What is zero-based budgeting?

Zero-based budgeting (ZBB) is a budgeting method in which every expense must be justified and approved for each new period, starting from a "zero base." Unlike traditional budgeting, which adjusts previous budgets, ZBB requires managers to build budgets from scratch, analysing each function’s needs and costs without reference to past spending. This approach ensures that resources are allocated based on current priorities and actual requirements.

Key takeaways

Fresh evaluation every cycle

Each budget period starts from zero, and all expenses must be justified, regardless of previous allocations.

Strategic alignment

ZBB ties spending directly to organisational goals and current needs, rather than historical patterns.

Cost control and efficiency

The method helps eliminate unnecessary spending, promotes cost consciousness, and can uncover operational inefficiencies.

Time-intensive process

ZBB is more detailed and time-consuming than traditional budgeting, requiring significant managerial effort and collaboration.

Why zero-based budgeting matters?

Zero-based budgeting (ZBB) promotes accountability by requiring managers to justify each expense, which encourages careful resource allocation and a sense of ownership. This process also enhances agility, as regularly reassessing needs allows organisations to adapt more quickly to changing business conditions. Additionally, ZBB supports growth and performance by identifying hidden costs and ensuring funds are allocated to areas with the most significant impact. By encouraging strategic thinking and prioritisation, ZBB helps improve decision-making throughout the organisation.

How to implement zero-based budgeting

Define objectives

Set clear goals for the budgeting period and identify required resources.

Identify cost drivers

Analyse variables that influence revenues and expenses.

Classify expenses

Categorise each cost as essential, strategic, supportive, or discretionary.

Allocate resources

Assign funds to each category, justifying each expense based on its benefits and necessity.

Monitor and review

Track actual spending against the plan and adjust as needed.

Impact on business and operations

Reduces waste and redundant spending.

Ensures alignment of spending with current priorities.

Encourages cross-departmental input and transparency.

Drives operational improvements and better use of resources.

Real-world examples

Case study: Unilever’s ZBB journey

Unilever implemented zero-based budgeting in 2017, shifting from historical allocations to justifying every expense. By 2019, the company had increased its absolute marketing spend while improving efficiency, resulting in higher operating margins and more effective resource utilisation.