May 12, 2016
Another Look at Zero-Based Budgeting
By: Rosemary Carlson

Alexei’s growing company needs a budgeting process that helps cost out projects, maintain effective financial controls, and make decisions about which projects to pursue while accounting for his fixed, variable, and semi-variable costs. The process must also be cost-effective and efficient.  Alexei has tried zero-based budgeting, but it carries a high cost and requires substantial research that focuses on defining each budgetary line item in each year. However, modified zero-based budgeting (MZBB) addresses these concerns by allowing him to hold fixed costs stationary and research only the project’s variable costs.

Alexei decides to use MZBB to develop a decision package for a potential project. 

Alexei first determines the base-level costs for the project using a simple formula while considering the base, best, and worst cases. Unlike traditional zero-based budgeting, once he has determined the fixed costs, he does not need to justify these costs in his project budget. He then estimates the cash flows for the prescribed timeframe, considering only the incremental cash flows specific to the project. Next, Alexei calculates the return on investment to help him determine how much value the project might add to the company. 

These first steps yield useful information, but Alexei recognizes the importance of conducting a sensitivity and a net present value analysis to ensure his initial research yields the best option. These analyses allow him to manipulate the variable costs and the weighted average cost of capital to see what happens when the variables fluctuate. With this additional information, Alexei gains greater insight into which decision package carries the potential to maximize the project’s value for shareholders. 

Alexei’s calculations give him confidence when he presents his project recommendation to his team, and his analyses help him answer all the concerns his stakeholders raise. Now that he has experienced the relative ease of using MZBB, he plans to implement the method at all levels: Company, department, division, and project. 

What budgeting methods does your company use? Would your financial decisions benefit from implementing the MZBB method? The Accenture Academy course Implementing Modified Zero-Based Budgeting (MZBB) will help you evaluate your firm’s budgetary technique to improve your budgetary control and planning process.

About Accenture Academy

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