5 Months Into Your Zero Based Budget – Is It Working?

This article is sponsored by ValQ, winner of the 2020 financial modeling innovation award. Learn more about how you can do your Zero-Based Budget with ValQ in this demo.

When companies were preparing their budgets last Fall visibility was still limited with no vaccines rolled out yet. We were on the verge of a second wave of the pandemic so many companies opted for budgeting as if they knew nothing. They basically started from scratch and perhaps for the first time used a Zero Based Budget. Now we are five months into the new year so what better time to check if it is actually working? 

It is of course challenging to answer if a budget process is working or not so we will have to set up some objective criteria that you can use to give a proper answer. We should also consider what the ZBB process has given you vs. the traditional process or Beyond Budgeting. Lastly, we should try to answer if it will be good to go for ZBB in the next budget cycle. 

What makes for a good budget? 

A budget (even a ZBB) has many purposes so whether it is a good budget naturally depends on how many purposes you need it for. Still, there are some criteria that all budgets should be measured against. 

• Does your budget help you make better choices?
• Does your budget allow for a more efficient resource allocation?
• Does your budget foster better collaboration across the company?
• Does your budget lead to better business and financial performance? 

You can always expand the list of criteria, but consider these as some of the essential ones. Seen in the perspective of ZBB we can now review each of them to reflect on if ZBB is working for you. 

Making better choices

Ultimately, any budget process should lead to making choices about what initiatives to go ahead with and which to can. When using ZBB this goes even further though because every single dollar proposed to be spent needs to be argued for. Ask yourself… 

“Did the process make us wiser about how we choose initiatives or did it clog up the process because too many choices needed to be made?” 

More efficient resource allocation

Oftentimes the resource allocation in a normal budget process leads to spreading the resources thin like peanut butter on a piece of bread. This means that most initiatives on top of business as usual are having tough times flourishing and often end up dying as a result. With ZBB this should be different as there is no BAU. Ask yourself… 

“Did our prioritization process of business cases and larger initiatives change, or did we again spread our resources too thinly?” 

Better collaboration

Too often a budget becomes a summation of the plans from different areas where no one has discussed the plans across until they hit the executive management team. That means we end up approving too many projects with too few resources. With ZBB it could be different as discussions need to be had with everyone about their needed resources before anything can be submitted. Ask yourself… 

“Did those discussions take place cross-functionally or did we still do budgeting in a silo?” 

Better performance

Now it will always be questionable if a budget process in itself can leave to better business results in the following year. However, as we know that poor planning leads to poor execution (and most often poor results) should the opposite not also be the case? Ask yourself… 

“How is our performance vs. the budget and if over-performing what are the underlying reasons – better planning (followed by better execution) or simply better external conditions?” 

Four criteria and four central questions to ask yourself. Positive answers could confirm the hypothesis that ZBB works better for you than ever budget process you used previously. If you cannot confirm whether it is not working or simply cannot tell the difference. 

Continuous vs. once a year 

Regardless, if you find that ZBB works better than the traditional budget process you might want to consider going continuous instead. Simply doing budgeting once a year often leads to an ineffective resource allocation. Instead, take an agile approach to resource allocation by ensuring you always have funds available to invest. Free up as much as 20% of your resources for investments and you are always ready to take advantage of opportunities that come along. 

You also want to ensure that you can do a proper tracking of performance. If you use ZBB perhaps track that against actual but also last year's spend. Do you see some significantly different results and spend patterns? If not, perhaps you did not get much out of ZBB after all since no behavior seemingly changed. 

Before we put ZBB to the grave though we must consider the evidence collected by all of you in 2021. If you used ZBB, what have you experienced if you consider the four criteria? Did it work better for you or you saw no difference? Share your experiences in the comments so we can all learn more about if ZBB works or not…

You can read previous articles from my collaboration with ValQ below.

Ten Challenges Facing FP&A In 2021

How To Speed Up Your Planning Process

Is Your 2021 Budget A Zero-Based Budget?

Do You Use The 80/20 Principle In Your FP&A Team?

What-If A New Black Swan Event Happens Next Year?

Have You Ever Showed Your CEO Your Financial Model?

Collaboration Is The Key To Success For FP&A

The Big FP&A Battle: Planning Systems vs. Spreadsheets

How Do We Create The Agile FP&A Department?

Here Is How You Can Bring Your Financial Models To Life

Key Lessons For FP&A From The Pandemic

The Cardinal Rule For Success In FP&A - "Less Is More"

What The CFO Needs From FP&A In 2021

Do You Know The Key Value Drivers In Your Company?

From Accounting To FP&A: How To Make The Jump

What History Teaches FP&A About The Future

You can read a lot more articles about FP&A, Business Partnering, and Finance Transformation below. It all start's with “Introducing The Finance Transformation Nine Box” where you set the ambition for your transformation. You should join the Finance Business Partner Forum which is part of Business Partnering Institute's online community where we will continue to discuss this topic and you can click here to follow me on Twitter.

8 Changes For FP&A To Make To Transform Strategy (part of a ten-article series about FP&As involvement in the strategy process)

An Open Letter To The CFO: Are You Ready To Transform FP&A?

The Future of FP&A – Two Ways To Take the Reins

All Successful Business Partners Are "Leaders" (part of a five-article series where we unfold our business partnering capability model)

Should We Keep Talking About Business Partnering? (part of a 17-article series where we deep-dive on our business partnering framework "BP on a Formula")

How To Create Value Through Business Partnering

Everyone Can Adopt A Business Partnering Mindset (part of a six-article series about FP&A Business Partnering)

From Business Partner To Working Within The Business (part of an article series where I interview finance professionals about their careers in FP&A and Business Partnering)

Is Your Product Optimized For Value Creation? (part of a toolbox series where we look at what tools FP&A professionals should leverage to drive value creation)

How Business Partners Turn Analysis To Insight (part of case study series where I interview business partners about how they drive value creation using real cases)

What Defines A Finance Master?

The New Career Path For Finance Professionals

How Finance People Can Be More Successful

The CFOs Roadmap To Transforming Finance

How To Become A Finance Business Partner

Financial Analyst vs. Finance Business Partner

You’re A Finance Business Partner, Now What?

Building A Team Of Finance Business Partners

Anders Liu-Lindberg is the co-founder, COO (Chief Operating Officer), and CMO (Chief Marketing Officer) at Business Partnering Institute and owner of the largest group dedicated to Finance Business Partnering on LinkedIn with more than 9,000 members. I have ten years of experience as a business partner at the global transport and logistics company Maersk. I am the co-author of the book “Create Value as a Finance Business Partner” and a long-time Finance Blogger on LinkedIn with 57.500+ followers.