Zero-Based Budgeting (ZBB): A Mindset Shift, Not Just a Methodology: One of the smartest moves you can make when stepping into a new role as a CFO/CEO

As the year ends, I find myself, like many others, deep in the familiar process of planning for the next year—manpower allocations, operating expenses, and capital expenditures. No pressure, right? For over a decade, I’ve seen how this usually works: department heads take last year’s actual expenses, bump them up by 10%, and present them as the budget for the following year. It’s been a reliable system, a comfort zone that managers like because it ensures continuity and predictability.

?Year after year, the previous budget becomes the foundation for the next, and managers fight to maintain their allocations. Whether due to a lack of time, scrutiny, or habit, most prefer to build on the past rather than question whether every expense is vital. Some companies take this even further—if you don’t use all of your budget, you lose it. If last year’s spending came in under budget, your new budget would reflect that lower amount, with no increase, even if the reduced spending was temporary or circumstantial.

The problem with this approach is that it treats the budget as one big lump sum rather than a thoughtful breakdown of what’s driving business success. As long as the numbers seem reasonable, no one stops to examine the details. One year, I proposed a budget that reflected increased business activities. Naturally, this meant a larger budget. That didn’t sit well with some leaders because it disrupted the norm.

?This budgeting habit becomes a chronic issue for well-established companies that aren’t fully recognized until a merger or acquisition shakes things up. When a company is acquired, the new owners often insist on reworking the budget from the ground up—starting fresh, or as they call it,?Zero-Based Budgeting (ZBB).?That’s when you realize the power of approaching every year’s budget as a blank slate, built from scratch, rather than just rolling over last year’s numbers.

?

A Brief History of Zero-Based Budgeting

?ZBB isn’t a new concept. It was developed in the 1970s by Peter A. Pyhrr, an accounting manager at Texas Instruments. His idea was radical then—instead of relying on previous spending trends, every expense had to be justified from the ground up.?This meant no automatic increases, no inherited allocations, just a fresh look at what needed to be funded. The approach gained widespread attention when President Jimmy Carter introduced it into the U.S. federal government, and from there, businesses, nonprofits, and even individuals began adopting it to take greater control over their finances.

?

ZBB: More Than a Process—A Mindset

?I’ve learned that Zero-Based Budgeting is?not just a methodology—it’s a way of thinking. Every dollar in the budget should have a reason for being there. It’s not about blindly cutting costs; it’s about ensuring your spending aligns with your business priorities.

?Budgeting should be treated like an investment decision. You must ask yourself:?Are you funding growth, efficiency, and innovation? Or are you just maintaining outdated processes??I like to think of it this way: Are you feeding something healthy, or are you unknowingly feeding inefficiencies acting like financial cancer?

?That’s why implementing ZBB isn’t as simple as deciding. It’s a?complex and disciplined process?that requires a deep dive into every dollar spent. This is why large companies often hire specialized consultants to guide them through the transition. Before starting, you must answer the most crucial question:?Why are we doing this? What do we expect to gain?

?

Breaking the Status Quo

?Any solution that disrupts the norm is going to be met with resistance. I saw this firsthand when the company I worked for was acquired. The new owners introduced ZBB, and people immediately assumed the only goal was to cut costs. That created fear, hesitation, and a whole lot of resistance.

?Convincing people to buy into the concept was no small task. We had to undergo extensive training, workshops, and strategy meetings to help leaders and teams fully understand what we were trying to achieve. It wasn’t about slashing budgets—it was about making sure we were spending money in the?right?places. We worked with consultants who provided structured frameworks, helped us define priorities, and partnered with us in decision-making.

?I won’t lie—it was a long and sometimes painful process. But I still remember one thing very clearly:?Zero-based budgeting is not something you can implement overnight.?It’s not a switch you flip. People read about ZBB and think they can implement it without much effort, but the devil is in the details. From?leading change?to?rebuilding financial structures, the process is complex, but the results are worth it.

?

The Pitfalls of Doing ZBB Halfway

?One of the biggest mistakes I’ve seen is when companies cherry-pick?certain parts of ZBB while ignoring the rest. Some will use it?only to cut costs, eliminating left and right expenses without ensuring the essential activities are still appropriately funded.

?That’s not how it works. You can’t just cut expenses and expect the business to thrive. ZBB?isn’t just about reducing costs—it’s about reallocating resources to what drives value.?You're missing the whole point if you only focus on the cuts, not the reinvestment.

?

How It Works in Practice

?In my experience, implementing ZBB follows a practical, step-by-step approach. Each department starts by defining?three or four key goals?for the upcoming year. Then, they list all the activities and related expenses that contribute to those goals. Once that’s done, we rank them in order of priority—what absolutely must be funded versus what can be reconsidered.

?The company then determines the total budget and the overall financial situation. From there, we allocate funds based on priority, ensuring that the most critical expenses are covered first. As we move down the list, every expense must have a clear justification tied to business objectives.

?On paper, this might sound simple. But in reality, it’s an?intense, sometimes uncomfortable process. Every unnecessary expense identified and eliminated means more money is available to invest in things that truly matter. It’s about?redirecting spending toward growth, not just cutting costs for the sake of cutting.

?

The Real Purpose of Cost Savings

?I’ve seen companies take different approaches to savings from ZBB. Some use it to?increase profit distributions, making shareholders happy. Others?reinvest in the business, using retained earnings to fund new projects, technology, or expansion. Some save aggressively to?increase profitability before a sale or merger.

?Regardless of the reason, one thing is clear—cost savings without a plan are meaningless. ZBB is most effective when there’s a clear strategy for reinvested savings.?Otherwise, you’re just cutting costs without a real purpose, which rarely leads to long-term success.

?

Final Thoughts

Through this process, I’ve learned that?Zero-Based Budgeting isn’t just about numbers but discipline, strategy, and wise financial decisions.?It forces businesses to rethink allocating resources and ensures that every dollar is used purposefully.

?It’s not easy. It takes time, effort, and a willingness to challenge long-standing habits. But once you go through it, the benefits are undeniable. Every year, you start fresh. You fund what truly matters. And you create a?leaner, more financially intelligent organization.

?If you’re stepping into a new role as a?CFO?or taking over a company as a?CEO, one of the smartest moves you can make is approaching the budget with a fresh perspective—even if only for your understanding. Taking the time to rebuild the budget from the ground up gives you?a clear, unfiltered view of how the company operates. It allows you to spot inefficiencies, challenge assumptions, and identify new opportunities to lead and drive change.?Instead of inheriting past financial decisions without question,?start from zero?and justify each expense. This approach not only sharpens your grasp on the company’s financial mechanics but also positions you as a leader who actively shapes the business rather than just managing its legacy. Once you have this foundation, you can take it from there—refining strategies, optimizing costs, and making informed decisions that truly move the company forward.        

?

Stay tuned for more insights into the full process, implementation steps, and best practices.