Zero-based budgeting

A budgeting method in which every cost is justified from zero each period instead of starting from last year's figure.

DefinitionA budgeting method in which every cost is justified from zero each period instead of starting from last year's figure.

Zero-based budgeting, or ZBB, builds each budget from nothing. Instead of taking last year's spend and adding a percentage, each department lists the activities it needs to run, costs each one and justifies it. Spending that cannot be tied to an activity does not make it into the budget.

How it is computed

Budget = sum of the costed activities that are approved. Compare it with an incremental budget (last year × (1 + growth)) to see what the exercise removed.

Example

A department spent $480,000 last year; an incremental budget at 5% would be $504,000. Built from zero, its three activities cost $210,000, $150,000 and $95,000, a total of $455,000, which is $49,000 less than the incremental figure.

Where it goes wrong

Time: rebuilding every line every year is expensive, so many teams apply it to one cost area at a time. It also rewards departments that write convincing justifications rather than those with the clearest need. The full guide is zero-based budgeting.

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