Achieving Financial Target Goals Using Zero-Based Budgeting and Traditional Budgeting
By: Jay Lee
Budgeting is a complex task for many businesses. Board members and executives outline revenue and profit targets, interpreting and comparing historical data to align with future forecasts. Once the goals are set, the roadmap for achieving targets involves departmental heads that aren’t always aware of how other teams contribute to the bottom line.
Meanwhile, downstream departments often have to complete expense templates, a time-consuming process that isn’t versatile enough to consider quick edits. Sales and revenue numbers are fixed based on goals, and financial planning & analysis (FP&A) is left to achieve net income targets using expenses.
If the complexity and intricacy of this process sound familiar — or slightly stressful — rest assured that there is a better way to budget. We will illustrate how combining zero-based and traditional budgeting strategies can streamline your financial forecasting efforts. Before showcasing the benefits of a blended approach, we’ll highlight the advantages and disadvantages of each budget strategy.
Understanding Zero-Based Budgeting
The zero-based budgeting (ZBB) model justifies all expenses for each revenue period.
Using this strategy, forecasting a budget begins from a ‘zero base,’ with each cost evaluated and more importantly justified against its contributing value to the business. Once these numbers are coalesced, budgets are built strictly around what is required for the forecasted timeframe. In other words, the ZBB approach does not measure the determined budget against previous models, but rather encourages evaluation independent of previous versions or years.
Thus by removing the weight of past budgets or future projections, ZBB allows businesses the versatility to view a truly ‘in the moment’ snapshot of their expenditures. This allows a greater level of budget control and management as the forecast is assembled.
Depending on the nature of your business, this strategy may be appealing or somewhat worrying; here we will outline the advantages and disadvantages of the ZBB method.
Advantages of Zero-Based Budgeting
Focused operations: ZBB affords your leadership the ability to think about how every dollar in your organization is spent. Each budgeting period, this process begins anew, granting a fresh perspective on the costs that impact operations. By forcing you to justify every expense, it helps you gain a greater understanding of which business areas are generating profit without weighing expectations based on past performance.
Lower costs: The dialed-in nature of a ZBB strategy may allocate resources better as a budget grows incrementally over time. By keeping old and new expenses in check, you effectively eliminate legacy costs that may have crept into a budget over years of operation. Some expenses grow as each department protects their budgets from cuts. This siloed approach to budgeting can lead to a misallocation of resources that only grows over time.
Budget flexibility & strategic execution: With each forecasting period, ZBB allows the ability to pinpoint operational costs across each department, free from the constraints of past performance. If your business determines that a specific area of operations requires more capital, it can allocate resources accordingly. As the budget is created, you have more flexibility to reduce operational spend per department, without waiting for the entirety of the process to be completed.
Disadvantages of Zero-Based Budgeting
Time-consuming and resource intensive: Since a new budget is developed for each period, the time and associated resources required for ZBB may prevent your business from adopting this method. Each cost is identified over every department, requiring a degree of granularity that may not align with the budgeting timeframe. Since the process repeats for every budget, dedicated resources are continually required to set aside time for cost analysis and approval. Depending on the size and scale of your organization, this may be an inefficient way to calculate costs.
Short-term vs long-term considerations: The zero-based budgeting approach offers a short-term perspective by allocating resources to segments of business that produce the highest revenue. While this has in-the-moment benefits, the long-term development of potential revenue sources may be overlooked. With revenue implications being further removed from the window of consideration, departments such as research and development may be allocated fewer resources with a ZBB strategy.
Misaligned perspectives: Savvy managers may be able to allocate more resources for their departments based on the weight they give to necessary expenditures. In these situations, some teams may be left with significantly fewer resources than others, fortifying work silos and decreasing cross-departmental collaboration.
The Merits of Traditional Budgeting
Traditional forecasting methods call for incremental increases or decreases from previous budgets. Unlike zero-based budgeting, the traditional model considers past performance for future projections. Using the previous budget as a base, the current model is prepared by adjusting expenses to account for costs and operational requirements. Factors such as consumer demand, market realities and inflation rates are weighed alongside past revenue and costs.
Any expenses that exceed the previous budget’s operational costs are triaged and further evaluated, with the rest being determined as already-vetted expenses.
You may be familiar with how the traditional budgeting process works. Here are the advantages and disadvantages of this approach, showcasing how reliance on tried-and-true methods may impact your cost predictions.
Benefits of the Traditional Budgeting Process
Easily deployed: This style of budget preparation saves time and effort for managers. Since the base of the budget is built upon the previous model, it doesn’t require significant changes. As opposed to a ZBB budget which begins from the ground up, traditional budgets roll over from previous models and only require insight into new or reallocated expenses.
Stability associated with familiarity: Most organizations are familiar with this style of budget building. Since every department will be aware of the process, you may experience fewer disruptions that negatively impact your turnaround deadlines. As opposed to learning a new method, the tried-and-true approach offers more coordination between departments.
Coalesce and consolidate with ease: The traditional method allows various projects to be consolidated under a single operational budget. By bringing departments together, those that underperform share equal consideration with high-revenue projects. For businesses with multiple branches, each sector can easily prepare its own budget under the same format. The 1:1 nature of these prepared forecasts allows them to fold easily into a larger operating budget.
Drawbacks of the Traditional Budgeting Process
Fixed and rigid: Once finalized, traditional budgets cannot be altered. Many factors, such as new competitors in the space, evolving market conditions and policy changes can occur during the forecast, without the ability to flex the budget to consider their impacts.
Excessive reliance: By relying on past-period budgets, the traditional strategy could build upon the errors or miscalculations of previous models. These inaccuracies can carry forward onto current budgets and affect the bottom line for years to come.
No priority for resource allocation: Adhering to the past prevents the ability to prioritize any project or department that should be ranked higher based on the business’s future growth. Assuming what worked in the past will work in the future undermines the ability to adapt to circumstances such as market fluctuations.
The Allitix Connected Planning Solution
Allitix provides a centralized platform that combines the best of traditional and zero-based budgeting strategies. Imagine a resource that could allow you to analyze new expenditures with the justification and flexibility of a start-from-zero approach.
With Allitx and Anaplan, this dynamic budgeting strategy is a reality.
How a Connected Planning Platform Streamlines Budget Building
Connected planning pulls all of your departments together under a centralized data source and forecasting platform. This marriage of strategic planning and decision-making removes the data silos that can hinder cross-department clarity. With this single source of truth, your leaders can make well-informed, dynamic decisions while seeing how it impacts other departments and your budget as a whole.
With Allitix and Anaplan, your connected workforce will be able to influence model scenarios effortlessly via drag-and-drop interactivity that updates your budget within minutes. Your teams will have real-time insight and KPIs that would normally take weeks to coalesce using traditional spreadsheets.
It’s all thanks to a platform that makes the data input from each sector available in near real-time. Within the connected Anaplan ecosystem, a ZBB model can connect to your existing budget template. Changes in one model can seamlessly reflect in the other.
With Anaplan, you don’t have to sacrifice the benefits of one strategy for another. Want to build a ZBB budget independent of last year’s results? Anaplan can help. Do you want to contrast your completed budget results against a previous year’s model? Within the easy-to-operate platform, you can examine even the most complicated business scenarios with support for multi-dimensional modeling with unlimited constraints.
You don’t have to be a coding expert to execute your vision: Anaplan’s intuitive interface maintains 100% consistency across all model changes. This gives you the freedom to analyze your budget in several scenarios without risking manual input errors that could cloud authentic projections.
Allitix Helps Overcome Budgeting Challenges
Allitix is dedicated to improving your connected planning journey. When it comes to building a budget, why not deploy a strategy that combines the best of ZBB and traditional methods?
Take a look at our five-step strategy designed to help you streamline your budgeting:
Standardize. Automate. Streamline.
Coalesce your important data in one place.
Unify your financial and operational data (and departments)!
Bend, don’t break: Flexibility is the key to operational efficiency.
Implement data security and access initiatives.
There is beauty in simplicity. To learn more about how Allitix and the Anaplan solution can impact your budgets, contact us to receive a free demonstration of our connected planning platform today. Together we’ll showcase the ways a blended budgeting strategy can streamline your forecasting process. We’ll provide your team with a single source of truth that removes unnecessary complexity from your plans.