EXECUTIVE BRIEFINGS

BUSINESS & MANAGEMENT: BUDGETING

Adit Jain, IMA India
January 2019
Let’s get it right

As business enterprises enter a new calendar year and more significantly, the last quarter before their
annual stumps are drawn, they scramble towards revenue and profit targets. Nevertheless, CFOs have
one eye keenly aimed on the budgeting process for the year ahead. Increasingly, some have resorted to
Zero-Based Budgeting (ZBB), which works on a premise that there are no holy cows and all costs are
subject to question. However, this is hard to do. In the first instance, it involves a considerable hike in
effort not only for the finance function but also for business operations and consequently, needs a solid
shove from top management.

The way it works is quite simple. All expenses must be justified for the new period and every function
is analysed for its needs and costs. Budgets are then assembled around what is actually required,
regardless of whether each entry is higher or lower than in the previous year. It works on the
hypothesis that simply because we’ve done it before, cannot be the basis of doing it again. The process
allows strategic priorities to be implemented into the budgeting process by knitting them into
functional areas. Because of its detail-oriented nature, ZBB may be a rolling process, undertaken over
several years, with a few functional areas reviewed at a time. It helps lower costs by avoiding blanket
increases or reductions to previous budgets, but it is more time consuming. Traditional ways of
budgeting look at incremental costs or new expenditures. ZBB, on the other hand, starts from zero and
every expense has to be prudently justified. It places the onus on business managers towards devising
arguments in defence of their demands. The idea is to sponge value out of every penny spent.

ZBB comes with a host of merits – greater efficiency to start with, in the allocation of resources, as the
budget does not look at previous numbers but actual sums judiciously calculated and defensible. Many
functions hurry along to spend allocated funds before they lapse, even when completely unjustifiable. I
remember an occasion when I spent a few days at a top luxury hotel in the Himalayas, to find the entire
Human Resource department of a consulting firm, on whose board I sat, enjoying a few days of
tranquillity on the pretext of some ridiculous internal strategy planning session. Since the money was
previously allocated it had to be spent, or the budgets next year might risk a bout of pruning. Zero
based budgeting eliminates redundant activities and savings take place in areas previously never known
and often of sizeable amounts. When managers look upon existing operations with fresh eyes, they can
reshape their organisations radically, by channelling funds into areas that will drive growth and
productivity.

More importantly, the process is actually more accurate as every department needs to re-examine each
item of their cash flow, whilst computing their costs. The standard practices of inserting 3-5% inflation,
creates needless inefficiencies. It ensures better communication within and between departments, as
employees are inspired to join the budgeting process.

Be that as it may, CFOs must be prepared for greater time allocation by business units and functions.
The process is often burdensome and time consuming. Frequently, there is a lack of expertise and
managers therefore require training. But in the end, it saves costs and improves margins. Most
significantly it creates a culture of accountability, which quickly spreads across an organisation, even in
areas far removed from mundane spread-sheets. ZBB, the evidence suggests, is worth considering;
there is a whole quarter ahead to do it. CFOs should have a serious think.

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IMA India Adit Jain’s articles and opinions can be found on his blog at www.aditjain.com Peer Group Forums
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