ADVICE | VIEWPOINTS

THE CASE FOR

ZERO-BASED
BUDGETING
Zero-based budgeting can be a powerful tool to engage and
empower line managers, increase budget transparency and
make sure your spending actually supports your business
Business Advisor
goals. Doing it purely as a cost-cutting exercise will undermine
all the benefits, though KEVIN PHILLIPS CA(SA)
CEO of IDU Group

Zero-based budgeting is a good idea that, unfortunately, is usually promoted for all
the wrong reasons. Many people think of it as a way to cut costs: slash everything
to zero and make everyone justify their entire budget from the ground up. There’s
a certain swashbuckling appeal to the idea, but the reality is more likely to be
widespread fear, resentment and frantic attempts to protect pet projects. It also
takes a lot longer to plan from scratch than to simply mark up last year’s numbers.
There’s another, more healthy way to think about zero-based budgeting. It’s not
just about costs, it’s about linking spending with strategy. When a new business or
project is starting from scratch, the budget is the place where big dreams get their
reality check. It means asking questions: What do we actually need to get this off
the ground? What can we do without? What’s the most efficient way to achieve our
objectives? What are the best tools and people for the job?
In an established business, the day-to-day routine can carry on for years without
anyone ever stopping to reconsider whether the existing answers to these
questions are still the right ones. At budget time everyone just slaps a mark-up on
last year’s budget and then, unless something is seriously wrong, keeps going in
the same direction.
Zero-based budgeting stops that mindless routine in its tracks and forces everyone
to actually think about what they’re doing. It can be an immensely empowering
process for line managers, creating an opportunity to reconnect with how their
work fits into the bigger picture. It will almost certainly also create opportunities to
cut some costs, as people see where they could be doing things more efficiently –
but the cost-cutting is not the main point.
Of course this all takes a lot more time than the usual approach, which is why so
FOOD FOR THOUGHT
few businesses do it. There are two ways to solve the problem. First, the whole
organisation doesn’t have to start from scratch every year. A rolling four-year Have you ever noticed departments in your
process where just 25% of the organisation does a zero-based budget every year organisation rushing frantically to spend their
will achieve all the same benefits without most of the disruption. Second, for the budgets at the end of the financial year? That’s
other 75%, a budget process that is fast and well-supported by software and a clue that your budget process has come
automation tools will free finance staff up to spend time where they are most seriously adrift from your strategy. If those
needed. activities were even remotely important,
nobody would be scrambling to get them done
It’s not an easy path to take – but the increases in flexibility and efficiency can have just before the deadline.
a massive impact on profitability.

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