In 1970 the Harvard Business Review published an article launching zero-based budgeting as a tool to examine a business from a 360-degree view. Today we have Simon Sinek’s popular writing about always asking the “why” question for our actions. Believe it or not, the two approaches are not very far apart in concept.
Zero-based budgeting (ZBB) is being used today by private equity (PE) firms after they acquire a company to determine the most effective way to take a company to the next level. ZBB is no longer your grandfather’s financial planning process.
To start the process, business leaders must be prepared to ask WHY about everything the company is doing:
- Why do we want these customers and why do we offer these products/services?
- Why do we have this operating structure and this organization structure?
- Why do we spend this money on these vendors?
- Why do we employ these people?
- Why don’t we look at ways of doing things better? In short, the ZBB process questions everything including; if this is the right strategic plan. Clearly a PE firm bought the company for a reason, but this process seeks to find the best way to fulfill that vision. The ZBB process examines every dollar expenditure and how it relates to every dollar of revenue instead of assuming a percentage increase in revenue over last year.
Every job and process across the company is reviewed to determine its contribution to producing revenue 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 that the company is doing the right things with the minimum amount of resources. This includes looking at the management layers to determine if the right amount of governance and control is in place.
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. The goal is to have people and operating processes accomplishing things at the right times without unnecessary activity. This improves employee focus and productivity plus hopefully increases morale as employees can see their direct contribution to company goals.
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. We appreciate your thoughts on this idea, so please call or email.
