Zero-based budgeting (ZBB) is less common than traditional budgeting and rolling forecasts. However, it’s been getting some attention in the last few years. Whereas traditional budgeting allows you to include items from the previous year, ZBB requires organizations to justify every dollar in detail.
Building a budget from zero might seem like a tedious process, but it can help you make the best decisions for your company in the long run. In this blog post, we’ll cover some of the pros and cons of zero-based budgeting. And, we’ll look at some questions you need to ask before getting started with ZBB in Hyperion Planning.
Pros of Zero-Based Budgeting
- Historical trends may seem helpful when creating your budgeting, but it doesn’t ensure that you take a detailed look at the spending. ZBB requires that you inspect all activities in the budget, ensuring that the budget is distributed in the most efficient manner — based on current needs, rather than past trends.
- It sounds great, but does that mean I have to start from zero every time? Not necessarily. If you have a tool like Hyperion Planning or Oracle’s Planning and Budgeting Cloud Service (PBCS), you can easily turn ZBB into a repeatable process baked into the culture of your organization. You can build a structured approach to ZBB and managers throughout your organizations will participate in the process, giving expert insight into the activities that make up the budget.
- ZBB is great for cutting costs, but it doesn’t have to mean severely cutting your budget. With ZBB, you have true control over how much cost you cut. ZBB allows you to be aggressive about cutting costs, but how much you cut and where you reallocate funds is entirely up to you.
- By looking at each activity with decision-makers in every department, you’re able to cut out activities counterproductive to your organization’s success. ZBB is a not just a budgeting method, but a tool to rid your organization of inefficiencies.
- ZBB might not seem like it’s designed for companies focused on growth, but cutting inefficient costs can allow you to redirect spending that assists in your organization’s advancement.
What ZBB really boils down to is allowing for you to address what’s happening in your organization now, rather than basing decisions on past, outdated trends.
Cons of Zero-Based Budgeting
- Though you can implement repeatable processes with ZBB, it will most likely be more time-consuming than traditional budgeting.
- You’re also faced with getting other departments to cooperate, and they might not be able to adequately measure their needs for the entire year.
- The process might not include fixed costs included in a contract, such as an office or building lease.
- Though a cost may not seem essential to your organization’s operations, it might affect your brand and your damage customer’s experience.
- If your organization is large, it might be too costly and require too much commitment from other departments to be a realistic method.
What are the alternatives?
Besides traditional budgeting, you might also consider using rolling forecasts. Rolling forecasts allow you to continuously plan with a constant number of periods. If you’re in a 12-month period, another month will be added when each month ends.
Usually, forecasts include a 12-month period, but they can also include 18, 24, 36, or more. Unlike traditional forecasts or ZBB, rolling forecasts are move like a living document where you can make changes throughout the year as predictions change.
To learn more, check out this post on the pros and cons of rolling forecasts.
Questions to Ask Before Getting Started with Zero-Based Budgeting
ZBB applications are becoming increasingly popular in Hyperion Planning, especially for organizations experiencing low growth who are interested in cutting costs. The biggest difference between ZBB applications and traditional budget applications are the amount of detail captured.
Traditional budgeting applications directly plan an expense item or use a price X quantity formula. As you might expect, ZBB applications plan every line item related to the expense. For example, if you’re budgeting supply expenses, a ZBB application includes values for each detailed line item, including things like paper, pens, staples, etc. Because of the level of detail needed for ZBB applications, you have to take careful consideration to reach peak performance in Hyperion Planning.
Before designing a ZBB application, ask yourself the following questions:
- Does the added ZBB detail require control over how you enter the data?
- If yes, add a separate line item dimension.
- If no, then supporting detail functionality within Planning may be sufficient.
- Does the detail have a direct relationship to an account?
- If yes, then smart lists within the account dimension can be leveraged.
- Is the ZBB detail relevant for in your current budget? Your application should include only the line items needed for the current budget and remaining line items should be purged.
- Do all accounts require additional ZBB detail?
- If no, consider having a separate ZBB plan type to store line item information for the account subset.
