Zero-based budgeting is a (old) budgeting method in which the building of the budget starts from a blank page or “zero base”. ZBB is not the usual variant of previous period budget with corrections but a totally new one starting from scratch.
The idea behind ZBB is to build a budget that fits the purpose or strategy of the organization, regardless of what have been in the past. Therefore, each function and related expenses must be weighted in terms of utility and contribution to the goal before making its way on the sheet.
And this is precisely where the link with lean thinking lies. ZBB was popular in the 1970’s, when “Lean Manufacturing” wasn’t even invented. It is only remembered by few persons exposed to it in their younger years or those who came across in literature.
In my case, I was initiated by my senior colleagues when I started consulting. We had only one assignment purely based on ZBB, but I found good use of the principles on numerous occasions since.
When building a Zero-based budget, each line has to pass the value-adding test and subsequent questions, as it is done in lean assessments:
- Does this add value?
- If not, can it be suppressed?
- If not, can it be minimized?
ZBB is easy to imagine when starting a new business with limited capital. Each expense has to be carefully challenged in order to keep the whole endeavor in safe zone.
It is relatively easy when starting in greenfield, no legacy carries over its costs to the budget.
This logic is also familiar to those designing to cost. The total cost of a product or the whole project is a given limit and the design has to meet all requirements within this limit. Thus, every function, component and expenses has to undergo the necessity-to-purpose test.
ZBB is no exactly piece of cake when an organization already exists as ZBB is facing expenses that are not so easy to cancel. Some are related to regulation, others to social package, etc. Every stakeholder will have good reasons to keep a specific budget line.
ZBB was therefore often considered as a cost cutting method rather as a critical introspection and creative way to reinvent the way business is done. Put positively, ZBB could be a way to demonstrate how Lean can impact bottom line.Follow @HOHMANN_Chris