November 1, 2021
“If the company’s problem did not lie in revenues, it could only stem from expenses.”
-Carlos Brito, AB InBev
Simply put, Zero-Based Budgeting (ZBB) is a radical cost-control program that foresees a complete annual revision of all the company’s spending.
In zero-based budgeting, managers are responsible for creating their budget from “zero costs” every year, assigning costs only to the activities they forecast to take place for the upcoming year instead of starting out with the previous years’ costs as a benchmark. This forces the management to go over every expense, line item by line item, leading to conscious and responsible spending decisions. As a result, using ZBB can dramatically increase the financial efficiency of a given project, or the entire organization, as every dollar being spent is properly planned and justified.
Once installed, zero-based budgeting serves as a tool not only utilized by senior management but by all layers of management throughout the organization. Empowering junior managers by allowing them to create their own budget with associated costs for each project from scratch instead of providing them with a template containing benchmark costs, leads to them taking more accountability for their respective departments. A simplified and systematic concept like ZBB also gives them a clearer economic picture of each project, leading to increased margins. Lastly, it sets up an invaluable culture of cost-management throughout the organization, starting from bottom up.
Some good examples of zero-based budgeting in today’s environment can be travel costs, office expenses, and commercial real estate. While under ordinary circumstances, costs in each of these categories might stay similar year over year, given today’s special circumstances they would be budgeted down dramatically. The point of using ZBB, however, is that costs in each category are recreated from scratch with every budgetary period regardless of the circumstances.
While zero-based budgeting is largely useful in most circumstances, possible short-sightedness due to being intensely focused solely on costs and rigidity due to having a strictly defined budget are some drawbacks to stay mindful of.
For more information or to request a Zero-Based Budgeting template, please email us at info@BridgeCapConsulting.com
February 1, 2022
Email Etiquette: Taming the Beast
“Because the mail never stops, Jerry! It just keeps coming and coming and coming, there’s never a let-up. It’s relentless. Every day it piles up more and more and more, and you gotta get it out but the more you get it out the more it keeps coming in!” -Newman, Seinfeld Most executives I know …Read
January 1, 2022
Don’t Lose Customers, Forge Elite Teams Instead
I’ve been a loyal Starbucks customer for 20+ years, mainly because of the consistency in their service and product. However, one of the locations close to me nowadays is a true test of patience; horrible attitude towards customers, lack of consistency in drinks and, worst of all, employees backbiting about each other, their superiors, and …Read
December 15, 2021
Negotiating with Suppliers The approach to negotiating with your suppliers is simple: treat them as your partners, be tough but fair, and don’t lock yourself in a situation that is impossible to walk away from. 1. Understand the balance of power: Understanding and playing the balance of power between buyer and supplier is a key …Read
December 1, 2021
Benefits Administration A company’s benefits package can be a very significant part of its total expenses, but in many companies, benefits are not really viewed as expenses. Instead, because of the need to hire and retain top-quality employees, the benefits package is considered a key asset that must be maintained if not increased. While a …Read
November 15, 2021
Strong leadership is a prerequisite for good cost management. Cost leadership starts with the CEO or business unit head and cascades down through the top management team. They need to build a tough cost culture and be good role models in their personal behavior. They need two key staff functions to be very active supporters …Read
October 15, 2021
HIRING & FIRING
People Cost The cost of people is the most difficult cost to manage. Because it is so tricky it is usually left until last in any cost-cutting program and any discussion of cost management. Why is people cost so problematic? First, people cost is very sticky. Once people are on the payroll it’s hard to …Read
October 1, 2021
Workers’ Compensation Insurance There are a number of techniques for bringing about modest reductions in the cost of workers’ compensation insurance. Job Classifications: One of the key determinants of the cost of workers’ compensation insurance is the job classifications into which all employees are slotted. An employee designated in a high-risk classification will cost far …Read