Zero Based Budgeting

A method of budgeting in which all expenses must be justified for each new period. The process begins from a “zero base” and every function within an organization is analyzed for its needs and costs.

It can help lower costs by avoiding blanket increases or decreases to a prior period’s budget but it's a time-consuming process that takes much longer than traditional, cost-based budgeting

Zero base budgeting starts from zero and calls for a justification of old, recurring expenses in addition to new expenditures. It drives value for an organization by optimizing costs, not just revenue.

Zero-based budgeting starts from scratch, analyzing each granular need of the company instead of using the incremental budgeting increases found in traditional budgeting.

Zero-based budgeting offers several advantages, including focused operations, lower costs, budget flexibility, and strategic execution. Lowered costs may result because zero-based budgeting may prevent the misallocation of resources that can happen over time when a budget grows incrementally.

ZBB may reward short-term perspectives in the company by allocating more resources to operations with the highest revenues.

Zero-based budgeting (ZBB) justifies all expenses for each new period. The process begins from a “zero base,” analyzing every function within an organization for its needs and costs.