Zero-Based Budgeting

Zero-based budgeting (ZBB) is a budgeting technique that allocates funding based on efficiency and necessity rather than budget history. Management starts from scratch and develops a budget that only includes operations and expenses essential to running the business; there are no expenses that are automatically added to the budget.

The final output is well justified and is aligned with the company’s overall business strategy or business plan.
Encourages more collaboration throughout the company
Improves performance and operating efficiency by challenging assumptions and examining expenditures
By avoiding traditional budgeting percentage increases, there is a significantly better chance of making cost reductions.

Implementing a zero-based budget requires qualified personnel and specialized training, which can be time-consuming and costly.
May harm the company’s overall culture or brand image
May be cost-prohibitive (because of time, research, and analysis required) for companies with minimal available funding
It is substantially more complex and tedious to start from a zero base. Traditional budgeting is much simpler, faster, and easier to implement.

All businesses use budgets to keep track of spending and improve ways to minimize costs and maximize profit. Budget planning for the current/next year is usually based on budgets from previous years. In fact, traditional budgeting begins with the previous year’s budget and usually implements incremental percentage increases or decreases to meet new goals. These percentages usually range anywhere from 1% to 10%.

Sometimes, budgets can get out of control, or in some years, may show significantly higher or lower costs, depending on the overall market outlook and other external factors. In such scenarios, it does not make sense to look at last year’s budget because significant changes in the company’s situation have taken place. The entire budget needs to be redone from scratch – hence, a zero-based budget.