As inflation continues, companies are turning to zero-based budgeting as a tool to scrutinize costs, find efficiencies and lower expenses.
What is Zero-based Budgeting?
Zero-based budgeting is a review of all expenses, with each line item expense needing justification to remain in the budget.
In the recent Wall Street Journal’s CFO Journal article by Nina Trentmann, Robert Willems, a senior managing director at consulting firm Accenture PLC, said that many companies are “starting with a clean sheet, because they can’t rely on their budgets from previous years due to the impact of the pandemic.”
According to S&P Global Market Intelligence, a data provider, total operating expenses at S&P 500 companies rose 17% in the second quarter, from $2.86 trillion in 2021 to $3.34 trillion in 2022, quantifying why financial chiefs are looking at ways to lower costs.
Companies such as auto manufacturing giant, General Motors; industrial firm, Honeywell; cosmetics business, Coty; chocolate maker, Hershey; and alcoholic beverage company, Diageo have leveraged zero-based budgeting to improve business performance.
Not each company is applying zero-based budgeting across their entire enterprise, but areas of cost scrutiny range from: operations, real estate, logistics, marketing, selling, general and administration, information technology, research and development, as well as slowing previously planned hiring.
At Honeywell, CFO Greg Lewis mentioned that the company is entering into planning for 2023 with caution, targeting to bring fixed costs down by 1% per year.
For Pennsylvania-based chocolate maker Hershey, the company regularly goes through every line of its profit and loss statement, Finance Chief Steve Voskuil said.
For Diageo, with zero-based budgeting becoming part of everyday management, the company expects annual productivity savings of around $460 million a year.
In each case, companies are leveraging data and developing decision support tools to help uncover areas of opportunity.
With 2023 fast approaching, this could be as good a time as ever, if you have not done so already, to incorporate zero-based budgeting as a best practice for your company.
This article was summarized from the September 6, 2022 article by Nina Trentmann in The Wall Street Journal: https://www.wsj.com/articles/zero-based-budgeting-gains-clout-as-a-way-for-companies-to-find-savings-11662463800?mod=hp_lista_pos5
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