One discipline applied to costs by high performing organisations is known as “Zero-based Budgeting”.
Zero-based Budgets are built from the ground up each year instead of taking last year’s budget as a starting point. Start from the ground up instead of adding a little or taking a little away.
Cost Centre Managers – Zero Based Budget
The Managers of each Cost Centre have to demonstrate why the costs in the Zero Based Budget are necessary.
Preferably do this on an annual basis, but if not, do it as a once off as part of this Profit maximisation exercise.
- Ask each Cost Centre Manager to justify their reason for a cost being present. More importantly, to present data on why that is the case.
- Google for additional web resources to help better understand this process.
When cutting costs, you will get push-back from the Cost Centre Managers saying:
- That the impact of these changes are unpredictable.
- “We should go slow”.
If you follow that advice, you will never achieve the cost cuts that are possible.
It is much better to cut heavily and then restore anything that you have cut that proves to be a necessity.
The Zero Based Budget will indicate these.
The only instance where you might think otherwise is in relation to making staff redundant.
- Not only is it unpleasant to let good people go, it is potentially difficult and uncertain to replace them with new hires later.
- In this instance, it is possible “the devil you know is better than the devil you don’t”.
One way to impose a cost saving discipline on your staff is to require that any expenditure of more than a certain amount (and make it a small amount) must be approved by you.
- In the short term, this makes a lot of work for you. But very quickly you get to work out the staff who are on board and present reasonable expenses to you.
- The staff in turn learn that it can be a painful experience taking requests for increased expenditure to a boss who is not going to sign and will probe deeply as to why this is coming to him.