ZBB originated in the 1970s. Therefore, it is nothing new and when something old becomes popular it is best to be cautious.
ZBB means zeroing out all line items in the budget and justifying every dollar that is added for each line item. There have been several stories recently about large organizations using ZBB to reinvent themselves. The success of some organizations that have used it has caused it to become popular. It is like many other great ideas: when used in the right way, at the right time, and for the right reasons, it can be highly effective.
Here is a good introduction to ZBB and some of the misconceptions that surround it.
If you decide ZBB is right for your nonprofit and now is the right time to implement it, here are some suggestions to guide your implementation:
Mission, Clients, and Growth – Your budgeting should center around your mission, what is best for you clients, and on growing the number of clients you serve. If it is impossible to directly relate the funds for Activity X to advancing one of those three, then allocate zero to Activity X (eliminate Activity X). This will drive your nonprofit to become more mission, client, and growth centric.
Value – If it is impossible to explain how funding Activity Y will create value that is important to your donors, other stakeholders, or community, eliminate Activity Y. This will drive your nonprofit to become more donor and community centric. It will also help to increase the support you receive from all sources. The more value others receive from your activities, the more generous they will be and the more your sustainability will increase.
Sacred Cows – Most organizations have one or more sacred cows. It is hard to eliminate them because of tradition or who loves them. You know an activity is a sacred cow if it has lost its value but people are unwilling to eliminate it. Now is the time to eliminated the cows from your budget. Remember that sometimes eliminating a cow might mean selling or transferring the cow to some other organization. In some cases, you may need to transfer a little initial financial support with the cow just to make it more attractive to the recipient. If it frees up resources and enables your nonprofit to use those resources to better serve clients or make your mission more effective, it will be well worth it. What is important is the increased sustainability of your nonprofit and eliminating the cows.
Alternatives – Look for less expensive and more effective ways to deliver the same or better results. Many things can be automated or will be automated in the near future. Automating activities or changing them to take advantage of new methodologies redirects resources to more important areas and increases sustainability.
ZBB is a budgeting tool. Most of the time it redirects costs to increase effectiveness and efficiency. Sometimes it reduces costs. Be careful that the cost reductions never impare effectiveness. Increasing effectiveness should always be more important than increasing efficiency. Greater effectiveness will increase support, which is a better way to balance the budget than cutting costs.
Next Step:
Think carefully about whether ZBB is right for you nonprofit (timing, culture, etc.)
Focus the decision-making on an objective analysis of the needs of your mission and clients as well as what will create value and drive growth
Eliminate your sacred cows
Our suggestions for implementing ZBB works equally well for the traditional budgeting process. The major risk with the traditional process is that costs are increased automatically in response to inflation and growth. The automatic part of the process limits the amount of objective analysis necessary to find new and better ways. The threat of budget cuts built into ZBB helps to encourage a more thoughtful, objective, and purpose-driven analysis of each expense.
Regardless of how your nonprofit creates its next budget, make sure the process is objective, purpose driven, and mission and client centric.
Take It Further:
Ask your donors, clients, other stakeholders, and community to tell you about the value they receive and the value they want to receive from your nonprofit before starting the budgeting process
Preview your budget decisions with a cross section of stakeholders before approving your next budget
