Value Based Budgeting
Typically, the budgeting process in many companies is based on previous year's costs and assumptions. This was not the case for the new normal after pandemic where the year 2020 could not be used as a basis for the 2021 budget because we needed to change business strategies and models into ones that are suitable for the new normal.
In the new normal, companies need to aggressively get rid of excess baggage and focus on what will drive growth in the future. For this reason, the appropriate budgeting method is value-based budgeting. Value-based budgeting addresses today's central problem, which is budgeting based on historical patterns and assumptions adjusted for projected consumption and revenue plans. Value-based budgeting incorporates and improves upon the core concepts underpinning zero-based-budgeting (ZBB). While many companies have used zero-based-budgeting (which starts every initiative with zero cost) as the preferred method for cost-cutting, few use it on an ongoing basis to unearth capital and drive future growth.
Things those must be considered for implementing value-based budgeting are as follows:
1. Create alignment: Identify the most important strategic areas for investment across the company. Determine how much capital will be needed and achieve alignment about the company's investment priorities.
2. Justify everything: In value-based budgeting, every item, from travel expenses to hiring a design firm, must be requested, justified and approved in real time before funds are allocated.
3. Put new data and processes in place: Use a system that links each expense line item across the associated cost components of the company's budgeting and expense platform into its financial system.
4. Ensure the culture is change-ready: Value-based budgeting requires changing the mindset of leaders from maintaining and controlling their department's budgets and activities, to looking for opportunities to challenge, justify, minimize, and reinvest. This requires a culture of accountability.
5. Create contingency: It is necessary to plan an extra emergency budget for any unexpected things that may occur.
Value-based budgeting basically doesn't care what the company spent last year and only identifies the investments needed to drive growth, putting investments in front of costs.
Source: Raja R. 2020. "How Your Company Can Budget For The New Normal". Forbes Finance Council. Forbes, November, 2020