HomeAbout UsBest PracticesSoftware AideOur ApproachHow We HelpPower SourceContact Us
BEST PRACTICES - Zero Based Budgeting

The objective of Zero Based Budgeting is to "reset the clock" each year. While a traditional budgeting process allows managers to start with last year's expenditures and add a percent for inflation to come up with next year's budget, Zero Based Budgeting implies that managers need to build a budget from the ground up, building a case for their spending as if no baseline existed - to start at zero.

If Implemented Well If Not Implemented Well
Can eliminate a sense of "entitlement" to costs increases.

Improved cost containment.

Increased discipline in developing budgets.

More meaningful budget discussions during plan review sessions.
May be overkill in some situations to request that managers justify every existing expenditure. Can meet with significant active and passive resistance.

Unless management takes the process seriously, budget holders will figure out they don't need to really build a budget from the ground up after all.

If reducing the cycle time of the budget process is a goal, this approach is inconsistent with meeting that objective.

There is a significant educational element to this approach that if ignored, will result in confusion and user backlash.

Can this work for my company?
Zero Based Budgeting (ZBB) can be a highly effective way to "shake things up". When management announces that budgeting as usual will be replaced with a process that requires individuals to justify all of their current and projected spending levels, that nothing is taken as a given, people get the message that things have really changed. It puts them on notice that not only are increases in spending going to be scrutinized, but even current expenditure levels will need to be justified. This can be highly effective in special circumstances like a merger, or severe industry turndown, to name but two. If implemented effectively, this can produce some dramatic results.

Success requires that management follow through on the message, that in fact they assess and evaluate all material expenditures and take nothing for granted. If they don't then people will catch on that Zero Based Budgeting amounted to lip service.

In addition, success also requires a fair amount of education for budget holders. Often times people are promoted into a responsibility that includes developing a budget, but are not given any training. Many times these people fall back on the simplest approach, which is to take last year's spending and add something for inflation or other known increases. Zero Based Budgeting requires a much more rigorous understanding of expenditures and what drives them, and many managers are simply not prepared for this.

You may want to consider implementing Zero Based Budgeting if:

You are in a situation, such as a merger, that requires senior management to understand every functional area's expenditures and justification.
You are prepared to hold workshops or other educational forum to teach budget holders how to create a Zero Based Budget.
You have the full, enthusiastic support of senior management (there will be pushback).
You have the technology tools to support development of zero based budgets.