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Zero Based Budgeting

A feature article in CFO says old is new again. Zero Based Budgeting, which gained prominence during Jimmy Carter's Administration. What do you think? Are you using or willing to change your budgeting/forecasting methodology to Zero Based?

Answers

Chris Shumate
Title: Accounting Manager
Company: Dominion Development Group, LLC
LinkedIn Profile
(Accounting Manager, Dominion Development Group, LLC) |

The company I work for doesn't use zero based budgeting. However, the church I attend uses a zero based budget. I thought zero-based budgeting was mostly for nonprofit companies and governmental agencies. Is that not the case?

Jim Burtt
Title: Director Global Financial Systems & Proc..
Company: formerly at Guidewire Software, Inc.
(Director Global Financial Systems & Processes, formerly at Guidewire Software, Inc.) |

Run-rate OPEX and CAPEX budgeting is ineffective and mind-numbing. It papers over inefficiencies and potential cost savings. It rewards managers who know how to spend, and it motivates them to spend more rather than be a frugal custodian of the company's finite resources. It encourages the status quo and discourages change as incumbents continue to be well-funded at the expense of challengers who want to pursue innovations. It may suppress valuable dialogue among mid-level managers, executives, and Finance that you want to encourage.

In contrast, ZBB forces you to dig into generic categories of expenses and call out the true drivers of costs. Budget discussions should focus on drivers such as units and prices rather than abstract currency amounts. If done correctly, it helps stakeholders confirm that spending for new initiatives is earmarked in appropriate budgets. ZBB and driver-based planning is also useful for identifying cost-reduction opportunities.

Yes, doing ZBB the first time may be onerous. However, if you do quarterly updates, all you have to do is tweak the previous version since much of the budget is composed of recurring expenses. The trick is to set an appropriate threshold below which you deal with aggregated amounts and don't perform ZBB analysis. Use ZBB only where the rigor is justified.

Understanding the true drivers of your expenses allows companies to be more nimble when the inevitable downturns arrive. Rather than peanut-buttering the pain to all departments, executives can spare strategic initiatives while making cuts in lower priority areas.

Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

At Intel we *always* did ZBBs. In fact to "ZBB" a project was a verb in Intel-speak. It meant that it / they were placed below the line (I personally got ZBB'd at one point, still good for a laugh when out with the people who were there).

The basic idea is that you never work from last-period's assumption, and you are always ready to walk away from a bad deal. It is most effective in defeating the concept of "Sunk Cost". As in, instead of focusing on "making good" on the $M you threw away last year, you focus on the best use of your budget this year.

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