What are the best practices and lessons learned from zero-based budgeting?

1 Define your objectives

The first step in ZBB is to define your objectives and desired outcomes for the budgeting period. What are you trying to achieve, and how will you measure your success? How do your objectives align with your mission, vision, and values? How do they support your long-term strategic plan? By setting clear and realistic objectives, you can create a framework for evaluating and prioritizing your expenses and activities. You can also communicate your expectations and rationale to your stakeholders, and get their buy-in and feedback.

2 Identify your cost drivers

The next step in ZBB is to identify your cost drivers, or the factors that influence your spending and revenue. These can include external factors, such as market conditions, customer demand, regulatory changes, or competitive pressures, as well as internal factors, such as operational processes, organizational structure, or employee performance. By analyzing your cost drivers, you can understand how they affect your profitability and efficiency, and how they may change over time. You can also identify opportunities for improvement, innovation, or optimization.

3 Classify your expenses

The third step in ZBB is to classify your expenses into different categories, based on their nature and purpose. A common way to do this is to use four categories: essential, strategic, supportive, and discretionary. Essential expenses are necessary for survival and compliance, such as rent or payroll. Strategic expenses are linked to objectives and outcomes, like marketing or customer service. Supportive expenses are indirectly related to objectives and outcomes, like administration or training. Discretionary expenses are optional or nice-to-have, such as travel or entertainment. You should minimize essential expenses without compromising quality or safety, invest in strategic expenses without overspending or overcommitting, optimize supportive expenses by reducing costs or enhancing value, and eliminate discretionary expenses unless they have a clear positive impact on objectives and outcomes.

4 Allocate your resources

The fourth step in ZBB is to allocate your resources, or assign funds to each expense category and activity, based on their relative importance and contribution to your objectives and outcomes. You should start from zero, and justify each expense based on its benefits, costs, risks, and alternatives. You should also consider the trade-offs and opportunity costs of each allocation decision, and how it affects your overall budget balance and performance. You should avoid using historical data or assumptions as a basis for your allocation, unless they are relevant and accurate.

5 Monitor and review your budget

The final step in ZBB is to monitor and review your budget throughout the budgeting period, and compare your actual results with your planned results. You should track your spending and revenue, and measure your progress and performance against your objectives and outcomes. You should also identify any variances or deviations from your budget, and analyze their causes and effects. You should report your findings and feedback to your stakeholders, and make any necessary adjustments or corrections to your budget. You should also learn from your experience, and apply any lessons or best practices to your future budgeting and forecasting process.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?