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Should You Consider Zero-Based Budgeting in 2016?

 
  John W. Braine, Partner, CFO Edge, LLC  
   
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  Article Summary  
Needing to review cost management structures due to pressures to reduce costs and increase profitability, executives leading Los Angeles and Southern California companies are taking a fresh look at zero-based budgeting (ZBB).

Zero-based budgeting is a robust cost management strategy that starts with a blank slate: from a “zero base,” analyze every functional need and cost - and justify all expenses for every new period.

Cited in the full article is a McKinsey & Company finding that correctly implementing ZBB can decrease sales, general and administrative (SG&A) costs from 10 percent to 25 percent within six months of implementation. *

Reviewed are descriptions of zero-based budgeting, environments where it is a beneficial approach, and frequent misperceptions of ZBB.

The article also notes that zero-based budgeting is not a replacement for ongoing financial forecasting and differentiates between the two.

As you review and assess costs with an eye to better controlling and reducing them, zero-based budgeting is worthy of a close look.

Characteristics such as its robustness, repeatability, and decision-making enhancements make ZBB an attractive strategy to reduce costs and significant increase profitability.

* Five Myths (and Realities) about Zero-Based Budgeting; Shaun Callaghan, Kyle Hawke, and Carey Mignerey; McKinsey & Company; October 2014.

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