Reference no: EM132500929

Advantages of zero-based budgeting

Better cost control

• One of the biggest advantages of ZBB is its ability to effectively control costs, create accountability surrounding the cost allocation process, and hone in on the most important initiatives to the company. ZBB can also challenge the organization to uncover more effective ways of adding value or accomplishing goals.

• For example, a business may spend a big chunk of its marketing budget every year on direct mail offers, never stopping to actually evaluate their effectiveness. With zero-based budgeting, the marketing team would have to prove the efficacy in order to continue spending on that channel next year, which may prompt them to look into other more cost effective methods of marketing, such as SEO or email marketing.

Better alignment of company resources to goals

• By questioning old methods, ZBB can also improve the services themselves, which provides the end customer with a better overall experience. For example, management decides that a company priority for the coming year is to improve the customer experience. In order to do this, the marketing team decides to budget an additional $250,000 (an increase to the prior budget of 25%) to increase the user friendliness of the company's web site. This type of expenditure would typically be difficult to justify, but due to management's stated goal of improving the customer experience, it is more likely to gain approval.

More focused discussions

• Additionally, budgeting becomes more focused and meaningful under ZBB. When managers have clear direction strategically and are tasked with crafting a budget from scratch, discussions stay focused on what the people responsible need to do to accomplish the objectives. Rather than simply increasing the budget by 5% over last year, more thoughtful conversations arise and those involved in the process feel more connected to the outcomes.

• If, for example, a snowboard company uses marketing dollars to attend snow sports conferences, but management directs the department to improve sell-through, they may decide to move the funds related to convention attendance into more direct support at their most profitable retailers. Creating additional sales support in the form of eye-catching displays would be more in-line with management's stated goal.

• In a large insurance firm where growth has stagnated and it's necessary to pursue cost efficiencies. You have communicated your company's strategic vision and top priorities with clarity and purpose and your employees understand the context and reason behind your stated goals. What do you think:

Question 1. Should a Zero-Based Budgeting approach be considered for your organization, and how do you think it would be implemented?

Question 2. How would it affect the time and effort involved in your company's annual budgeting process?

Question 3. How do you think it would it be received/supported by personnel within your company and upper management?