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The budget reduction problem: quantify key metrics
Long Meetings: A Lose-Lose situation
The issue with managers who want to stick to their budget
Zero Based Budgeting: the best way to approach the business planning process
Challenges of Zero Based Budgeting
The perfect tool for Zero Based Budgeting
When the market is going through a recession and the economy isn't doing well, businesses are left with no choice but to cut their spending so they can maintain profitability or at least prevent financial losses. However, slashing budgets is always easier said than done. Almost every company experiences a budget struggle which is often exacerbated by a multitude of internal and external factors.
In the post-pandemic world, every business is trying to lower the cost of doing business as their income hasn't witnessed any growth in the past twelve months. The logical conclusion of budget reduction is easy to reach but difficult to implement. Usually, the primary issue is that no budget owner believes that there is any room to cut down their expenditure.
Every manager and team leader thinks that they are 'here to stay'. The real question is, are they really 'here to stay'?
There are no two arguments about the fact that each department or team is responsible for contributing to the organizational goals and objectives. However, it is often unclear how valuable a team really is because there is no attempt or even intent to quantify key metrics that can be helpful in terms of determining the extent and effectiveness of a department's performance.
It is quite possible that a team is adding more value to the bottom line than what their budget reflects. Similarly, a team can have a massive budget without any substantial value addition to show for it. That's why it has become increasingly essential for organizational departments to demonstrate exactly what they are doing to add value.
- Your team or department directly makes money
- Your team or department supports other teams/departments in making money
- Your team or department prevents financial losses
- Your team or department avoids spending too much money
How many times have questions been raised during the budget round on whether expenditure is really creating added value.
- ‘Is this cost really necessary’?
- ‘How can we justify this budget? This expenditure was not there last year!’
- ‘Why isn’t your budget decreasing? We all have to chip in.’
Lengthy discussions and meetings always take place that requires explanation and conviction to gain the approval of stakeholders and can be the discussions you would like to avoid. This is time-consuming and gets the organizations away from the real priority of getting the right budget in place to put the company on the path of sustained growth and profitability.
Without any adequate framework in place, what really happens is that some departments get their desired budget while others don't. This leads to a rift between different teams which can result in inefficiency, lack of motivation, and reduced productivity. When a department has to convince the budget committee through their communication and presentation skills, they don't really focus on how they can add value but how they can appear to be an ambitious and value-adding component of the organization.
It is not exactly a secret that managers and team leaders tend to defend their employees and department in budget meetings. They typically believe that they are adding immense value to the organization and helping it get closer to its goals and objectives. They also think that their position in the organization is essential and shouldn't be questioned periodically.
However, the reality is not quite identical. Budget discussions and meetings often being with the last year's spend and department heads have to explain any changes that need to be made to the budget. More often than not, managers choose to increase their budget year on year citing inflation and other challenges as the primary reasons.
This happens despite the message from the board to cut down the expenditure owing to difficult circumstances such as poor economy or declining profitability. This is particularly true in recent times when many companies are struggling with complete lockdowns and border closures leading to limited trading activity across a number of industries
To overcome the aforementioned problems, there are a number of effective budgeting procedures. However, the best way to approach the business planning process is through zero-based budgeting. Instead of going through those lengthy discussions, negotiations, and arguments, budgets should be made transparent and they should strictly translate to the role of that particular department within the organization.
Instead of simply basing your budget on what you spent or achieved last year, start from scratch and tell the story on why your department should be there and convince management of the position that you believe to be true: i.e. 'you are here to stay'. This creates a bottom-up budget that explains what, why, and when you are going to spend or make money.
A good starting position is to rely on trend data such as previous three-month spend instead of the full year. Plan in detail, for example by workforce per employee, or CAPEX per asset, commitments per contract, project portfolio per project or your production plan per stock keeping unit. But most of all make the connection between spend and the value added to the bottom line.
With this approach, organizations can completely eliminate the painstaking and often unproductive process of budgetary meetings where everyone leaves unhappy. This way every department knows their worth and the value they add to the organization. Their budgets reflect what exactly they are doing to help the organization make money.
Despite being a superior solution to the budget allocation problem, an overwhelming majority of organizations do not deploy the zero-based budgeting procedure. According to them, it is not only time-consuming but requires a lot of data, analytics, and insights to work effectively and efficiently. Many companies don't really have the tools to organize everything they need to implement zero-based budgeting.
This is despite the fact they know the top management can really benefit from this process to support informed decision making. It all creates a real dilemma for finance professionals as they are fully aware of a surefire way to reduce expenditure but have no way of convincing the management because of a multitude of challenges.
- It is complex and costly - One of the major drawbacks that are often cited against zero-based budgeting is that it's too complex and expensive to implement. You need too much time, effort, and resources to ensure that the budget is built from scratch instead of relying on data from the last financial year. This also puts pressure on the finance team as they have to ensure proper documentation of all budgets.
- It can be short-term oriented - Since zero-based budgeting is directly tied to the revenue streams of the organization, it can lead to numerous challenges. First, it could be a challenge to quantify the value addition of a certain team. Secondly, an organization might start to focus on the short-term financial gain over long-term growth. This usually happens because of a lack of data and analytics.
- It can be quite disruptive - Sudden implementation of zero-based budgeting can lead to issues as managers might not have the right training or find it taxing to prioritize and justify every component of their budgets on a regular basis. This may result in a pushback which can prevent improvement in productivity and efficiency. Significant changes in the budget procedure might also force managers and team leader to make strategic decisions which aren't beneficial for the company.
- Lack of Adequate Tools – One of the primary challenges for most organizations is that they don’t have access to the right tools to streamline their shift to zero-based budgeting and planning.
OneStream is an advanced corporate performance management software that can enable finance professionals to focus on streamlining the zero-budgeting process, saving time and avoiding those lengthy and unnecessary discussions.
With the right capabilities in your financial planning software, you can quickly convince your board that your recommendations are the right way to go by ensuring transparency, and by slicing and dicing to the right level of detail to tell your story. This efficient process can help justify budgets to achieve organizational goals.
If you are able to demonstrate your contribution and value, management is able to prioritize activities within the company to reach the company's goals. This is essential in the current climate and in times of crisis when the management of most organizations have no choice but to make tough decisions – and fully understand the consequence of those decisions.
The companies using OneStream have streamlined this process in areas such as Workforce Planning where budgets per employee are designed from the bottom-up. Other organizations are also using CAPEX Planning to understand their investments and the duration and time to replace those assets.
They can understand commitments, for example, what did we commit to spending and when are we spending this? Apart from that, there are organizations that are planning large capital projects relying on all of the above features.
This all ends up in an overall detailed cash flow plan which helps management to make the right decisions when tackling low-income periods.
The feedback from the organizations is that the deployment of driver-based planning in different scenarios is the most effective way to go. This way the main profit and cost drivers are key to the forward plan. By being open and transparent, the impact of changes to those drivers is immediately visible. Adding profitability and cost analysis to this demonstrates the added value of your businesses.
Combining everything above will bring you to implement Driver Based Planning 2.0, which enables you to also plan on your added value drivers. How much money are you making, how much support do you deliver to make money, how much money do you avoid losing or avoid spending in your company? Everything will be at your fingertips and you will be able to leverage the insight for informed decision making.
There is no doubt that an effective and efficient budgeting process is at the core of optimizing expenditure and maximizing profitability. While zero-based budgeting offers a viable solution as it compels managers to build a budget from the ground up justifying every major expense, it is also a resource-intensive and somewhat complicated way to finalize departmental budgets.
Since an effective tool is required to deploy zero-based budgeting and driver-based planning, OneStream fills in that role remarkably. It enables the organization's finance teams to streamline the overall shift to zero-based budgeting and ensure the data is available to all managers who want to justify their value addition to the upper management.