Zero-based Budgeting (ZBB) is an approach to accounting that scrutinizes an organization’s spending. Every department is expected to monitor their spending, as every line item under expenses and expenditure requires justification in each budgeting cycle. Traditional budgeting increments the expense as a percentage from year to year or the respective period for Budgeting. Traditional Budgeting ignores essential factors like the need for cost efficiency, fluctuating demand, and the possibility of taking more experimental approaches to running operations that may require the reallocation of resources. All of these scenarios require an in-depth analysis of the cost to keep a business operational.

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Advantages of Zero-Based Budgeting:

• Eliminates outdated or unnecessary expenses.
• Drives cost efficiency and resource optimization.
• Aligns spending with current strategic goals.

Why do you need Zero-Based Budgeting?

You run a lucrative company that should be earning you a handsome profit. Yet your expenses are skyrocketing! The expenses are growing at a rate that your business, which seems profitable on the outside, is bleeding. As an entrepreneur or a high-ranking executive, you want to get insight into what you could do differently to set your business up for its true profit potential. Zero-Based Budgeting (ZBB) is your answer. 

How can Zero-Based Budgeting make a difference to my company?

Any company prospers when adopting a frugal approach to managing expenses, as a penny saved is a penny earned! Here are some scenarios that require the approach:

• If your business is under pressure from competitive prices and rising raw material and distribution costs, you can benefit from inspecting your expenses more thoroughly. 
• If your business has thin margins or is subject to change due to customer behavior, you’ll have to examine your expenses.
• When your entity is subject to reimbursement pressures or regulatory compliance, external stakeholders scrutinize it. Reviewing your expenses makes accountability easier. 
• Detailed cost control is vital for manufacturing concerns that have high fixed costs and variable input prices. 
• If your company experiences labor shortages or supply chain disruptions, you stand to benefit from investigating the expenses. 
• If you have redundant programs draining your profits, it’s time to scrutinize your expenses.

Industries like Consumer Packaged Goods (CPG), Retail, Healthcare, Manufacturing, Energy and utilities, logistics, and mature tech make better profits using the Zero-Based Budgeting approach. Kraft Heinz famously adopted ZBB around 2015-2016 as part of a significant cost-cutting and efficiency drive. The company used ZBB to scrutinize every expense and reduce overhead costs in areas like marketing, sales, and supply chain. This approach helped Kraft Heinz save billions over a few years, improving margins and cash flow.

How do I adopt Zero-Based Budgeting?

• ZBB starts by understanding how each department works and delving deep into how expenses are treated under each department. 
• Identify and segregate the organization into units or departments, making each unit responsible for its Budgeting and justification. 
• Establish Budget objectives, e.g., “Decrease logistic and manufacturing expenses by at least 5% by eliminating redundant activities and investments.” 
• Define the period of the budgeting cycle (usually done annually).
• Proceed to assign the department head/accountant in charge of forecasting and justifying a budget. 
• The budget has to explain every line item under ‘Expenses’. Every expense has to be analyzed and justified in writing, explaining each plunge and surge. 
• ZBB also requires an explanation of previous years’ expenses, which gives a detailed perspective on changes that could be proposed.
• Your accounting executives have to consolidate the departmental accounts and outline an overall picture to understand the purpose, cost drivers, and impact of each activity.
• Align expenses with strategic priorities before allocation.  
• Review for further modifications and approve the budget.
• Implement the new budget. On completion, evaluate and re-adjust 

Can Zero-Based Budgeting be a one-time activity? Would it be just as beneficial?

• ZBB’s goal is to evaluate and justify all expenses each budgeting cycle continuously. Doing it just once means you might eliminate outdated costs only initially, but over time, inefficiencies and non-essential spending can creep back in.
• Markets, strategies, and cost structures evolve constantly. A one-time ZBB cannot adapt to new priorities or unexpected changes, such as economic shifts, new competitors, or technological advances.
• Ongoing use of ZBB enforces a culture of cost awareness and accountability. If done only once, that discipline might fade, and spending habits may revert.
• ZBB is resource-intensive, so some companies use it periodically (e.g., every 2-3 years) or for specific cost centers rather than every department every year. This can balance benefits and effort.
• However, during a restructuring or when launching a new strategic decision and resetting budgets, using ZBB as a single-time approach could help balance time and resources.

How Does Zero-Based Budgeting Compare with Traditional Budgeting and Performance-Based Budgeting (PBB)?

The goal of Zero-Based Budgeting is to manage the expenses of an entity to better align it with the objectives of the business and to maintain or grow the bottom line. ZBB essentially starts at zero base as every expense has to be justified. The budget has to be built from scratch and is a time-consuming and resource-intensive initiative.  

Traditional Budgeting assumes the previous period’s budget as the baseline and builds on incremental changes to the previous year’s budget. It’s a good practice for a stable business that needs predictability and continuity. 

Performance-Based Budgeting: This requires a purpose for changes in budgetary allocations. Every spending is tied to a measurable outcome, i.e., executives are held accountable for the performance metrics and targets of each program or department. The principle is to fund what works. 

ZBB is the most time-consuming and resource-intensive of the three. However, it is also the most flexible, considering that it starts from ‘Zero Base’ and does not make assumptions. Although it can be challenging, it has proven to be of great benefit to companies like Kraft Heinz. 

What is the 50/30/20 rule? How can I adopt it? 

The 50/30/20 rule refers to an individual or a home setting up its expenses as;

Ø  50% spending towards essentials, 

Ø  30% towards recreation and entertainment, and 

Ø  20% towards savings and debt repayment. 

An organization can also adopt it when the framework is set. For example, 50% towards the Cost of Goods Sold (COGS), 30% towards marketing and promotion, and 20% towards funds set aside as investments generating alternate income. This may be designed how you deem fit to best benefit your business. 

How can I adopt ZBB while focusing on my day-to-day operations?

Hiring a company like Profitjets could make a huge difference! Building everything from the base by yourself will burn you out for essential activities. Your time is best reserved for revenue-generating activities, innovation, and strategic decisions. Delegation helps free up your time and eliminates personal bias of favoring one activity or program over another. Prfitjets gives you an unbiased report with accountability and strict discipline. 

It makes sense to hire a professional, when your company is going through a major restructuring requiring expert advice. 

FAQs on Zero-Based Budgeting