What Is Zero Based Budgeting ZBB?

What is zbb

In addition, ZBB promotes innovation and minimizes the waste and scope creep that can accompany baseline budgeting, where every dollar is often spent to protect the following year’s budget against cuts and encourage an increase—even when it’s not necessary. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy. Though this particular company chose to reinvest their savings in the customer-facing areas of their business, other companies use the savings to fund and amplify the next stage of productivity. What you choose to do with the savings depends on your strategic goals for the business. Gain unlimited access to more than 250 productivity Templates, CFI’s full course catalog and accredited Certification Programs, hundreds of resources, expert reviews and support, the chance to work with real-world finance and research tools, and more.

  • However, over the last half century, the tool became dogged by misperceptions and faded into obscurity.2 2.See Shaun Callaghan, Kyle Hawke, and Carey Mignerey, “Five myths (and realities) about zero-based budgeting,” October 2014.
  • The number of companies publicly referring to zero-base budgeting has exploded over the past few years, including such disparate companies as Alcoa, Boston Scientific, Jarden Corporation, and Quiksilver (exhibit).
  • Done right, ZBB can translate into cost savings that fund future strategic initiatives and drive growth.
  • It’s becoming clear that ZBB can be effective across industries, in companies big and small, and under both public and private ownership.

Meanwhile, lowered costs may result as zero-based budgeting may prevent the misallocation of resources that may happen over time when a budget grows incrementally. Traditional budgeting also only analyzes only new expenditures, while ZBB starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. Zero-based budgeting aims to put the onus on managers to justify expenses and aims to drive value for an organization by optimizing costs and not just revenue.

A tool for all seasons

The zero-based budgeting process is a strategic budgeting approach that mandates a fresh evaluation of all expenses during each budgeting cycle. Unlike traditional budgeting, where previous spending levels are typically adjusted, ZBB requires individuals or organizations to justify every expense from the ground up. The aim is to optimize resource allocation by ensuring funds are allocated to activities that align with strategic objectives and generate the highest value. ZBB is an effective tool, but it is also a thorough process that takes time to execute and requires management buy-in. Before budgeting begins, management needs to build a highly detailed fact base, develop visibility into cost drivers, and put in the effort needed to support aggressive top-down targets with detailed bottom-up analysis.

What is zbb

Certain services may not be available to attest clients under the rules and regulations of public accounting. To the extent that ZBB has encouraged governors and legislators to take a hard look at the impact of incremental changes in state spending, it produced a significant improvement in state budgeting. But in its classic form – begin all budget evaluations from zero – ZBB is as unworkable as it ever was. Managers may find it difficult to make the switch to prioritizing and justifying every item in their budgets on a monthly basis, creating pushback that needs to be addressed before you can operate at peak efficiency. When every line item has to be justified, it’s easier for some organizations to identify and eliminate the ones that aren’t generating adequate return on investment (ROI).

Zero-Based Budgeting In a Box

The setup period could take anywhere from four to 10 months, with full-time support from finance and IT, and part-time support from profit-and-loss owners, and cost-category owners throughout the organization. The annual budgeting process starts from zero but is very structured, detailed, and interactive to spark meaningful financial debate between executives and managers. Over the course of the year, multiple team members are tasked with performance management and cost management debate.

What is zbb

With the deep visibility into costs that ZBB requires, you can make changes to cut the fat while allowing the organization to build muscle. It was during the 1990s that China began looking out for a new and modern form of budgeting for their country’s nationwide budget reform, and ended up settling on ZBB. The concept of ZBB was first introduced to China at the beginning of the 1990s and was primarily focused on Hubei Province. A new policy was set in place to put ZBB into action there, known as the DBR, or the Departmental Budgeting Reform. According to Jun Ma, a professor at the University of Nebraska, the beginning years of ZBB in Hubei were a bit rocky as the DBR had not yet been implemented in all the state departments in Hubei.

Explore on-demand demos to discover how our modeling and planning capabilities are designed to meet the specific and unique needs of your business. Use of ZBB is expected to remain flat in the Asia Pacific, except in China, where it is expected to rise—perhaps due to lower implementation barriers and lower failure rates. Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

The ultimate guide to zero-based budgeting (ZBB)

And if your company or organization is looking to make a shift toward ROI-focused, efficiency-minded budgeting techniques while still maintaining the flexibility to leverage opportunities and handle unexpected disruptions, incorporating zero based budgeting can help. In other words, zero based budgeting is monthly, but can provide data for deeper analysis in other financial models that incorporate data for the longer periods, such as the fiscal year, provided your organization makes such analyses part of its workflows. 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. Zero-based budgeting (ZBB) is the process of building your annual budget from zero each year to verify that all components are cost-effective, relevant, and drive improved savings.

  • It does take time to embed the new cost management culture into the organization but setting up and rolling out the ZBB program has limited requirements.
  • All businesses use budgets to keep track of spending and improve ways to minimize costs and maximize profit.
  • McKinsey partner Wigbert Böhm sat down with the editorial board of McKinsey on Finance to discuss just these questions.
  • It was during the 1990s that China began looking out for a new and modern form of budgeting for their country’s nationwide budget reform, and ended up settling on ZBB.

Zero-based budgeting can drive sustainable significant savings but must be considered as more than building a budget from zero. The best ZBB programs build cost management culture through increased cost visibility, accountability at all levels of the company, governance model, rigorous and routine processes, and aligned incentives. ZBB frees up funds from unproductive costs, allowing those savings to be directed to more productive areas of the business or taken to the bottom line to facilitate future growth whether you’re a small business or an enterprise-level corporation. In the zero based budgeting process, no line item is automatically transferred to the new budget from the previous month’s.

How is zero-based budgeting different from traditional budgeting?

The approach does favor departments and functions that achieve direct production or revenue since those contributions are easier to justify than in departments such as research and development and client services. A traditional budgeting method, on the other hand, calls for incremental increases over previous budgets, such as a 3% increase in spending, without the justification of both old and new expenses, as called for with the ZBB approach. Traditional budgeting practices only look at new expenses, while ZBB starts from zero and mandates justification of all expenses.

Zero Based Budgeting Disadvantages

Only a few departments implemented the budgeting system, and the results of multiple departments using multiple budgeting systems were not good. Officials in the Hubei province and the DBR began looking for ways to incorporate the best parts of ZBB and form a new budgeting system that would work for their needs. This form of budgeting required bureaucracies and agencies to submit a simple budget within a pre-set time limit. TBB, as a modified form of ZBB, has worked out moderately well for the Chinese government in Hubei over the years, but many problems still face the budgeting system. One of the most reliable ways to make such an implementation a reality is by choosing to centralise data and spend management with a comprehensive, cloud-based solution like Planergy.

How to get started with zero-based budgeting

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. In the initial setup phase, there’s a central coordination team that develops the deep visibility into costs and sets the detailed savings targets for the upcoming budget cycle. That team is also responsible for making sure the company’s systems and processes are ready for the detailed reporting, governance, and performance management that ZBB requires.