AFP recently published an article on zero-based budgeting as part of its effort to offer insights and networking opportunities to treasury and finance professionals. The article sparked a lengthy discussion on AFP’s Certified Corporate FP&A Professionals group. Below are some of the thoughts and opinions on this controversial finance topic.
Jonathan Franco, FP&A Manager, CeLA Region at Zoetis, Costa Rica: “Personally, I believe (from all that I had read and watch related to 3G’s previous work with ZBB) that the methodology can work in any kind of company. ZBB has been implemented in beer, fast food, retail and so on. I strongly believe that the capacity to do a good job with ZBB depends on the commitment from the employees.
“How do you get that commitment? I believe the drivers to obtain the required commitment are the objectives. If the bonuses are attached importantly to the alignment of the budget to the actual situation all employees will be committed to the ZBB. I believe in the 3G companies that approach worked perfectly because those companies are well known to have salaries below average but huge bonuses.”
Gary Cokins, CEO at Analytics-Based Performance Management, United States: “I interpreted the article from a different angle. My view is ZBB from decades ago was unsuccessful because organizations did not have three capabilities: (1) access to unit-level calibrated cost consumption rates; (2) reliable product/service volume and mix forecasts; and (3) modeling capability to classify changes in resource capacities as sunk, fixed, step-fixed, variable, etc. (associated with time length of the planning horizon).
“But today some FP&A software tools accommodate this. So if these models are ‘refreshed’ at periodic time intervals, the ZBB ‘budget’ can become the driver-based rolling financial forecasts referred to in the AFP article. And as a bonus, the model can also be used for other types of decisions, such as is what-if scenario sensitivity analysis, make-versus-buy; outsourcing; and product rationalization (e.g., impact of abandoning).”
Kevin Riley, Managing Director, Riley & Riley, Australia: “I agree that starting from scratch is simply not feasible for most organizations. There will be pre-exiting suppliers’ contracts, labor arrangements, already established, yet not necessarily efficient and effective business processes, and distribution channels that may take some time to re-design.
“Possibly we need to remind ourselves that one of Charles Horngren’s principles of management accounting is to consider the technical and behavioral aspects. Possibly the most useful aspect of zero-based budgeting (ZBB) is not the technical aspects of ZBB, but the behavioral aspects of ZBB. Challenging managers with the question: Can we do this better?
“In this way, I believe, we have the opportunity of harnessing the continuous improvement focus of ZBB without finding ourselves weighed down by costing systems (and spreadsheets). Of course more adaptive budgeting tools also require us to consider the behaviors that managers are likely to exhibit when faced with budgeting and forecasting requests from finance professionals. Jeremy Hope, Robin Fraser, Steve Player and Steve Morlidge are all correct to point out that beyond budgeting requires us to address both process and culture.”
Christian Fournier, finance executive and author, France: “Methodology is a reference point but the matter of importance for companies is to design an FP&A process (plan/budget/reforecast/analysis and reporting) that is end-to-end and consistent with the company situation and industry. Industry characteristics such as time from order to revenues or number of customers/purchasers or size and geographic scope/reach., etc. needs to be considered in building these processes. Bottom/up, top down, ZBB, etc., have all academic values but at end what counts is the relevance and effectiveness of the company specific built process (end-to-end not just budget). Different situations/challenges call for different process design (generally mixing methodologies).”
Anuradha Dhavalikar, Cost Accountant, India: “In addition to Gary and Kevin’s views, I’d say ZBB can be used effectively, if expenses are further classed as discretionary and mandatory. Similarly, on the revenue side, ZBB challenges the marketing and sales teams to identify new strategies and markets, by setting aside the orders at hand. As mentioned in the article, we need to balance the approach by adjusting the budgets periodically (every quarter/half-year). This is necessary to give the managers a reasonable and reasonably stable base-line to compare actual.”
James Morales, FP&A, FP&A Manager at Simply Healthcare Plans, United States: “I was at Burger King when ZBB was rolled out. Bottom line, you need the right people and culture to make it work. Nothing else matters. Has to start at the top, this is not something that can be rolled out by finance without top level support from CEO and board. This is 3G’s secret sauce, they live and breathe it day in day out at all levels.”(Ed. Note: Comments have been edited for clarity.)