Since the outbreak of COVID-19 we’ve seen an increased buzz around zero-based budgeting (ZBB) as many organizations look to this budgeting framework to address market volatility and uncertainty caused by the pandemic. This environment offers the perfect opportunity to re-examine ZBB. How are organizations incorporating ZBB into their planning cycles? What technical enablers are helping them make this approach effective?
ZBB was developed to help organizations focus and prioritize their spend on the activities required to achieve business objectives. How? Instead of starting with the prior period spend as the baseline for new budgets, organizations start at zero for every cost category. From there, business leaders then determine what specific expenditures are required to achieve their financial and operational goals.
The cycle begins with Finance working collaboratively with cost center managers to identify and justify the resources required to achieve organizational goals. Once the final budget is set, budget owners then monitor results and make adjustments as variances arise.
How does that work in practice? Let’s dig into it.
ZBB in Practice
In discussions with our customers, we see an evolution in how ZBB is actually being deployed. Instead of using ZBB for broad cost-cutting, many organizations are employing ZBB concepts to identify opportunities for allocating spend to high-value activities that align with top-level business goals. Additionally, rather than taking a dogmatic approach, many organizations are balancing their budgeting efforts and efficiency by selectively building ZBB into a hybrid framework.
Here are just a few examples:
- Organizations are moving away from simply seeding new budgets by applying a % change rate to historical spend
- With access to detailed historical spend, budget owners can seed new budgets by annualizing recent trend data, such as the last 3 months of spend. This approach ensures that baseline budgets reflect more recent run-rates on spend.
Budget owners can then adjust their baseline budgets up or down to reflect new expectations on organizational growth and change, such as adding new customers or products.
Addressing Challenges with Modern Solutions
While ZBB is an attractive concept, many organizations struggle to deploy ZBB due to their reliance on outdated point-solutions and spreadsheets for planning, budgeting and forecasting.
Here are two common challenges organizations face when attempting zero-based budgeting.
- Data Access: To align spend targets with organizational goals, budget owners require access and transparency into who spends what and how much. Without seamless access to historical spend details from transaction systems, the burden is on Finance teams to navigate across fragmented systems or spreadsheets to stitch data together for basic analysis.
- Limited Reporting Ability: According to Deloitte, senior executives reported “poorly designed tracking and reporting” as a significant barrier to effective ZBB. Reporting capabilities impact all aspects of ZBB as Finance teams require the ability to easily analyze spend, modify budgets and collaborate with budget owners during the planning process. Fragmented tools and spreadsheets add difficulty to the initial evaluation process and when monitoring to expose and react to variances.
A New Way Forward with Modern CPM Solutions
A modern corporate performance management (CPM) solution with built-in financial data quality provides users with direct connection capabilities to disparate ERP systems and other sources of transactional data. Such capabilities give users unified access to the granular detail they require – when evaluating new budgets – without forcing them to navigate fragmented systems and spreadsheets. Modern CPM software solutions also provide the ability to include detailed commentary along with budget inputs, so users can document their justification for requested spend. Additionally, these solutions offer self-service access to data, reports and dashboards to help Finance users collaborate with budget owners and business partners.
OneStream’s Planning, Budgeting and Forecasting Enables ZBB
OneStream’s unified, intelligent Finance platform (see Figure 1) incorporates these and other advanced planning, budgeting & forecasting capabilities – enabling organizations to address challenges of rapid change and complexity presented by the current economic environment.
Within that environment, how are our customers applying ZBB through the OneStream platform?
One global consumer appliance manufacturer is using ZBB to plan for marketing budgets at the business-unit level based on an itemized detail of initiatives. With direct access to marketing spend transactions through OneStream, budget owners can work within their budget forms to analyze prior periods and drill down to capture details such as event spend by employees, guest speakers and venues. Within minutes, Finance team members can slice and dice through the uploaded budgets and get insight into underlying data. They couldn’t do this before because the underlying detail wasn’t available in their planning point-solution.
Similarly, a manufacturer of highly custom engineered products implemented ZBB with OneStream. While they do start each year’s annual budget with zero spend, plant managers are provided spend details from their trailing 12 months for easy reference. Budget users can then drill into prior spend data for the additional insights required to inform the new budget period.
The bottom line? ZBB is an attractive option to help organizations prioritize and optimize budgeted expense allocations. There’s no “silver bullet” to deploy ZBB. Organizations must ultimately implement processes to address their unique planning requirements. What’s new is that modern CPM solutions are enabling organizations to take practical steps to execute ZBB without the technical complexity that’s previously held Finance teams back from turning their ZBB visions into reality.
Originally posted by OneStream