Zero Based Budgeting (ZBB) is a strategic process of budget preparation that involves starting from scratch, unlike the traditional budgeting technique in which corrections are made to the previous year’s budget. In ZBB, the management prepares budget by taking the base as zero each year and strategically allocates funds to different activities by ranking them based on priority and efficiency. It helps in making the right choices, reduce costs and improve financial performance by better allocation of funds in the business operations.
Features of ZBB
- Cost-Effective: ZBB involves evaluating every organizational activity and expenditure related to it. This helps in controlling costs by focusing on activities which are necessary for the smooth functioning of the businesses in tough situations like this pandemic.
- Strategic Approach: It requires a lot of strategizing and planning in terms of implementation, prioritizing the needs of the organization, meeting targets, etc.
- Improves Efficiency: It helps in making better investment decisions which in turn improves the performance of the businesses. This encourages the leaders in the organization to take decisions more efficiently and allocate the funds in the best possible way so that the organization can maintain its performance trajectory.
- Time-consuming: The process of ZBB can be a bit time consuming as it involves starting from scratch by taking into account every expenditure undertaken by the organization and justifying the same.
Cost Optimization the “New Normal”
The coronavirus pandemic has caused destruction worldwide, which has led to the changes in the functioning of businesses. Companies all around the world, SMEs or MNCs, are struggling to survive and, in some cases, maybe shutting down. Businesses are likely to shift towards cost optimization to battle against this pandemic. According to ICRA, India’s GDP growth rate is estimated to contract by 9.5% in FY21, while S&P Global Ratings have forecasted a contraction of 5%. The economic slowdown is creating more difficulties for the businesses, in creating demand and generating revenues, not only in India but worldwide.
Most of the companies have shifted to ZBB for cost restructuring. It helps the organization:
- Remove common biases: Survivorship bias being one of them because the organization while allocating funds might choose business/division that prospered in the past without properly considering the need for the future.
- Avoid decision making pitfalls: ZBB might help in taking into account opportunity costs that the organization might be omitting through the traditional approach of budgeting as the ZBB process involves starting from scratch and evaluating every expenditure all over again.
- Focus on necessity: ZBB helps in controlling costs by filtering out activities which are necessary and essential for the organization.
Dabur Cuts Costs through ZBB to Survive the Pandemic
Dabur faced a significant impact on its sales due to the sudden lockdown in the last week of march as it affected the pre-seasonal summer-centric sales of the Company in India as well as abroad. The demand for discretionary products took a significant hit as the consumers shifted towards the consumption of healthcare and hygiene products. The Company reported an estimated loss of approximately Rs.360 Cr. on sale in Q4FY20 due to the COVID impact.
Dabur has decided to reduce costs by Rs.80-100 Cr. by evaluating and justifying expenditures which were previously undertaken by the Company. To do so, the Company launched Project Samriddhi, which is based on ZBB.
Project Samriddhi does not only aim at cost reduction but also cost deferment wherever possible. Savings made through this project will be reinvested in the business to meet the growing demand for healthcare products.
The Company has already reported savings worth Rs.40 Cr. in the Q1FY21 itself through Project Samriddhi.
Tips for implementing Zero-Based Budgeting
- Carefully Assess the Impact of Change: The organization needs to decide the extent to which it wants to implement changes through ZBB and also understand the impact of those changes in all business areas.
- Ensure the Preparedness of the Management: Adapting ZBB is not as easy as it affects entity-wide operations. So, the senior management should completely understand the framework around ZBB.
- Communicate: There should be proper communication among all the levels of management regarding the ZBB implementation process or changes that will take place in the organization. This would ensure proper coordination within the organization and might prevent any contingencies.
- Continuously Monitor the Process: After the implementation of ZBB, it is essential to ensure that proper monitoring of activities is done to avoid any failure.
Companies implement ZBB on an enterprise-wide approach rather than picking any particular business/division.
According to Accenture, before 2013, only 2% of the companies had initiated to adopt ZBB as an approach in their organizations globally. But over time, that number has grown exponentially to 57% each year. Earlier, many companies had the choice to stretch their budget in order to meet their desired targets. However, considering the current situation, it is evident that the companies are struggling to contain the damage and revive their operations, which was disrupted due to the pandemic. So, the companies are more likely to adopt ZBB and undergo cost restructuring to retain their positions in the market and achieve financial stability.
Contributor: Team Leveraged Growth
Co-Contributor: Pragya Pandey
Research Desk | Leveraged Growth