With the Covid-19 Pandemic persisting towards the last quarter of 2020, uncertainties cloud the pace of recovery. Businesses can use this as an opportunity to re-evaluate their budgeting processes.
What is the zero-based budgeting approach?
Instead of building incremental budgets on last year’s actuals (traditional approach), you would be building on external assumptions and internal business drivers. Some of the questions to help determine external assumptions and internal business drivers are:
- Which of our products are still relevant in a post-pandemic world?
- What new products could we launch that is more relevant in the Next Normal?
- What should our office footprint be, considering more staff will work from home?
This approach is beneficial in times where the past year actuals do not make sense anymore in today’s business environment. A Zero-Based approach could be a relevant tool in this current business environment.
How can a zero-based budgeting approach help my business?
Uncertainty has become the greatest challenge faced by businesses in today’s environment. There will always be events that create uncertainties, putting planning off course. We are now in the middle of a pandemic, but a year ago it was a trade war and Brexit before that. Thus, the best way forward could be using a zero-based approach.
This would mean that is wise to consider the only constant here as change. Taking a zero-based approach to budgeting would make a lot of sense. Yet, fixed costs such as contracts, leases, and licenses make it tough for businesses to be 100% fluid. Hence, it would not be practical to start from zero in the budgeting process. That is why businesses should adopt a driver-based approach, where the forecast changes as the business environment around us change.
Organizational agility could be your competitive advantage in this business environment
A zero-based approach allows us the best possible conditions to make informed decisions. Rather than comparing to an outdated budget as traditional budgeting would call for, we are now comparing to the best available information. This is crucial for times of crisis where uncertainty is at its peak. Freeing up as many resources as possible can create organizational agility. That would give businesses the ability to act on changing environments as they develop.
It is important to note that starting from a clean slate all the time will be tough and impractical. However, increasing budgets from past year actuals may also cost your business a lot of money. Therefore, the key to budgeting in an uncertain business environment is to understand what drives the business and to plan around that!