What are the main challenges and risks of switching from traditional to zero-based budgeting?

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Zero-based budgeting (ZBB) is a method of planning and allocating resources that starts from scratch every budget cycle, rather than basing it on previous or expected spending. ZBB can help organizations achieve cost savings, efficiency, and alignment with strategic goals, but it also comes with some challenges and risks. In this article, we will explore some of the main issues that you may face if you decide to switch from traditional to zero-based budgeting.

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1 What is traditional budgeting?

Traditional budgeting is a common approach to financial planning that uses historical data and projections to determine how much money to allocate to different departments, projects, or activities. Traditional budgeting often assumes that the current level of spending is justified and necessary, and only adjusts it for inflation, growth, or cuts. Traditional budgeting can be useful for maintaining stability and continuity, but it can also lead to inefficiencies, waste, and misalignment with changing priorities.

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2 What is zero-based budgeting?

Zero-based budgeting is a different approach to financial planning that requires every expense to be justified and approved from scratch every budget cycle, regardless of past or expected spending. Zero-based budgeting aims to eliminate unnecessary or outdated costs, optimize resource allocation, and align spending with strategic objectives. Zero-based budgeting can be applied to the whole organization, or to specific functions, processes, or products.

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Brad Burgess

Director @ Sutter Health | Strategic Partnerships
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I have prepared zero-based budgets for several public agencies and departments. It has always been a painful process because from a practical perspective, nobody would choose to go through a true Z-B budget process if it wasn't necessary. The usual reason for building this type of budget is the lack of reliable historical data. In these cases, the challenge isn't deciding what expenses are necessary, but rather determining what expenses were real.

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3 What are the benefits of zero-based budgeting?

Zero-based budgeting can provide organizations with several benefits, such as identifying and eliminating wasteful spending and freeing up resources for more valuable initiatives. Additionally, it can foster a culture of accountability, transparency, and ownership by requiring managers and employees to justify their budget requests. It can also increase flexibility and responsiveness by allowing the budget to be adjusted to reflect changes in market conditions or customer needs. Finally, it can enhance alignment and collaboration by using the budget process to communicate the organization’s mission, vision, and values.

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4 What are the challenges of zero-based budgeting?

Zero-based budgeting is a complex process that can pose numerous challenges for organizations. It can be very time-consuming and require a lot of data collection, analysis, and validation, as well as frequent reviews and approvals. Additionally, it can be costly and resource-intensive, potentially necessitating additional staff, systems, or consultants. It may also be disruptive and stressful, potentially resulting in radical changes to the organization's structure, culture, or operations, creating uncertainty among managers and employees. Lastly, it can be risky and unrealistic due to assumptions or estimates that may not materialize or overlook essential costs or benefits.

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5 How to overcome the challenges of zero-based budgeting?

Zero-based budgeting is not a one-size-fits-all solution and may not be suitable or feasible for every organization or situation. However, if you decide to switch from traditional to zero-based budgeting, there are some steps you can take to increase your chances of success and minimize potential pitfalls. For instance, you should define your objectives and scope clearly, aligning them with your strategic vision and priorities. Additionally, involve and engage stakeholders early and often, communicating the benefits and expectations of zero-based budgeting. Establish clear and consistent criteria and processes for evaluating and approving budget requests that are based on data and evidence. Provide adequate training and support for staff, equipping them with the tools they need to implement and manage zero-based budgeting. Leverage technology and automation to streamline the budget process and reporting. Monitor results regularly, making adjustments as needed. Finally, recognize best performers and learn from mistakes or challenges.

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Larry K.

Disrupt the status quo to drive change I Stewardship I Integrity I Operations Executive I Develop/mentor professionals to grow in all facets of business to achieve personal and professional goals
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Zero based budgeting is an effective methodology to ensure the leadership team thoroughly understands their business and corresponding expenses; however, be cognizant that organizations with high turnover or new leaders can potentially miss costs that they are unaware of or minimize due to a lack of experience. In either approach it is beneficial to utilize per unit cost to do a sanity check on year over year improvement.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the main challenges and risks of switching from traditional to zero-based budgeting?

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5

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1 What is traditional budgeting?

2 What is zero-based budgeting?

3 What are the benefits of zero-based budgeting?

4 What are the challenges of zero-based budgeting?

5 How to overcome the challenges of zero-based budgeting?

6 Here’s what else to consider

Budgeting & Forecasting

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What are the main challenges and risks of switching from traditional to zero-based budgeting?

1

2

3

4

5

6

1 What is traditional budgeting?

2 What is zero-based budgeting?

3 What are the benefits of zero-based budgeting?

4 What are the challenges of zero-based budgeting?

5 How to overcome the challenges of zero-based budgeting?

6 Here’s what else to consider

Budgeting & Forecasting

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