When it comes to business management and organizational operation finance, accounting, and budgeting are three of the most important elements, regardless of industry. As such, finance professionals and accounting specialists are always on the hunt for new formulas, algorithms, and budgeting systems to improve their operations and optimize savings. One budgeting strategy that doesn’t always get enough attention is zero-based budgeting.
Zero-based budgeting is a strategy in which an organization allocates every single dollar spent or saved to a specific “expenditure” category or activity. After doing so, the sum of the amounts allocated across the various categories should equal zero. This, in turn, gives an organization exceptional transparency into its spending habits, cash-flow duration, and other financial areas of interest. However, the seemingly modest and simple zero-based budgeting model has, for one reason or another, shouldered a number of ugly myths from the industry.
Zero-Based Means Building from Zero
Firstly, zero-based budgeting does not mean building a budget from zero. This is a very common misconception, as zero is the endgame, not the starting point when it comes to zero-based budgeting. All in all, ZBB is meant to account for each and every dollar spent or saved by an organization.
This happens by creating ‘expense’ categories even for investments, savings, and other types of financial growth assets. Furthermore, the remaining dollars are allocated to organizational costs, costs of goods, operational costs, and other regular operating costs that your business incurs. These costs also include administrative costs and other internal sources of the cost that often go overlooked.
Cuts, Cuts, Cuts
Another ugly myth about zero-based budgeting is that it requires your organization to make an absurd number of cuts to other areas in the budget. While there are instances in which zero-based budgeting illuminates wasteful or frivolous spending within an organization, this is hardly the case 100% of the time. In addition, while utilizing zero-based budgeting as a financial tactic within your organization, you and your financial team are still in charge of the final decisions.
As long as the dollars are appropriately allocated, it’s up to you and your accountants to decide what stays in the budget and what doesn’t. The strategy is just a tool to help build transparency into the spending habits and cash flow of your organization.
Zero-Based Budgeting Is All-Consuming
Even further, it’s been thought that zero-based budgeting is such an all-consuming practice to establish within your organization that it’s the only thing your organization will be able to accomplish or focus on. This is a huge exaggeration and could be said about any comprehensive accounting strategy.
By taking a comprehensive approach to the accounting and financial budgeting practices within your organization, zero-based budgeting equips your team with the insight they need to make informed and high-quality decisions regarding the budget, and organizational spending. This is specifically helpful in the context of procurement when your team is researching spend management solutions.
ZBB Has Too Narrow of a Scope
With many companies bringing their focus back to building centralized and comprehensive strategies to roll out through the entire vertical of their firm, zero-based budgeting has come under fire for having a sole focus on SG&A expenses. SG&A stands for selling, general, and administrative and is a common expense category used by many organizations.
While of course zero-based budgeting includes and incorporates systems to appropriately account for SG&A expenses, it is by no means the sole focus of a zero-based budgeting strategy. In fact, the entire point of zero-based budgeting is to account for each and every dollar that comes in and goes out of your organization.
Acts as a Hindrance to Growth
Finally, in concert with all of the other myths and rumors floating about around zero-based budgeting, it’s no surprise that there’s a general feeling that zero-based budgeting acts as an overall hindrance to growth. However, the reality paints a stark contrast with companies unveiling additional savings, and finding extra avenues for growth through zero-based budgeting strategies. Going a step further, procurement teams are starting to pair a zero-based budgeting strategy with the best contract management software in order to really optimize their spending habits and contract management strategies.
Wrapping Up on Zero-Based Budgeting
When it comes to accounting and finance, there are always new avenues to explore and new strategies to test. As a business professional and organizational manager, or procurement professional, having a grasp of the various strategies and tactics that will bring the most value to your specific organization, will guide you and your firm toward optimal savings, and strong decision making.
For more information about zero-based budgeting, or anything else related to procurement, keep browsing ProcurePort’s extensive content library. ProcurePort is the internet’s premier place for everything procurement, from technology and software to information and knowledge and anything in between.