Zero Based Budgeting

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?

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.