Zero-Based Budgeting

ZBB Definition: What is Zero-Based Budgeting for Hotels?

Zero-based budgeting (ZBB) is a budgeting method where all expenses must be justified and recreated from scratch for each new budgeting period. Essentially, you start from a “zero base” each time.

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Unlike traditional budgeting, which builds on previous budgets with incremental adjustments, ZBB requires a fresh look at every expense category. This forces hotels to critically evaluate their spending and prioritize resources for maximum impact.

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While zero-based design involves redesigning processes and strategies from scratch across various organizational areas, zero-based budgeting applies only to budgeting and financial planning.

4 Benefits of Zero-Based Budgeting for Hotels

Implementing zero-based budgeting may not be a traditional approach, but it can help hotels save time and resources.

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Here’s a deeper look at the benefits of this approach:

1. Cost Control

ZBB encourages you to meticulously examinee all expenses, exposing unnecessary costs and inefficiencies.

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A study by McKinsey & Company found that companies implementing ZBB typically see savings in fixed and semi fixed costs of 10% to 25%, usually within 12 months.

2. Improved Decision-Making

ZBB fosters a data-driven approach to budgeting. By justifying each expense, hotels can gain valuable insights into resource allocation and make informed decisions about spending priorities.

3. Flexibility

ZBB allows hotels to adapt quickly to changing market conditions. Budgets are not tied to historical figures, making it easy to make adjustments based on your hotel’s current needs and opportunities.

4. Increased Accountability

ZBB promotes a culture of ownership among department heads who are responsible for justifying their spending requests.

Examples of Zero-Based Budgeting in Hotels

ZBB can be applied to various hotel expense categories.

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Here are some examples:

 
• Hospitality expenses: Review staffing levels, explore alternative suppliers for amenities and analyze the cost-effectiveness of outsourced services.
 
• Financial expenses: Evaluate bank fees, insurance premiums and merchant processing charges. Consider negotiating better rates or exploring alternative providers.
 
• Hotel line item plan: This detailed budget outlines all hotel expenses. ZBB forces a reassessment of each line item, ensuring resources are allocated to essential areas that maximize guest satisfaction and revenue.

Zero-Based Budgeting Best Practices

 
• Define clear goals: Establish your desired financial outcomes before starting the ZBB process.
 
• Involve your department: Empower department heads to analyze and justify their spending requirements.
 
• Take a data-driven approach: Use historical data, industry benchmarks and competitor analysis to build your ZBB model.
 
• Be flexible: ZBB is an ongoing process. Be prepared to adjust the budget as necessary throughout the year.

How to Create a Zero-Based Budget in 6 Steps

 
1. List all expenses: Identify every expense category, big or small.
 
2. Use activity-based costing: Break down expenses by activity or function.
 
3. Justify costs: For each expense category, require department heads to justify the associated costs and expected benefits.
 
4. Prioritize expenses: Rank expenses based on their importance and contribution to hotel goals.
 
5. Allocate budget:Allocate resources based on the priority ranking.
 
6. Monitor and track: Regularly monitor spending and adjust the budget as needed.

Helpful Formulas and Rules for Zero-Based Budgeting in Hotels

While ZBB is not a formulaic approach, some guiding principles can be helpful:

 
• Cost-benefit analysis: Evaluate the financial return on investment (ROI) for each expense.
 
• Benchmarking: Compare your hotel's expenses to industry benchmarks to identify areas for improvement.
 
• Redundancies: Eliminate duplicate spending across departments.

Canary Technologies: Your ZBB Budgeting Partner

While ZBB requires dedication, it can significantly optimize your hotel's financial health. Canary Technologies offers solutions that streamline operations, increase revenue and improve the guest experience, all while complementing your ZBB strategy.

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For example, Canary's Dynamic Upsells product helps drive incremental revenue, while Digital Authorizations reduce costly chargebacks and fraud. Canary AI helps maximize staff resources and automatically upsell guests, leading to increased efficiency and cost savings.

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By implementing ZBB and partnering with a hotel management software provider like Canary Technologies, hotels can achieve a win-win situation: streamlining costs while elevating the guest experience.