Though some international markets are on their way to recovery from COVID-19, there’s still a cloud of uncertainty looming over vaccinations’ success, which can leave any business worried about its finances.
In these challenging times, effective budgeting is crucial to ensuring the company’s cash flow and daily operations remain unhampered.
Zero-based budgeting is ideal in crisis times as it can help lower costs and control expenses because everything needs to be reviewed. Compared to traditional budgeting, which usually builds upon an existing budget from the previous period, zero-based budgets are created from scratch for every new period. Hence the term “zero-based.” Therefore, this type of budgeting is ideal for more short-term periods. But it works in times of crisis because careful thought is put into every dollar spent. No matter if they are old and recurring, every expense needs to be justified before being piled into the new budget.
It is, therefore, no surprise that 85% of the world’s largest companies that use zero-based budgeting have grown at a rate of 57% each year. While it can be resource-intensive and geared towards short-term planning, zero-based budgeting can make budgets more flexible depending on the scenario and help companies focus on essential aspects of their operations.
Here’s a look at how else zero-based budgeting can improve efficiency in organizations.
Resources are reviewed and allocated for better efficiency.
With zero-based budgeting, companies are forced to focus on expenses that have the greatest return on investment. This means budget line items that bring more excellent value to the company are allocated more, whereas those of lesser priority are removed or added to the next budget.
Critical business processes are well-optimized
Once high-priority items are identified, business leaders are driven to focus on improving and managing them for greater efficiency. This makes way for continuous improvement and better streamlining of budget spending, improving financial forecasting, decision-making, and cash flow management. Zero-based budgeting can help streamline your workflows and enable business leaders to assess every project’s value per department and team continually.
Teams Learn Better Cost-Benefit Analysis
When every line item in the budget plan needs to be justified, managers are given more room to identify and carefully review what isn’t generating an adequate return on investment (ROI). Along the zero-based budgeting process lines, teams will be tasked with developing metrics that seek to identify every project’s value and harness insights for better cost-benefit analysis and tracking.
Even if zero-based budgeting is done monthly, it can encourage organizations to harness data for better analysis, which can easily integrate with existing workflows.
It Promotes Transparency and Company Growth
Because expenses are justified and need to be aligned with company goals, zero-based budgeting requires managers and leaders to clearly explain the reason behind every budget. This encourages greater time spent reviewing these projects’ purpose and makes way for careful planning on how to optimize resources best to ensure nothing is wasted.
In the long run, this method creates a system that promotes better accountability and improves the company’s profitability by improving organizational performance as a whole.
It Improves Innovation Across the Organization
While zero-based budgeting helps lower costs with careful reviews of every expense, it fosters an environment focused on minimizing wastage through cautious resource planning. It has been noted that teams that are focused on maximizing resources can boost innovative practices in teams.
If you’re looking for an ideal tool to help you implement zero-based budgeting for your organization, Performance Canvas Financials is equipped with the ability to automate budget workflows, which can be customized according to your needs. It is a complete and cloud-based financial reporting, budgeting, and forecasting tool that can just as easily integrate with Dynamics 365 Business Central (Dynamics NAV and GP) and Dynamics 365 for Finance and Operations platforms (Dynamics AX), SAP, Epicor, and many other ERP systems.
If you’re keen to know more, get in touch with us for a free demo today.