The economic downturn is forcing finance executives to take a more detailed look at their companies’ spending. One tactic they are turning to is zero-based budgeting, a technique growing in popularity, according to The Wall Street Journal.
Companies including General Motors, Guess? and Signet Jewelers are using zero-based budgeting to slash costs and navigate the effects of the coronavirus pandemic. The expense-management strategy requires finance executives to question and justify each line item in their budgets from the bottom up.
That stands in contrast to more traditional budgeting techniques that involve adjusting the previous year’s spending and cutting top-line budget amounts by a flat percentage based on economic forecasts.
The clean-sheet approach to budgeting has become more popular with finance chiefs during the pandemic because it allows them to cut costs surgically, says Luke Pototschnik, managing director at Boston Consulting Group, who advises companies on zero-based budgeting. It also helps chief financial officers budget for longer-term changes in their business–for example, a smaller real-estate footprint as employees increasingly work from home and customers move more to online purchasing.
“The disruptions of COVID-19 are causing people and companies to fundamentally rethink parts of their budget,” Pototschnik says.
The budgeting technique, which was developed in the 1970s, was used by consumer goods companies first but is now applied across industries. It has faced criticism, though, for encouraging companies to focus too narrowly on costs at the expense of innovation.
In an April survey of over 300 global finance executives, 26% said they planned to zero-base their budgets due to the pandemic, according to research firm Gartner Inc. Around 300 global companies used zero-based budgeting as of 2018, according to Accenture PLC, an advisory firm. Read the full story.