For many organizations, the thought of rebuilding the company budget from the ground up can be nightmare-inducing. Wiping the financial slate clean and starting from scratch would be a last resort in a worst-case scenario, never an option to be considered under normal circumstances. Yet an increasing number of organizations choose to do exactly that, an extreme method of budgeting known as 'Zero-based Budgeting.'
What is ZBB?
Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history.1 As opposed to traditional budgeting, no item is automatically included in the next budget.2 In ZBB, budgeters review every program and expenditure at the beginning of each budget cycle and must justify each line item in order to receive funding. Budgeters can apply ZBB to any type of cost: capital expenditures; operating expenses; sales, general, and administrative costs; marketing costs; variable distribution; or cost of goods sold.3 When successful, ZBB produces radical savings and liberates organizations from entrenched departments and methodologies.4 When unsuccessful, the costs to an organization can be considerable.
1. Perspective on considering a Zero Based Budgeting (ZBB) planning approach, Deloitte Analysis.
2. Baseline Budgeting vs. Zero Based Budgeting: Americans for Prosperity, 2012.
3. Callaghan, Shaun; Hawke, K; Mignerey, C. Five myths (and realities) about Zero-based budgeting, October 2014.
4. Save to Grow- Deloitte’s Third Biennial Cost Survey: Cost Improvement Practices and Trends in the Fortune 1000. Deloitte POV/Article. March 2013.
Advantages and disadvantages
Download the PDF to explore more of the potential benefits, challenges, and risk associated with ZBB, and whether ZBB components and theory or more practical and less costly budgeting alternatives are suitable for your company.
Zero-based budgeting (ZBB) is a budgeting process that allocates funding based on program efficiency and necessity rather than budget history
Global macroeconomic factors are having a major impact on cost management efforts at large US companies. While the domestic economy has gained significant strength, other parts of the world are still struggling. This has created a cost/growth paradox we call “thriving in uncertainty,” where companies are simultaneously pursuing the seemingly conflicting goals of aggressive cost improvement and aggressive growth. Deloitte’s fourth biennial survey of cost management and cost improvement trends explores how companies are managing costs in this challenging environment. For details and practical insights on tackling the cost/growth paradox, download the full report—or read on for some highlights