A Real estate company had been experiencing a relevant decrease in their income over the past years, and their sales and administration expenses ratio (SG&A) over total sales had been above the ratio of similar companies. By undergoing a zero-based budgeting exercise, the company was able to significantly reduce it’s SG&A
Context
A Local leading real estate company had been experiencing sustained sales decrease over the past years, as their SG&A expenses also grew in relation to their total sales. This was impacting their net profits, and management wanted to implement a more conservative expense philosophy by applying a zero-based budgeting exercise and by this means also identify and capture different savings
Opportunities detected
In order to approach the project, the team decomposed the work in three different stages. In the first stage, the potential savings opportunities throughout the different expense categories were sized through different analysis and benchmarks. This allowed to undergo a prioritization exercise together with the client in which it was defined which expense categories would be budgeted from zero. In second place, a zero-based budget was constructed for the 3 prioritized costa categories (marketing, travel, and IT services). Finally, a behavioral work was done in order to guarantee a cultural transformation that enables the follow-up, control, and extrapolation of the zero-based budgeting methodology towards other cost categories of the organization.
As the cost analysis was performed, it was found that an important part of the budgeting system was based only in historic data, without further questioning and justification of that expense. There was also unexplainable variability amongst different business units in terms of different prices and quantities for same cost categories. These findings were worked and corrected as the zero-based budget was worked for these 3 cost categories
Proposed actions
In terms of the marketing cost category, an opportunity was identified of negotiating with marketing agencies as a holding company instead of the current state, where each busines unit negotiated individually on their own, resulting in different fees. Also, marketing expense policies were defined according to the stage of the lifecycle in which the different real estate projects were, and some advertising tools were eliminated.
For the travel category, a corporate travel policy was defined, establishing a minimum advanced purchase criteria, so that expensive last-minute travel expenses (such as airplane tickets) could be avoided. Also, maximum ticket prices for different destinations were recommended based upon industrial analysis
In terms of IT services, the mobile plan costs of the company were optimized, and dedicated internet connections were reduced since regular internet connections could serve well most of the company’s project locations
Finally, a corporate governance and structure was defined in order to guarantee that the zero-based budgeting exercise would go beyond the Matrix Consulting engagement, establishing clear leaders, a follow-up scheme, and building control panels that allow the monitoring of the realized expense during the next financial period
Results
The cost saving opportunities that were found via the zero-based budgeting exercise allowed for a 22% reduction for the 3 cost categories that were worked
An efficiency and cost-conscious philosophy was installed throughout the company, where leaders acted as cost ambassadors and pushed more cost accountability throughout their own different teams
