ZERO Based-Prioritization to Reset ALL Projects


By now the executive teams of companies of all sizes, know just how jumbled and messy the revenue forecasts are for the balance of 2020 and there’s an almost  panic-driven commitment to preserving cash and eliminating operating costs.  

After three months of intense review and analysis of the structures of your company, you are wondering if certain things once thought to be essential, may not be so important, at least for the foreseeable future.

It’s time to start over! It’s time to rethink every aspect of your company’s structure, all expenses, projects, marketing and revenue projections.  Start from ground ZERO.  You must now approach budgeting with the goal of starting with a clean slate, nothing is sacred, and build out and up the company structures sufficient to accomplish it’s mission.

By definition, Zero-based budgeting, developed in the 1970s, is a proven, unique and compelling exercise, wherein executives use a re-start process to justify every department, staffing, salaries, etc.. Any company can use Zero-Based budgeting formulas to make sure it is spending and investing its money the right way, consistent and aligned with the strategic plan.

It starts from a "zero base" at the beginning of every budget period, analyzing needs and costs of every function within an organization and allocating funds accordingly, regardless of how much money has previously been budgeted to any given line item.  Operating budgets are then built around what is needed for the upcoming period, regardless of whether each budget is higher or lower than the previous one.

How does an executive team get started with incorporating a zero-baseline for prioritizing spending and projecting operating costs?

In a normal business atmosphere, business executives would need to justify why they’re adding an expense to the budget. Now with the portfolio empty, they can examine, discuss and justify why an activity should be allowed back into the operating budget.

First, set the target on spending and agree on a framework to assess and classify all expenditures, regular and periodic. An example of a framework to categorize the projects can be: Mandatory, transformation, core differentiation, growth and improvement investments. 

Next, start building the portfolio back up from zero, piece by piece, until it reaches the target. It’s important that the executive team be aware of the cutoff point, after which further expenses cannot be added to the planned budget.
  • Mandatory. These projects must be done. Typically, they conform with prior commitments or resolve an issue that would otherwise lead to significant loss of sales, delays in invoicing or delays in financial reporting.
  • Transformation. These projects build the future core competitive advantage of the organization. They must link explicitly with the organization’s strategy and focus on creating new markets or business models.
  • Core differentiation. These projects build the capabilities that enable the organization to stand out in the market. Ensure that there’s a clear understanding from decision makers of what belongs in this category. 
  • Growth. These projects focus on growing the business within the current business models.
  • Improvement. These projects seek to deliver operational or capital efficiency. They also include projects that provide maintenance or basic improvements.
If projects near completion have not been included, determine whether you allow them to finish by assessing the expected benefits and the relative importance of completing the project, compared with projects already identified as high priority.

Once done, formally approve the renewed portfolio together with the other key decision makers. Cancel or postpone all other expenses, projects and activities that didn’t make the final portfolio until the next approved budget cycle comes around.

Executive leaders may face some challenging results, such as too many mandatory, core or transformational expenses that may require revisiting the process with the aim of balancing if possible. 

Instead of blindly increasing the budget by a certain percentage and masking the cost increase, the company can identify a situation in which it can decide to make the part itself or buy the part from the external supplier for its end products. 

Traditional budgeting may not allow cost drivers within departments to be identified. Zero-based budgeting is a more granular process that aims to identify and justify expenditures in detail.

Zero based prioritization is the perfect solution for creating an operating budget that dovetails with the impact the pandemic has wrought on your company, the economy and lines up with slow growth expected over the next year.
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