A quick note on what a budget is and where it comes from: The budget is a forecast, usually for the next calendar or fiscal year.
Creating a budget is an arduous process, which generally will involve all levels of management. Ideally they are created from a bottom-up approach, with each manager creating a budget for their department or area. After these smaller budgets are created, they’re passed up the chain and collected by someone higher up that can then assemble the budget, as a whole, for the company or organization.
At this point in time, the budgeting process is in a state of flux here in the U.S. The traditional method behind budgeting is something like a “bolt-on” process. Say that you were assigned the task of developing the 2016 budget. Starting with the 2015 budget, you could then factor in inflation, sales increases, make a few adjustments, and move forward with that as your 2016 budget. However, this budgeting process can be problematic if there is slack, sandbagging, errors or fluff in last year’s budget. If there has been fluff built into the previous year’s budget, and all you look at is inflation factors and sales adjustments, bolting on those changes will result in leaving the fluff in place.
A number of companies (like Kraft, Coca-Cola, Mondelez, etc.) have started working with a new process of budgeting called “zero-based budgeting.” This method is extremely aggressive, with a starting point of nothing when building next year’s budget. Every line or portion of the budget being built has to be justified from the point of zero. That includes labor costs, such as employees. All these costs must be justified with real reasoning- not just, “Well, we had them last year.” The justification is forward looking. What value are they going to add to the company or organization, moving forward? Ironically, the managers in charge of running this style of budgeting are also at the mercy of zero-based budgeting, needing to provide justification for what value they’ll be adding for the coming year, too.
This budgeting approach can be, and is intended to be, extremely disruptive. There is the possibility that it can challenge employee and organizational commitment, because it can be a strong negative experience having to justify your own job. However, the results can be extremely effective. Companies like the previously mentioned have been able to shave hundreds of millions off of their annual budget using the zero-based budgeting process. Not all of these cuts are jobs or positions. In some cases the money saved has come from cutting loose assets that aren’t justified for keeping or maintaining. The justification for having these things has been, “well, we’ve always had them.” This type of thinking is exactly what zero-based budgeting was intended to help eliminate.
If you’re interested in learning more about the budgeting process, operational budgeting or even projecting revenues, sign up for our Budgeting Concepts course!
Michael Flores, MAcc, CPA, earned his ABD in Accounting from Texas Tech University, Master of Accountancy from New Mexico State University, BBA in Accounting from the University of Texas at El Paso, and CPA from Texas. His areas of expertise include Cost and Managerial Accounting, Accounting and Administration for Health Care Organizations; and Ethics including Accounting, Business, and Health Care.