During a crisis, organisations find themselves in a situation where every decision, especially those related to finances, can significantly impact their survival and recovery. One powerful strategy that stands out in such times is applying Zero-Based Budgeting (ZBB) concepts for fast resource optimisation. The methodology of starting each budgeting cycle from a 'zero base' is not merely a finance tool; it serves as a beacon for organisations navigating through stormy waters, ensuring quick resource optimisation and a robust pathway to recovery.
This approach represents a paradigm shift from traditional budgeting, which often perpetuates historical inefficiencies and falls short during crises. Instead, ZBB demands a comprehensive re-evaluation of expenditures, compelling organisations to justify how each penny spent aligns with their strategy and goals. This methodology becomes crucial for identifying non-essential expenses and investments, thereby generating significant reductions in operational and capital expenditures.
Understanding Crisis Scenarios
Crisis scenarios can vary widely across industries but are primarily caused by complications in financial management, operational disruptions and strategy challenges:
- Financials: Inability to pay debts, cash flow issues (e.g., mismanagement of the cash conversion cycle and customer defaults), and other external economic factors, such as a drop in commodity prices, reducing revenue and profitability.
- Operations: Unexpected events like the COVID-19 pandemic and natural disasters (earthquakes, floods, hurricanes) and difficulties in rationalising operational costs (e.g., raw material and workforce costs).
- Strategy: Unsuccessful M&A, new product or market failures, and competitive pressure.
During a crisis, quick resource optimisation is crucial for businesses. One advantage of applying ZBB is that it can help evaluate all projects and expenditures in line with revised strategic goals, focusing resources on the most promising initiatives. The goal is to cut non-critical spending, renegotiate contracts, and potentially pivot operations to more cost-effective solutions.
Visagio's Methodology for Quick Resource Optimisation
Visagio`s methodology for quick resource optimisation starts with an assessment of current spending patterns by mapping all processes, projects, contracts and other resources present in the company forecast to define what are the main drivers we should be considering giving the new scenario of the organisation.
Afterwards, an analysis is conducted to determine each item's relevance to the business by evaluating the magnitude of its impact on the main pillars of a decision like cash flow, costs, revenue, NPS, eNPS, and operational continuity.
A final recommendation is compiled, containing actions for each budget item and an estimation of the financial impact expected from these decisions. The decisions include suspending (e.g., immediately suspending spending on R&D and projects without immediate payback), slowing down, replanning, maintaining, or accelerating (e.g., accelerating projects that improve cash flow).
Once decisions are made and the company has a clear roadmap of actions, it is essential to monitor and ensure implementation by integrating the plan into the company's forecast and tracking actuals.
Proven Success
Visagio's experience has shown that efficiency and business continuity are mainly achieved by:
- Cutting all non-essential costs
- Renegotiating contracts
- Stopping investments and hiring, re-evaluating all initiatives with a focus on those with immediate payback
- Reducing all expenses, including bonuses and extra remuneration
- Controlling cash daily, focusing on liquidity and anticipating receivables
- Structuring cash to withstand the most adverse scenarios, forecasting zero revenue
The application of this methodology in a telecom company resulted in a reduction of more than AUD 26 million in OPEX and over AUD 8 million in CAPEX, in addition to aligning the company’s efforts to thrive in a new market context. This outcome was achieved through an exhaustive review of over 800 initiatives and projects, spanning more than 10 directorates within the company.
Critical Success Factors
There are critical success factors when implementing this methodology. It is important to involve finance as a strategic partner, starting from the assessment until ongoing monitoring of the results. No time can be lost during a crisis, so agile decision-making and a clear sense of prioritisation are indispensable. ZBB implementation affects cross-functional stakeholders, so strong leadership, unified organisational objectives, and a transparent communication plan are necessary.
Conclusion
Zero-Based Budgeting (ZBB) provides a critical strategy for organisations navigating crisis scenarios, enabling a comprehensive reassessment and reallocation of resources. By starting from a zero base, companies can identify and eliminate non-essential expenditures, focusing instead on initiatives that deliver immediate value. This approach not only facilitates substantial cost reductions but also aligns spending with strategic priorities, ensuring long-term stability and growth. The telecom sector case study exemplifies how ZBB can lead to significant financial and operational gains, making it an essential strategy for businesses aiming to thrive in uncertain times.
About the Author:
Renan Momesso is a Management Consultant at Visagio with extensive experience in implementation projects, developing and applying solutions in various areas such as post-merger integration, global services provider, procurement, financial modelling and customer experience. He has worked across a broad range of industry sectors, including mining, financial services, technology and the not-for-profit sector.
