In 1970 the Harvard Business Review published an article launching zero-based budgeting as a 360-degree review tool. Today we have Simon Sinek asking the “why” of our actions. Believe it or not, the two approaches are not very far apart in concept.
Zero-based budgeting (ZBB) was recently used by GM to examine every aspect of the business after Mary Barra took over as CEO. Every line item is examined as if you are starting up the business.
To start the process, leaders must be prepared to ask WHY to everything the company is doing. The process must tie every expense to a specific purpose tied to strategic goals. After answering the “why”, you ask when the expense is needed and can it be postponed. The COVID impact on all businesses should make ZBB more meaningful.
Some of the “why” questions are:
- Why do we want these customers and why do we offer these products/services?
- Why do we have this operating/organization structure?
- Why do we use these vendors?
- Why do we need these people?
- Why don’t we look at ways of doing things better?
As you examine the details of your operating costs, the process needs to be mindful of your strategic plan. Is it time to pivot parts of your strategic plan?
Every job and process within the company is reviewed to determine its contribution to revenue, profitability and growing the company. ZBB starts at the bottom of the organization and works its way up to the senior management team. The result is to document what are the right things to do with the minimum amount of resources. This includes looking at the management layers to determine if the current amount of governance and control is necessary.
If a process or person cannot be linked to revenue creation, then it is examined to determine if it is essential. If it is marginal, it is eliminated. Use your accounting system and staff to examine cost trend lines and relate them as a percentage of revenue and percentage of total operating costs. Closely examine the items with the highest percentage and work your way down. This way the largest impacts can be found first. Ideally the ZBB process need not be done every year but at least once every three years to create a well-focused company that can sustain growth.
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