need visibility into:
		+	**The relationship between activity (cost driver) and cost, so you can see which levers of cost are adding value and which aren’t.
		+	**Whether costs are variable, fixed, discretionary or nondiscretionary
		+	**The impact on costs if spend changes, e.g., contract penalties, severance costs
		+	Without this level of transparency, you can’t see inefficiencies hidden within services/projects/initiatives and can’t identify behaviors that need to be managed to change costs.
		+	*Identify strategic business priorities and KPIs: Identify and cascade strategic business priorities into the budgeting process to ensure alignment and to identify key performance indicators (KPIs) by which to measure the success of investments. Executive leaders must agree and communicate strategic priorities collaboratively and across functions. Without this consensus, zero-based budgeting can’t effectively prioritize spend in terms of business value and outcomes. The choice of metrics/KPIs should reinforce the strategic alignment. Also make sure senior executives endorse the use of the zero-based budgeting approach vs. traditional budgeting methods, either across the enterprise or in the function(s) adopting it. Clearly communicate its purpose and principles to avoid pushback and gain buy-in from the budget holders who will need to examine their cost base. This smooths ZBB implementation.
		+	*Align, evaluate and optimize: Conduct the process of zero-based budgeting as a rightsizing exercise to align functional area spending priorities with desired business outcomes. Especially amid the post-pandemic resetting of business strategy, this realignment ensures that approved budgets are focused on driving value, that is, enabling a business priority/outcome. Note that even though cost-cutting is not the primary objective of zero-based budgeting, cost reduction could be an outcome — although only if:
		+	**There are no value-adding priorities to which spend could be shifted.
		+	**The enterprise needs to return cash to the bottom-line for imminent survival.
		+
		+
		+	[[File:ZBB Budgeting Cycle.png\|400px\|Gartner ZBB Budgeting Cycle]]<br />
		+
		+
		+	*Control and monitor the budget: Maintain a comprehensive and regular review of budgets, spending and variances, at least quarterly and maybe monthly, to stay aligned with business priorities and to contain variances. Monitor budgets to ensure that spending and forecasts remain closely aligned to the activities and outcomes that were the original intent of ZBB implementation. Use the chosen metrics and KPIs to measure and assess the value and alignment of spending to the strategic/desired business outcomes. Just because spending stays within budget doesn’t automatically mean the objectives of the spend have been met.
		+	*Value-based spending : Operationalize the concepts of zero-based budgeting through an ongoing process of value-based spending. If senior leaders focus too much on the procedural changes of ZBB implementation, functions may view it as just another budgeting method. Instead, articulate and reinforce that budget holders don’t “own” approved budgets and value-based spending involves an active assessment of all spending — regardless of whether or not it has been previously agreed to in the budgeting process. Senior executives should actively demonstrate and reinforce behaviors that are at the core of zero-based budgeting, such as:
		+	**Encouraging honest trade-off discussions, driven by alignment to business outcomes
		+	**Making tough resource sacrifices.

← Older revision		Revision as of 16:54, 6 May 2021
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	'''Zero-Based Budgeting (ZBB)''' is a methodology that helps align company spending with strategic goals. Its approach requires organizations to build their annual budget from zero each year to help verify that all components of the annual budget are cost-effective, relevant, and drive improved savings.		'''Zero-Based Budgeting (ZBB)''' is a methodology that helps align company spending with strategic goals. Its approach requires organizations to build their annual budget from zero each year to help verify that all components of the annual budget are cost-effective, relevant, and drive improved savings.

−	Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.<ref>What is Zero-Based Budgeting (ZBB)? [https://www.anaplan.com/blog/zbb-zero-based-budgeting-guide/ Anaplan]</ref> Zero-Based Budgeting in [[Management Accounting\|management accounting]] involves preparing the [[Budget\|budget]] from scratch with a zero-base. It involves re-evaluating every line item of [[Cash Flow\|cash flow]] statement and justifying all the expenditure that is to be incurred by the department.	+	Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.<ref>What Does Zero-Based Budgeting (ZBB) Mean? [https://www.anaplan.com/blog/zbb-zero-based-budgeting-guide/ Anaplan]</ref> Zero-Based Budgeting in [[Management Accounting\|management accounting]] involves preparing the [[Budget\|budget]] from scratch with a zero-base. It involves re-evaluating every line item of [[Cash Flow\|cash flow]] statement and justifying all the expenditure that is to be incurred by the department.
		+
		+
		+	__TOC__
		+
		+
		+	==Definition of Zero-Based Budgeting<ref>What is Zero-Based Budgeting? [https://www2.deloitte.com/global/en/pages/operations/articles/gx-zero-based-budgeting.html Deloitte]</ref> ==
		+	Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history.1 As opposed to traditional budgeting, no item is automatically included in the next budget.2 In ZBB, budgeters review every program and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding. Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general, and administrative costs; marketing costs; variable distribution; or cost of goods sold.3 When successful, ZBB produces radical savings and liberates organizations from entrenched departments and methodologies.4 When unsuccessful, the costs to an organization can be considerable.
		+
		+
		+	[[File:Zero-Based Budgeting.jpg\|500px\|Zero-Based Budgeting]]<br />
		+	source: Deloitte

@@ Line 6: / Line 6: @@
 == Zero-Based Budgeting vs. Traditional Budgeting<ref>Zero-Based Budgeting vs. Traditional Budgeting [https://www.investopedia.com/terms/z/zbb.asp Invetopedia]</ref> ==
 Traditional budgeting calls for incremental increases over previous budgets, such as a 2% increase in spending, as opposed to a justification of both old and new expenses, as called for with zero-based budgeting. Traditional budgeting analyzes only new expenditures, while ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses, and aims to drive value for an organization by optimizing costs and not just revenue.
@@ Line 83: / Line 90: @@
 G Capital has become successful using ZBB within their company. arlos Brito, a protégé of Jorge Paulo Lemann, "brought to Anheuser-Busch the concept of 'zero-based budgeting,' wherein every expense must be newly justified every year, not just new ones, and the goal is to bring it lower than the year prior" at Anheuser-Busch InBev as early as in the 1990s. Following their decade of lessons in ZBB, 3G Capital employed similar cost management concepts at their next acquisitions: Burger King, Tim Hortons, Heinz, Kraft Foods, and Popeyes Louisiana Kitchen. The use of ZBB might have continued the subjective notion that this budgeting style is a fix-all for businesses trying to lighten the load of a new company. This concept triggered measures as drastic as cutting hundreds of management jobs and jettisoning corporate jets, to as simple as requiring employees to ask to make photocopies. Following the 2015 merger of Kraft and Heinz, some analysts and former employees blamed 3G Capital's use of ZBB for the company's poor performance.
-'''Impact of ZBB on Stockholders'''
+'''Impact of ZBB on Stockholders'''<br />
 According to Accenture, "examples of companies that have successfully implemented ZBB...include a consumer goods company that was able to achieve 18 percent savings and a 20 percent increase in the share price. Another case was that of a prominent commercial bank, which unlocked a large sum of money and reinvested it in ‘going digital’, and a healthcare company that achieved savings of £1.2bn (€1.36bn) for three years." As a result, companies are vocal about their use of ZBB programs in their earning calls including Mondelēz International, Campbell Soup Company, Kraft Heinz, Anheuser-Busch InBev and Tesco. In its 2017 first-half results, Unilever even reported that ZBB was improving its marketing productivity and streamlining its advertising spend, while also reducing overhead costs that weren’t bringing much value. In another case, the use of ZBB within 3G Capital has been profitable for stockholders. When 3G Capital quickly cut costs within Kraft, their stock prices increased 36% as a direct result. This type of budgeting enabled companies like Kraft to compete again on price with some of the leaner competition, that had previously undercut Kraft's prices. Zero-based budgeting helps more money to flow to stockholders than into unused departments, over-funded programs, and wasteful spending habits.
 Zero-based budgeting can drive significant and sustainable savings, but it is much more than simply building a budget from zero. 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. ZBB frees up unproductive costs and allows those savings to be taken to the bottom line or redirected to more productive areas that will drive future growth.

← Older revision		Revision as of 16:55, 5 May 2021
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−	'''~~Content Coming Soon~~'''	+	'''Zero-Based Budgeting (ZBB)''' is a methodology that helps align company spending with strategic goals. Its approach requires organizations to build their annual budget from zero each year to help verify that all components of the annual budget are cost-effective, relevant, and drive improved savings.
		+
		+	Implemented effectively, ZBB is a cost discipline that can help businesses improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure that spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can help businesses identify how to best course-correct for the months ahead.
		+	'''Zero-Based Budgeting''' in [[Management Accounting\|management accounting]] involves preparing the [[Budget\|budget]] from scratch with a zero-base. It involves re-evaluating every line item of [[Cash Flow\|cash flow]] statement and justifying all the expenditure that is to be incurred by the department.