Use Zero-Based Budgeting to Rightsize Your Budget

Creating a zero-based budget requires time and resources, but the outcomes — reduced costs, less waste, strategic alignment, a clear idea of headcount, and greater cost transparency and accountability — are well worth the effort. 

Start by resourcing for the following roles, making sure all participants understand their responsibilities, processes and timelines:

• Function leaders prioritize their department activities, allocate funds and drive cost reduction or process improvement efforts.

• Cost center owners evaluate activities within their cost centers and propose a budget that supports funding decisions.

• Financial planning and analysis (FP&A) business partners help departments estimate required costs and resources, and facilitate budget review discussions.

• HR supports change management efforts and gives data on headcount allocations and salaries.

• A finance-led, cross-functional ZBB implementation team designs the budgeting process, gains leadership buy-in and trains department and finance staff.

• Cost-category owners review and monitor enterprise-level spending in their expense categories.

• The CFO, COO and corporate budget committee review and approve the final budget.

The ZBB process can be unwieldy for some areas of the business and doesn’t require whole-enterprise adoption. Instead, choose the departments and cost centers that would most benefit from using the ZBB approach, and educate them on the ZBB process by doing the following:

• Define the scope, highlighting areas where specific department budgets are misaligned with company objectives and where there are opportunities for cost reduction. 

• Develop guidelines and deliver training on process, expected outcomes, and cost center owners’/department heads’ role in achieving them.

• Plan a rotating schedule where departments engage in ZBB every two to three years. Follow the standard budgeting process during the in-between years.

Work with selected cost centers to analyze and assess their activities against business and function objectives. 

• List activities for each cost center. Document the activity owners, key performance indicators and negotiated service levels for internal services.

• Identify nonessential or redundant activities that can be eliminated and inefficient ones that can be modified to free up resources. 

• Hold open conversations about opportunities and outcomes versus cost cutting. Focus on “must-haves” versus “nice-to-haves” and necessary trade-offs based on department and business goals.

• Document and justify the costs of each activity in a budget proposal document. Include people-related, capex, general and administrative, sales and marketing, and distribution costs — and the benefits of each activity versus the consequences of not funding it.

Rank all of the proposed cost center activities within a department based on their criticality to the business. 

• Discuss outliers and differences of opinion within your team to establish the final ranking, and allocate resources accordingly. 

• Pressure-test cost estimates and resource allocation decisions with each department and make any needed refinements.

• Submit the zero-based budget to the corporate budget committee.

• Iterate and finalize the budget based on the committee’s feedback until they approve.

With the ZBB process in the rearview, ask for feedback from key stakeholders who helped build the budget to identify opportunities to improve.

Going forward, monitor the budget’s performance by comparing actual results periodically against targets, and make adjustments as needed to reflect market and business changes.