Over time, and in all industries, some topics are bound to resurface. They come like waves and are malleable as a result of industry climate and the climate of the economy as a whole. Zero-based budgeting (ZBB) is one of these topics and is primarily functional when implementing the best way to budget for projects.
Zero-based budgeting (ZBB) is an approach that lends itself to the notion that a budget should be made from scratch, starting at zero. It isn’t based on previous budgets and the subsequent addition or reduction of money allocation within these previously set budgets.
Zero-based budgeting (ZBB) is based on the justification for a budget dependent on a bottom-up approach, dictating where money is to be allocated in a business. In opposition to a “top-down” approach, where the executive level decides where money should go and to which department within the organization, ZBB holds the department heads responsible for setting a new budget. A “bottom-up” approach to budgeting is more ROI-focused. There is also more accountability and transparency in a “bottom-up” approach.
If you find yourself trying to justify money allocation and implement best practices to make strategic investment choices, implementing zero-based budgeting could be the most strategic way of making an investment decision. However, a survey conducted in April, accounting for three hundred global finance executives, found that only 26% of those surveyed plan to zero-base their budgets due to the pandemic.
The question becomes: if zero-based budgeting (which is considered a “logical” strategy that suits the current financial climate (COVID-19)), why aren’t there more organizations implementing it?
To answer this, we have to keep in mind that change is a hard reality that requires us to adapt. The move to zero-based budgeting requires many resources and commitment from every department. An organization has to work in orchestration to implement ZBB.
If you are looking to improve your capital budgeting process, this is what you need to consider. CapEx is a focused science. Ultimately, it would help if you held everyone within the organization accountable to make a sound, justified investment decision.
Why Should I Begin with Zero-Basing Project Budgets?
The management of a CapEx budgeting and all its moving parts is something that can be actualized. Capital projects have a set of financials that can be easily compared to other projects, making the process of assessment play a pivotal role in your investment decisions.
In an environment like we find ourselves in today, we can see the influence of capital budgets on the market. Elements like competition and opportunity, and changes in the regulatory environment, make it important to assess changes to respond to opportunities and challenges the pandemic brings.
Effective Zero-based Budgeting and How to Achieve it
When criteria are consistently evaluated, it is important to make a zero-based budget for CapEx work. Assessing how you will allocate a budget will ensure a fair assessment and consideration of its impact.
It will help to increase the speed of where you will want to spend money. To apply a zero-based budget to help capture the most lucrative projects, you need to work from a central location by establishing financial/ROI models, as well as what-if scenarios.
This is why you need a CapEx partner, someone who will be with you every step of the way as you move forward in a budgeting plan. A CapEx partner enables you to sort out and group projects based on goals: reducing cost, expanding, and location makes it possible to have a clearer picture of where money should be going.
By creating portfolios, you can impact different budgeting strategies. For example, you can create a budget that lends focus to reducing costs. The right CapEx partner helps create a portfolio by adding the projects you want to include and automatically seeing how that choice impacts the overall profitability index and ROI of the total budget. This is a bottom-up/zero-based budgeting process – a more precise and impactful approach to allocating budgets.
Ultimately, zero-based budgeting for CapEx is heavily reliant on coordination between stakeholders. Zero-based budgeting helps create open communication lines and the revelation of all information like budget proposals, financial models, and supporting materials that would reside under one umbrella in a central location without the need to control issues using spreadsheets.
Analyst Bottom-Line
Zero-based budgeting is something that forward-thinking executives are captivated by because it provides a 180-degree swing from the top-down approach, giving today’s economic reality and uncertainties the ability to ensure that the capital that is available is being strategically allocated.
Moving from theory to practice is always daunting with an “all or nothing” point of reference. However, when this viewpoint is implemented in CapEx management, using the right systems and tools enables you to sustain and succeed when zero-based budgeting is evaluated.
And, so it goes, that zero-based budgeting may be a buzzing topic in today’s uncertain world, but it is something you want to and should consider. This is a time to adopt the right methodology to your budget allocation practice. Zero-based budgeting may be the direction you want to move towards to ensure that you are making the soundest investment decisions to benefit your organization in all possible ways.
