Amid coronavirus crisis, zero-based budgeting presents opportunities for positive change, Accenture reports

Spend Or Save Signpost Shows Budget Finance And Income

Executives at every level are in for a tough year as the coronavirus disruption continues to weigh down the global economy. Procurement leaders, however, are also being presented with a unique opportunity to rethink how they approach budgeting at a time when controlling costs are more important than ever.

In the recent “Getting Ahead by Cutting Back” report, Accenture outlines how businesses can employ zero-based budgeting to hedge against volatility and move away from budgeting practices that rely on simple calculations based on conditions from previous years.

The report explains that zero-based budgeting (ZBB) is the practice of justifying the need and cost of each item within a budget while adhering to top-down targets set by cost category owners. Applying ZBB practices across an organization enables much more accurate benchmarking and forecasting, and has the potential to free up capital to increase raw material reserves or weather a disruption in production and revenues.

Accenture found that employing ZBB allowed organizations to reallocate as much as 35% of their budgeted costs while helping to align data between finance and procurement functions.

The practice of justifying and recording each cost within a budget increases visibility, allowing deeper line-item analysis into spending practices that have built up over time but may not have been officially documented. Insights into these activities can allow procurement executives to pursue cost savings in the form of price or contract negotiations, tighter consumption policies or identification of inefficient operational overlaps in production or administration. Many aspects of digital transformation can help streamline this process and contribute to collecting and organizing budgetary data.

The report notes that only half of companies that achieve cost savings through changes to their budgetary practices are able to sustain those savings for more than two years. Changing the company culture around budgets and spending, then, is an essential component to getting true value out of a ZBB approach. A clear, firm, top-down policy regarding how budgeted funds are spent helps to create an environment where employees are predisposed and encouraged to think critically about the need for any spending activity.

The behavior of middle managers and senior executives should also be informed by a ZBB policy, enabling internal leaders to set an example for others in the organization around justifying costs and avoiding the habit of spending remaining budgeted funds with next year’s allocation in mind. An ambitious shift in policy and mindset at high levels of the organization will flow down to other members of the business, uncovering cost savings that might otherwise have been outside the view of leaders focused on many competing priorities.

Accenture also recommends companies communicate ZBB policies and successes through multiple channels within the organization, bringing everyone on board in the effort to identify savings opportunities and highlighting the benefits of cutting back on unnecessary spending.

Accenture points out that for businesses to get the most out of their cost savings, it’s important to have a strategy for reallocating freed-up capital effectively.

In healthier times this could mean increased spending on R&D, market research, maintenance or efficiency improvements to production equipment and back office software.

In light of the coronavirus crisis, procurement professionals might make different considerations, prioritizing paying down accounts payable to ensure strong relationships with suppliers or expanding sales team toolboxes to take advantage of disruptions in competitors’ supply chains. Alternatively, budgetary savings from ZBB could be allocated to a temporary crisis fund to deal with issues related to COVID-19, such as increased paid sick leave for employees or cash for increased expenses related to shortages of raw materials.

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