If the human body is exposed to a highly calorific diet and limited exercise, it will accumulate substantial pockets of fat over time. This excess weight will in turn slow the body down and affect the individual’s day-to-day life as well as overall performance. If the individual is determined to get back to full fitness, then a complete detox will be required. It will take stamina and continuous, strenuous effort for the individual to remain fully fit.
Like the human body, an organisation that neglects its high level of costs and allows spending to spiral out of control, will accumulate excessive weight that will slow the whole organisation down. In today’s uncertain times when the pound is plunging and wafer thin margins are the norm, the bottom line has come under immense pressure. As many retailers are reliant on imports1, the falling pound will have a high impact on their COGS and gross margins (approximately 10-13% in line with GBP current value). This is a prime time to detox your cost structure to remain sustainable and become sufficiently agile to withstand the financial demands of the constantly changing landscape.
THE ZERO-BASED BUDGETING APPROACH
The zero-based budgeting (ZBB) approach, developed in the 1960s by Peter Pyhrr, represents one of the most thorough methods of transforming spend into a competitive advantage, where cutting costs and growth strategies are aligned with corporate goals.
The ZBB approach dictates that the purpose and effectiveness of all spending must be justified from scratch each year. It provides management with a tool to evaluate and allocate its resources effectively by forcing an examination of all activities in light of corporate objectives and financial targets.
Organisations normally build budgets at the beginning of their fiscal year in order to outline financial and operating goals. However, this forecasting process can be unreliable and overloaded with insignificant data that has been in the system for years and years with no meaningful objective, leading to the inefficient allocation of funds.
ZBB helps organisations identify resources that are not generating an adequate return and encourages strategic redeployment of those funds in order to achieve business objectives and strengthen organisations’ market positions. And in today’s era of digital disruption, many use those funds to invest in new technologies and capabilities that can help them out-compete traditional and non-traditional, digitally enabled competitors.
In a nutshell, ZBB is used to reset budgets and confront the status quo of an organisation’s cost structure, helping overcome complexity and building clear, flexible budget forecasts that deliver better and more targeted results year-on-year.
1 65% of fashion retailers and nearly 40% of grocery retailers rely on imports, according to the Annual Business Survey, November 2015, Office of National Statistics
6 October 2016