Zero Based Budgeting – the Key to long-term Sustainability
Large enterprises have traditionally struggled to keep up with the pace of their more agile and disruptive SME counterparts. Nowhere is this truer than the finance department. It’s incredible to think that many businesses are still chained to the same arcane budgeting process that’s been used for over 100 years. A traditional budgeting process based on extrapolating the previous year’s spend fails to provide the detailed insight needed to achieve a material change in the cost base, particularly when line item expenses are already highly-aggregated.
Companies should no longer feel tied to these dated processes. New technologies are enabling innovative finance teams to overhaul how budgets are allocated and managed, through introducing zero based budgeting (ZBB) – and the resulting savings are starting to make headlines.
Take Coco Cola, which has revealed that it has broken out of the dark ages by incorporating ZBB into its processes, targeting savings of $3 billion by 2019 in the process. Or the world’s largest cereal company Kellogg Co., zeroing in on $150-180 million savings from ZBB. In 2016, the company publicly announced savings directly from ZBB, and noted that these savings will build to a run rate of $450–$500 million by 2018. Crucially, it will enable the company to invest in its existing brands, acquire new brands and fund geographic expansion.
Despite the prospect of realising savings of a similar magnitude, many organisations still shy away from ZBB due to concerns that it is expensive, time consuming to implement, and will disrupt their business. But this is no longer true. With the advent of the cloud and connected planning tools, organisations can implement ZBB seamlessly, without disruption to the business or existing processes.
In a world where every advantage counts, adopting ZBB where everything in every budget must be justified as both relevant and cost effective – will be central to future business success. Enterprises can use the methodology to level the playing field and bring that SME agility into their enterprise armoury. Incorporating ZBB in to business processes doesn’t have to be a complicated process. With so much uncertainly in the market and with Brexit continuing to cast a shadow over business confidence, the importance of driving greater cost discipline across all sectors has never been greater.
As we’ve seen, particularly in retail in recent weeks, sales are dropping and costs are continuing to increase for buyers, creating a squeeze on businesses. In light of this, ZBB can offer an opportunity for long-term sustainability. Despite some recent profit margin improvements caused by ferocious cost cutting, these opportunities are fast running out for organisations and are ultimately short-lived. Instead, companies should focus their efforts on how they can take advantage of marketplace opportunities, which are the real keys to growth.
ZBB is a significant shift in how organisations budget, but the huge opportunities for savings which it can unlock can make vast improvements to any business. The examples already being showcased in the market demonstrate that, for big businesses, the numbers involved are significant, and the opportunity to innovate in this way can be a real market differentiator, enabling the business to allocate funds where they’re really needed.
What’s required is a clear plan for how the business can switch to a ZBB model, with buy in from the top of the organisation. As Kellogg have openly stated, top-down sponsorship is crucial to making any ZBB initiative a success. The business also needs to be equipped with the right tools to enable this form of connected decision making and planning. By looking to tools born in the cloud, organisations have the opportunity to introduce ZBB quickly and without significant cost implications, capturing substantial value in the process.
As organisations start the New Year and are fast approaching the new financial year, never has there been a better time to refresh how costs are considered and find new ways of driving significant cost savings within the business. With continued uncertainty expected in the market, it’s essential that every business equip itself with the necessary tools and processes to strengthen their armour for 2018 and beyond.
Karen Clarke, Regional Vice President, Anaplan
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