Blog · Territory, capacity and quota planning
What zero-based budgeting (ZBB) means, where it came from, and how it differs from an incremental budget. A finance department is worked through ten decision packages to a funded budget, with the check that the funded packages sum to the approved total, the pros and cons, and how to see whether the savings showed up.
Zero-based budgeting (ZBB) builds every cost line from zero each budget cycle, instead of taking last year's figure and adding a percentage. Each activity is written up as a decision package with its cost, the packages are ranked, and money goes down the ranking until a spending limit is reached. In the example below, a finance department that would have received $1,030,000 on an incremental budget is funded at $860,000.
In a zero-based budget, no cost is carried forward by default. A manager has to say what each activity does, what it costs, what the alternatives are, and what happens if it is not funded. Whatever is not justified this cycle is not in the budget.
The method came out of Texas Instruments. It gained attention in 1970 when Peter Pyhrr wrote about the company's experience with it in Harvard Business Review. Jimmy Carter then used it for Georgia's state budget as governor, and as president told federal agencies in April 1977 that the Office of Management and Budget had issued guidelines for zero-based budgeting in the executive branch. The federal version proved heavy to run and was dropped in the 1980s; companies revived it later, mostly for overhead and discretionary costs.
| Incremental budget | Zero-based budget | |
|---|---|---|
| Starting point | Last year's budget or actuals | Zero |
| Question asked | How much more or less than last year? | Should we do this at all, and at what level? |
| Unit of work | The cost line | The decision package (activity, cost, alternatives) |
| Effort | Low: a few days per department | High: weeks of manager and finance time |
| What it misses | Costs nobody would choose today, carried forward year after year | Benefits that appear later, if packages are judged only on this year |
Incremental budget = Prior-year budget × (1 + uplift %)
ZBB budget = Sum of funded decision packages, taken in rank order up to the funding limit
Saving against incremental = Incremental budget − ZBB budget
Last year's budget was $1,000,000. An incremental budget at +3% would be $1,000,000 × 1.03 = $1,030,000. Instead, the department submits ten packages, and leadership sets a funding limit of $860,000:
| Package | Requested (USD) | Alternative chosen | Funded (USD) |
|---|---|---|---|
| 1. Annual financial statements and tax filings (mandatory) | 190,000 | Full | 190,000 |
| 2. Accounts payable, 3 staff | 180,000 | Automated invoice capture, 2 staff plus software | 145,000 |
| 3. Credit control | 125,000 | Full | 125,000 |
| 4. ERP licenses and support | 90,000 | Full | 90,000 |
| 5. External audit (mandatory) | 95,000 | Full | 95,000 |
| 6. Monthly management reporting package | 110,000 | Full | 110,000 |
| 7. Treasury and cash forecasting | 85,000 | Full | 85,000 |
| 8. Ad-hoc analyst | 75,000 | Not funded | 0 |
| 9. Process consultants | 60,000 | Not funded | 0 |
| 10. Travel and training | 40,000 | Reduced level | 20,000 |
| Total | 1,050,000 | 860,000 |
The packages asked for $1,050,000 at full level, more than the incremental budget. Two choices of alternative and two packages below the line bring it to the limit:
$1,050,000 − $35,000 − $20,000 − $135,000 = $860,000. Against the incremental budget, the zero-based budget is $1,030,000 − $860,000 = $170,000 lower, a 16.5% reduction ($170,000 / $1,030,000). Against last year's $1,000,000 it is $140,000, or 14.0%, lower.
Three things must reconcile before the budget is approved:
Keep the approved ZBB budget as its own plan version, so later reforecasts do not overwrite the baseline the savings were measured against.
For ZBB:
Against ZBB:
The $170,000 only exists if actual spend follows the packages. Each month, compare the ledger with each funded line: is accounts payable running at two staff plus software, or did a temporary hire bring back the third clerk? Spend booked against packages 8 and 9, which were not funded, is spend outside the budget; maverick spend by requester shows who is incurring it, and spend under management covers the procurement side of holding the cost base.
Covirage compares actual spend from the ledger with each funded line in the uploaded budget, with tools computing every variance, so a ZBB saving is checked in the actuals rather than assumed; the external AI model explains the variances and never calculates them. Upload the budget and the actuals, and see which cost lines are running over and why, with the rows behind each: cost variance analysis. To build the budget itself, start from the business budget template, and track it during the year with the budget vs actual template.
A finance department that would have received last year's 1,000,000 plus 3% instead lists each activity with its cost, ranks them, and funds the top ones up to 860,000, choosing automated invoice capture over a third clerk and dropping external consultants.
Incremental budgeting starts from last year's budget and adjusts it. Zero-based budgeting starts from zero and requires every cost to be justified each cycle. Incremental is faster; ZBB is better at removing costs nobody would choose to incur today.
It takes much more time and management attention, can encourage short-term cuts to training or maintenance, and depends on honest ranking. Many companies limit it to discretionary costs or run it every few years rather than annually.
Peter Pyhrr developed it at Texas Instruments in the late 1960s and described it in Harvard Business Review in 1970. Jimmy Carter adopted it as governor of Georgia and later for the US federal budget.