How to effectively take a Zero-Based Budgeting approach to cost reduction

Zero-Based Budgeting

Rajeev Mitroo, Anaplan

With companies throughout the world striving to achieve long-term, sustainable growth, increasing numbers are turning their attention to cost reduction. The strategy of Zero-Based Budgeting (ZBB) is gaining traction as understanding about the potential it offers grows. Senior managers and boards realise that it’s not possible to cut their way to growth, however ZBB offers ways to improve both competitiveness and profitability, writes Rajeev Mitroo.

ZBB is a particularly hot topic in the consumer packaged goods (CPG) sector where companies are facing declining margins and shifting consumer demands. Here, reducing costs can be a very effective way of ensuring long-term viability in a volatile market.

The ZBB strategy

A ZBB strategy forces managers to critically assess all the activities performed by their organisation’s departments and justify every dollar being spent. The approach can free up cash which can then be reinvested into new areas and initiatives.

The strategy requires a complete re-think of the budgeting process and must be tightly integrated with a company’s overall growth strategy. It will create a new cost culture within the organisation and challenge managers to think about how they operate across teams, business units and geographies.

Adoption of the strategy should begin with management agreeing on an overall savings goal for the organisation – one that is ambitious yet achievable. Also, there needs to be a clear idea of where the savings achieved will be reinvested as this is the objective of the exercise.

Once goals have been set, each item in budgets should then be examined to determine where savings can be made. Once identified and achieved, the savings are then immediately reinvested in the pre-identified areas where they can support ongoing growth.

Cuts should be made in places that don’t directly deliver value to customers. Many are likely to be in administrative areas where changes to workflows and processes can deliver savings without any negative impact on operations or levels of service.

Taking this approach means budget reductions can also be secured without any unwanted effects on employee morale. If staff understand that budget savings are being invested into other parts of the organisation to support growth, they are more likely to willing to embrace the strategy and be involved in its implementation.

Putting the strategy to work

When implementing an effective ZBB strategy, an organisation’s finance department will quickly find it needs a flexible and efficient platform to support the activity. Both financial and operational data will need to be held in a single, central repository to allow it to be shared and examined by multiple parties.

Having such a platform in place is critical because, to be successful, ZBB needs to become embedded in the day-to-day functioning of the organisation. Far from being a set-and-forget activity, it must become a core part of ongoing operations.

Also, because ZBB is about making incremental improvements over an extended period of time, it is important that staff have the ability to write and amend the business rules that will underpin the planning models they will use. Nothing is set in stone.

The platform also needs to be flexible enough to cope with ongoing changes in the organisation itself. Changes to staffing structures and facilities may result from opportunities identified by the ZBB process, and the platform needs to be able to change as well.

The platform also needs to be able to integrate with existing legacy systems such as general ledger accounts and enterprise databases. This, in turn, ensures flexibility and also the ability to create planning models that are based on the most accurate data available.

The benefits of a ZBB strategy

Senior managers of many CPG companies report that implementing a ZBB strategy saved between 10 and 25 per cent of their selling, general and administrative (SG&A) expenses within the first six months. Such results are clear evidence of the power of taking this approach.

Even in already well defined cost areas, such as travel and human resources, a ZBB strategy can result in savings through the creation and use of detailed tracking templates. This can ensure that any spending that is not absolutely needed is removed.

Overall, organisations are finding ZBB provides a valuable framework that can support ongoing cost control that supports growth. By putting in place a supporting platform that allows the efficient collation, storage and analysis of data, these goals can be realised in a relatively short period of time.

Rajeev Mitroo is ANZ managing director, Anaplan.

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