Hello there, welcome back.
We have a fascinating topic to talk about today.
As we have mentioned throughout course, there are many methodologies, techniques,
and approaches which help management to allocate resource and
define the financial targets to pursue.
One technique often employ in companies, using the previous year's budget
as the starting point, making adjustments in some percentage points.
But this approach doesn't fit for any business.
It might help for structrued companies in stable segments.
In some organization the budget and its control are not aware of structure,
when it exists, and demands a complete review of performance evaluation,
and cost structure of their development.
In situations like that using the prior year's budget will certainly be a mistake.
Considering the both case, something very new is affecting the environment
where the organization isn't certain,
or there is no efficient budgeting process and controls.
A whole new budget planning, as well as its control, is required.
Let's assume that company x is struggling to survive.
The management team has no clue about where and why they are losing money.
The manager just can't use the prior year budget and the controls are a mess.
After three months of terrible results, they decided to analyze all aspects,
futures, and expenses of the the business.
They look at the current year's results to evaluate where cost
can be adjusted and what can be done efficiently.
This analysis will be developed from scratch, zero base.
As a consequence of this analysis,
the high management will be able to judge if the budget request for
each department, or activity, are essential to the company's operations.
And its responsible manager must justify
the budget request in detail, avoiding the lack of control.
This example illustrates a zero-based budget process.
Zero-based budget, or ZBB, is nothing disruptive.
It's just a management approach, which looks to enhance its effectiveness and
efficiency.
And the management must justify the resources request during
the budgeting plan in detail, beginning with the zero balance.
But an effective ZBB is much more than building a budget from zero.
We can find some key features about the process and its implication nowadays.
Such as the decision to implement the ZBB usually comes from the CEO or
other key operating managers.
Decreasing costs of production, service, and operating.
It's more common to find the use of this approach in companies known for
their good management.
The benefits overcome the costs of implementation,
even considering that the process is complicated and
requires lots of effort to make it efficiently.
The ZBB is a budgeting approach which provides control and
sustainable alternative to cost management.
It is a priority structure of budgeting, which ranking and
evaluating all company's initiatives.
Reviewing and analyzing programs, proposal, and activities,
to increase the profitability, enhance efficiency, or lower costs.
The goal of this approach is to find excellent resources allocation.
This approach also look at activities target and how to accomplish them.
One warning point in this approach is to consider that the failure
in funding an activity could result in adverse consequences.
That is, the inability to produce or develop a particular product or
service could negatively affect the sales of related prducts or
services in the company's global products and line service.
Have you enjoyed this topic?
Now go to the reading to learn more about zero-based budgeting,
its process, and decision package.