Welcome to Your New Budget. Zero.

The ancient Babylonians may have been the first to classify “zero” as a number.  Which at least gives those who have been subjected to “zero-based budgeting” someone to blame.

Zero-based budgeting is just as painful as it sounds – new budgets are set at zero dollars instead of being based on historical spending trends and patterns.  Managers then fight to justify every dollar added to the budget above zero.  Operating costs, capital expenditures, R&D, and salaries are often cut and, notoriously, coffee machines removed from hallway stations.  And in the next budget cycle, the process starts all over again…

The extreme belt-tightening approach has made a comeback as finance executives reconsider budgets due to the economic downturn.  Far from just a passing fad, Walgreens and GM are among the big-name companies practicing the technique, with GM stating that some of the efficiencies will remain permanently.  (Also see our previous PriSim Post about zero-based budgeting and the private-equity firm 3G.)

One criticism of the technique is that extreme cost-cutting comes at the expense of growth and innovation.  Accenture offers a solution in their “Zero-Based Mindset”, or ZBx, that shifts the focus from cost-cutting to identifying where to invest non-working money freed up from ZBB (Zero-Based Budgeting).

And if the pandemic has you ready to go one step further and apply zero-based budgeting to your personal finances, Forbes has some ideas

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