5. Zero-Base Budgeting
If the business requires significant cost reductions to ensure its results, zero-base budgeting (ZBB) offers the ideal approach to challenge the budget in a radical way.
Using this cost-planning approach, budgets are planned and approved for the relevant planning period completely from scratch (zero-base) in line with the defined performance levels instead of being based on the preceding period. Additionally, this is done in short cycles on a monthly basis instead of once per year. Doing this creates transparency for costs and contributes significantly to the efficient use of available funds. This approach must be applied for all overhead costs and serves as strict control tool for liquid funds in times of company crisis. Zero-base budgeting additionally helps to disrupt established structures of thinking.
ZBB supports a complete paradigm change within the planning process and must therefore be established top-down, unconditionally. In the first step, the management resets all budgets to zero (zero-base) instead of just freezing them. The framework for the new budget planning is laid out in accordance with the economic situation by defining the performance level.
› Performance level 1 – minimal performance to maintain the business operations necessary for survival
› Performance level 2 – regular services in accordance with the work and position specifications
› Performance level 3 – measures required to ensure a long-term future
Business divisions are strictly required to comply with this framework when re-planning their budgets for the next month. The management’s approval of the budgets is done centrally after a conclusive explanation and check of the performance level. This process is repeated at a monthly interval.