Zero-based budgeting – start fresh, achieve more!

Every year, good business executives develop a budget. Peek into the planning sessions and operating mode of any well-run company and you will find a strong budgetary process at work.

Simply put, a budget is a financial tool -- sort of a "spending-guide'. But, it can also be a healthy discipline forcing the company to think and constructively debate the investments and priorities for the coming year. As such, senior executives should demand a tight alignment of corporate goals to the annual budget. A well-developed budget puts into place the necessary structure to measure, manage and control the variety of spending within the enterprise. Savvy company leaders also utilize the budget process to communicate to the rest of the company the priority of various projects as well as the amount and timing of the funds allocated. The annual budget and its monthly review and quarterly updates memorialize and documents the companies financial intentions for the coming year. This fulfills a requirement demanded by most banks and lending institutions.

However, there is an inherent trap that most companies fall into when developing yearly budgets. And it is so insidious and subtle, that most senior executives unwittingly become part of this annual charade without realizing it. Global Marketing calls it the ‘creep-factor'.

What is the creep-factor? Some clients of Global Marketing have guessed it is an apt description of their firm's newly hired CFO. Some have indicated that, as in the likes of ENRON, WorldCom and etc., it must be a new method that defines profit. And others thought it might be a ratio of lost customer revenue to the firm's competitor. All reasonable guesses, but none correct!

Global Marketing Inc. has many clients and sooner or later the topic turns to ideas on cost-cutting measures. At this point the Global Marketing team asks to review the summary budget schedule for the past 3 years. All key expense items are analyzed with budgeted increases from previous years highlighted. With few exceptions, we find that budgets grow (creep) by 5-12% per year usually without an increase in the revenue (shipments) line. And even if the top line does increase, this only temporarily masks the expense increase and the inevitable cost-cutting sessions to come.

This insidious budgetary creep-factor is routinely accepted in many companies, but it can be effectively neutralized through a simple business technique called zero-based budgeting.

Here's how it works. The CEO or senior department head demands that everything...that's right everything (including his own expense) in the budget be open for healthy debate and defended logically if it is to get back into the newly created budget. These managers and senior leaders should ask their people to start with a clean sheet of paper. Then, and only then begin to put together the expenses (people, projects, supplies, etc.) that gain the organization the best return. Sadly, many firms begin or start with a budgetary baseline made from last year's expense run-rate. This is a fundamental budgeting mistake and the root cause of creep-factor.

New and more innovative thinking occurs when zero-based budgeting is inserted into the annual budget process. Instead of automatically increasing the travel expense by x%, new ideas begin to emerge. If you tie certain bonus considerations to the budget process and pay on achievement of reaching this budget - you may be surprised at the outcome. Now the thinking becomes more non-linear (out-of-the-box) and interesting results usually happen.

Global Marketing has always found that good people like (demand) to be challenged. The courage to act and insist on this type of annual budget process will challenge your good people and ensure that your firm receives a fresh, annual start and perhaps you'll achieve more!