Zero-Based Budgeting is a broad-reaching cost transformation effort that takes a “blank sheet of paper” approach to resource planning. It differs from traditional budgeting processes by examining all expenses for each new period, not just incremental expenditures in obvious areas. Zero-Based Budgeting forces managers to scrutinize all spending and requires justifying every expense item that should be kept. It allows companies to radically redesign their cost structures and boost competitiveness. Zero-Based Budgeting analyzes which activities should be performed at what levels and frequency and examines how they could be better performed—potentially through streamlining, standardization, outsourcing, offshoring or automation. The process is helpful for aligning resource allocations with strategic goals, although it can be time-consuming and difficult to quantify the returns on some expenditures, such as basic research.
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How Zero-Based Budgeting works:
For Zero-Based Budgeting, companies should take the following steps:
- Re-envision the business and ask what activities and resources will truly be needed to compete under future market conditions, then set a clear strategic vision and cost target
- Build a comprehensive fact base of current offerings, functions and expenses
- Use a “blank sheet of paper” approach to build the ideal state and identify vital initiatives
- Build the future state, bottom up, by justifying what activities should be performed
- Reset budgets and full-time employee levels, redesigning the organization and planning for implementation
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Companies use Zero-Based Budgeting to:
- Confront conventional thinking and resource allocations by challenging every line item and assumption, including the most sacred of cows
- Help organizations that are overly complex due to mergers or acquisitions
- Fund key strategic imperatives while removing large non-value-adding costs
- Align resources with the mission of the function and enterprise
- Justify proposed activities and resources
Bragg, Steven M. Budgeting: A Comprehensive Guide. Accounting Tools, 2011.
Cheek, Logan M. Zero-Base Budgeting Comes of Age: What It Is and What It Takes to Make It Work. AMACOM, 1977.
Lalli, William R., ed. Handbook of Budgeting. 6th ed. Wiley, 2012.
Pyhrr, Peter A. Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses. John Wiley & Sons, 1977.