At a time when business models themselves are in question due to the COVID-19 afflicted chaos, zero-base budgeting (ZBB) is making a comeback in boardroom discussions and finance departments.
ZBB works on the principle that costs need to be justified afresh each year after a hard look at what they accomplished the previous year. In the pressure that it builds on managers to justify existing costs, ZBB works in sharp contrast to the incremental mode of budgeting where the previous year's budget is built upon.
As a concept, ZBB has existed for a few decades. Peter Pyrrh, an accounting manager with Texas Instruments, is credited with creating the concept of zero-based budgeting in the 70s.
However, it became particularly popular and much criticised in the last decade when Brazilian private equity firm, 3G Capital, pushed it to the forefront at companies that it acquired.
Along with Warren Buffett's Berkshire Hathaway, the firm engineered the merger of Kraft-Heinz to become one of the largest packaged food companies in the world in 2015. Over the last few years, Kraft Heinz focused relentlessly on cutting costs using ZBB.
Over the last few years, many of the problems that the merged entity faced have been laid at the door of ZBB, yet the company remains steadfast in its support of ZBB. Last year, as Miguel Patricio came in as CEO, he told a news agency, "cost cutting should be a priority for any company. However, you cannot cut costs every year." However, that is Kraft-Heinz after four years of aggressive cost reduction.
Yet, the conditions created by COVID-19 are conducive for a more unrestrained embrace of zero-base budgeting. Billionaire investor and founder of Social Capital, Chamath Palihapitiya predicts the resurgence of ZBB across corporate boardrooms as companies rebuild their expenses line-by-line, dropping all the bells and whistles and focusing on the bare essentials.
The squeeze on cash flows and the total business unpredictability is also making sure that finance departments in India too are using this budgeting tool.
Bhavin Ashar, Director of Finance at IMA-PG, however, believes that the use of ZBB is always good. "Particularly in current times when rules of the games are going to change. Curtailment of travel , requirement of robust IT infrastructure for remote, need to rightsize and downsize along with the prevalence of the gig economy will make ZBB very helpful to revisit and relook at business plans, business models and cost structures."
Ashar's view is supported by Amit Sachdeva, CFO at online grocer, Grofers. While outlining the cost containment measures being undertaken by the company told Moneycontrol in an earlier interview, "We are leaving no stone unturned right now in cost reduction and every cost line is at scrutiny now with ZBB."