Is Your 2021 Budget A Zero-Based Budget?

September 12, 2020

2020 has for many companies been an opportunity for a significant reset of business activities. For some, it has been out of desperation in the face of bankruptcy. For others, it has been a way of trying new ways of working that we once thought impossible. Regardless, there will be no better opportunity to review the planning processes and how we decide resource allocation and the activity level for the coming year.

One such tool that could be relevant for many companies is Zero Based Budgeting. At its core, companies would use it to look at administrative expenses such as salaries, travel, and other discretionary spend. However, it could easily be used in a much wider context where all business activity would be reviewed to discuss questions like.

  • Which of our products are still relevant in a post-pandemic world?
  • What new products could we launch that are more relevant in the Next Normal?
  • What should our office footprint be considering more staff will work from home?

From a Financial Planning & Analysis (FP&A) perspective, it could also lead to the design of a brand-new planning model. Instead of building incrementally on last years actuals you would be building on external assumptions and internal business drivers. From these, you would derive the economics of your forecast for the coming year.

When you know nothing Zero-Based might be the best approach

Very few companies can be 100% fluid in the sense that they can start and stop the use of resources whenever needed. People have employment contracts, offices have leases, licenses have subscription periods, etc. Hence, it would be too costly to abandon everything at will. Still, it would make sense to plan differently when in fact you do not know much about what will happen next year.

In 2020 we suffered a still on-going pandemic and we still do not know how it will impact next year. Even in a scenario where a vaccine becomes widely available next Summer we are still looking at least at a year of continued uncertainty. And as one senior finance leader put it to me “now it is COVID-19 but a year ago it was trade war and Brexit before that”. We keep being hit by large and small events that put our planning off course.

This means we would do wisely to consider nothing as being fixed and everything as fluid. Taking a zero-based approach to planning, therefore, make a lot of sense. However, constantly looking at a clean slate would not be practical either. That is why companies should adopt a driver-based approach where the forecast changes as the business environment around us changes.

This will help focus discussions between business leaders and FP&A around how to make the best out of the current situation and the actions to take. It will also make the follow-up that FP&A would make as actuals become available monthly more relevant. Rather than comparing to an outdated budget, we are now comparing to the best available information one month back. Why one month back? Because a driver-based forecast and planning model can be continuously updated and refined. You can also adjust the time horizon as needed depending on the topic of the discussion be it strategically, tactically, or operationally.

Zero-based budgeting as a driver of organizational agility

Let us remind ourselves of what we are trying to achieve with the planning process. We are trying to give ourselves the best possible conditions to make informed decisions. Sometimes we need to give a view of how things will look like one year from now because that is the decision-horizon we are looking at. However, it should not mean that we will keep this static view throughout the rest of the year. In fact, the view could change the next day!

We know what we do not know and knowing what happens next year is one of them. Hence, by freeing up as many resources as possible through a zero-based budgeting exercise we can create organizational agility. That would give us the ability to act depending on how the world develops. It does not mean that everything should change all the time. Rather it means knowing what should change and what should stay the same.

Do you know the trigger points in your budget for when the situation is so significantly different from what you thought that you must act? More importantly are you able to track this on an almost real-time basis? This is the real benefit of taking a zero-based budgeting approach powered by driver-based planning. Use the opportunity that 2020 has provided and start adopting a different planning process now!

This blog is presented by ValQ in collaboration with Anders Liu-Lindberg, Business Partnering Institute. Perform Zero-Based Budgeting (ZBB) seamlessly in Microsoft Power BI with ValQ. Leverage various spreading, allocation & distribution methods such as equal, weight-based and driver-based. Learn how to perform one with a free demo here.
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