What is zero-based budgeting?
Zero-based budgeting, or ZBB, is a budgeting method in which every cost has to be justified from zero for each new period, rather than starting from last year's spending and adding a percentage. Each activity is reviewed for whether it is needed, how much it should cost and how it could be done more cheaply.
Also calledZBB
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- Starts from
- Zero, not last year
- Unit of review
- Activity or cost category
- Best suited to
- Overhead costs
How zero-based budgeting works
Spending is broken into cost categories or activities, often called decision packages, each with an owner. Owners set out what the activity delivers, the options for doing it at different levels of service and cost, and what would happen if it stopped. Leadership ranks the packages and funds them until the budget is used. Standard cost categories, such as travel, software, marketing and professional fees, are compared across departments and against benchmarks, which often shows savings. Full ZBB every year takes a lot of management time, so many companies apply it to selected cost categories, or run a full review every few years and incremental budgets in between. ZBB suits overhead costs more than revenue-linked costs, which are better planned from drivers. Spend data from AP and card systems helps by showing what was actually bought, and from whom.
Common questions
What is the difference between zero-based and incremental budgeting?+
Incremental budgeting takes last year's figures and adjusts them. Zero-based budgeting ignores the history and makes each cost justify itself for the coming period.
What are the drawbacks of zero-based budgeting?+
It takes much more time and effort than incremental budgeting, and teams may justify what they already do rather than rethink it. Many companies use it selectively for that reason.
What is a decision package in ZBB?+
A description of an activity, what it delivers and what it costs at different service levels, used by leadership to rank activities and decide which to fund.
Software that supports zero-based budgeting
Part of Accountio’s accounting technology coverage · Glossary
