3 Myths of Zero-Based Budgeting

Since the 1980s, the global economy, rather predictably, has experienced a slowdown every eight years, and 2016 is shaping up to be one of the slow years.

However the response from senior managers around the world has been less conventional. Almost certainly still spooked by the 2007-10 recession, there has been a lot of effort to “do something” or “act quickly,” and many firms have turned to radical approaches – such as uniformly reducing G&A costs by 10% – to improve their processes, change their company culture, and ultimately improve their bottom line.

Zero-based budgeting (ZBB) has reemerged too. It’s a management practice that was introduced and popularized by Peter Pyhrr in the 1970s, and the return to economic uncertainty has re-energized managers’ interest in finding tangible ways to cut costs through ZBB.

Avoid the ZBB Hype

The rate at which ZBB has gotten attention in earnings calls and press releases from Fortune 500 companies was relatively stable over the past five or six years. But in the past couple of years, it has increased dramatically. In fact, the number of ZBB mentions has gone up by more than three-and-a-half times in the last year alone. Put another way, roughly 10% of the Fortune 500 is openly talking about ZBB in their earnings calls.

And when from surveys of finance executives in CEB’s member networks, 34% report that they’re already zero-basing key components of their functional or business line budgets on an annual basis, and this proportion holds true across dozens of industries and companies both large and small.

But just because ZBB is a hot commodity doesn’t mean it’s the right approach for all firms. ZBB works well under an array of financial conditions and corporate strategies, but implementing ZBB without due consideration or knowing all the facts will do more harm than good.

The Myths

  • Myth #1: ZBB is better than traditional budgeting.
    The truth: CEB research shows that ZBB does not significantly outperform traditional, incremental budgeting. If your goal is to achieve huge reductions in SG&A costs or significantly better margin performance, ZBB is not guaranteed to be more helpful than traditional budgeting. Its track record is 50/50, at best.
    Then again, this so-called underperformance of ZBB could be a symptom of companies missing the mark somewhere (or in many places) when it comes to implementing a time-consuming and difficult process.
  • Myth #2: ZBB budget cycles are excruciatingly long.
    The truth: ZBB is fundamentally designed to force managers to think hard about how to fund every function or every program within his or her control, and then document, analyze, and prioritize which ones will get funding and which ones will not.
    So ZBB should take significantly longer than the traditional approach. But not according to CEB data: the average traditional budget cycle time is 69 working days, and ZBB is just marginally longer at 74 working days.
  • Myth #3: ZBB is a budgeting approach.
    The truth: ZBB is a more of a mindset than a process. Companies that are best at managing ZBB set a strong tone from the top that this is a shift in strategy versus an introduction of a new process. A zero-based mentality must permeate the day-to-day conversations that finance teams have with business partners, and that business partners have amongst themselves.

22 Mar 2016 | CEB Finance
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