Investment in increasing profits, improving costs, and reducing capital improves the cash flow and focuses on the owner’s business. It ensures the optimal use of available resources and measures performance against the budget by referring to it. Budgeting helps businesses anticipate revenue and provides a detailed estimate of expenditure, identifying the resources available.
In the era following the COVID-19 pandemic, the conventional ‘incremental budget’ will likely be counterproductive. Businesses emphasize the need for a more precise budget in the post-pandemic reality. This is evidently clear.
However, there are certain issues with this approach. It is straightforward and comprehensible since it is the most prevalent budgeting technique. Following the business plan, any capital expenditure (CAPEX) and operating expenditure (OPEX) are subsequently incorporated. We expect an inflationary rise in expenses and a specific percentage of revenue growth, as we conventionally employ an incremental budgeting approach.
Post pandemic world will certainly stress on a different approach in budgeting. This is where the relevance of Zero Based Budgeting comes.
Zero-based Budgeting (ZBB)
The budgeting method used in this organization starts from scratch and assumes that all department budgets are zero-based. This means that every expense needs to be justified for each new period, regardless of whether it is lower or higher compared to the previous period. The organization reviews the costs involved and details its wants and needs for every function within the organization. Unlike the traditional method, this budgeting method requires a detailed review of the organization’s needs and starts building the budget from zero. It is considered to be the most efficient method of budgeting.
ZBB allows businesses to streamline the budgeting process by identifying and grouping costs in specific functional areas of the organization, and then comparing and grouping them with the previous year’s results. This judgmental way of budgeting enables businesses to cut off unwanted activities and costs, while aligning with current expectations and strategic goals.
Businesses can develop their own unique approaches to implement baseline and ZBB by following the five steps provided below. The process, which spans several months or even years depending on the size and structure of the organization, is reviewed by business leaders at regular intervals. This process is detail-oriented and oriented towards nature, thus rolling through several functional areas.
· Launch.
The current needs are analyzed instead of historical data. When creating a new annual budget from scratch at ground zero, a baseline is not used as last year’s actual.
· Appraise.
Assess each cost category. Eliminate and decrease unnecessary tasks or services.
· Rationalise.
O Take into consideration all elements of the budget. Identify areas that are economical, pertinent, and that promote cost reduction.
· Streamline & Bench-marking.
Whenever feasible, mechanize and standardize procedures. Evaluate the practices of others in the same or related field. Ascertain which tasks need to be executed and in what manner.
· Execute.
Implement a thorough planning and execution procedures. Communicate concise strategies, positions, and duties.
For ZBB to be successful, it needs to be delivered and modeled through a flexible and capable solution planning. Although the current economic environment drives the interest in new, practical, and less costly alternatives to budgeting, organisations can examine alternative activities, technologies, and methods that may focus more on the underlying cost drivers and be less costly. Rarely does a full ZBB exercise merit going without any improvement and exercise, as extremes can be made.