When companies were preparing their budgets last Fall visibility was still limited with no vaccines rolled out yet. We were on the verge of a second wave of the pandemic so many companies opted for budgeting as if they knew nothing. They basically started from scratch and perhaps for the first time used a Zero Based Budget. Now we are five months into the new year so what better time to check if it is actually working?
It is of course challenging to answer if a budget process is working or not so we will have to set up some objective criteria that you can use to give a proper answer. We should also consider what the ZBB process has given you vs. the traditional process or Beyond Budgeting. Lastly, we should try to answer if it will be good to go for ZBB in the next budget cycle.
What makes for a good budget?
A budget (even a ZBB) has many purposes so whether it is a good budget naturally depends on how many purposes you need it for. Still, there are some criteria that all budgets should be measured against.
- Does your budget help you make better choices?
- Does your budget allow for a more efficient resource allocation?
- Does your budget foster better collaboration across the company?
- Does your budget lead to better business and financial performance?
You can always expand the list of criteria, but consider these as some of the essential ones. Seen in the perspective of ZBB we can now review each of them to reflect on if ZBB is working for you.
Making better choices
Ultimately, any budget process should lead to making choices about what initiatives to go ahead with and which to can. When using ZBB this goes even further though because every single dollar proposed to be spent needs to be argued for. Ask yourself…
“Did the process make us wiser about how we choose initiatives or did it clog up the process because too many choices needed to be made?”
More efficient resource allocation
Oftentimes the resource allocation in a normal budget process leads to spreading the resources thin like peanut butter on a piece of bread. This means that most initiatives on top of business as usual are having tough times flourishing and often end up dying as a result. With ZBB this should be different as there is no BAU. Ask yourself…
“Did our prioritization process of business cases and larger initiatives change, or did we again spread our resources too thinly?”
Too often a budget becomes a summation of the plans from different areas where no one has discussed the plans across until they hit the executive management team. That means we end up approving too many projects with too few resources. With ZBB it could be different as discussions need to be had with everyone about their needed resources before anything can be submitted. Ask yourself…
“Did those discussions take place cross-functionally or did we still do budgeting in a silo?”
Now it will always be questionable if a budget process in itself can leave to better business results in the following year. However, as we know that poor planning leads to poor execution (and most often poor results) should the opposite not also be the case? Ask yourself…
“How is our performance vs. the budget and if over-performing what are the underlying reasons – better planning (followed by better execution) or simply better external conditions?”
Four criteria and four central questions to ask yourself. Positive answers could confirm the hypothesis that ZBB works better for you than ever budget process you used previously. If you cannot confirm whether it is not working or simply cannot tell the difference.
Continuous vs. once a year
Regardless, if you find that ZBB works better than the traditional budget process you might want to consider going continuous instead. Simply doing budgeting once a year often leads to an ineffective resource allocation. Instead, take an agile approach to resource allocation by ensuring you always have funds available to invest. Free up as much as 20% of your resources for investments and you are always ready to take advantage of opportunities that come along.
You also want to ensure that you can do a proper tracking of performance. If you use ZBB perhaps track that against actual but also last year’s spend. Do you see some significantly different results and spend patterns? If not, perhaps you did not get much out of ZBB after all since no behavior seemingly changed.
This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute.
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