What is zero-based budgeting (ZBB)?

In a recent survey from FSN, only 13% of organizations said they use zero-based budgeting (ZBB). However, 54% of finance said they were looking to unify their budget model across the enterprise.

For those businesses who haven’t yet implemented ZBB, it may be a matter of understanding the advantages and disadvantages of ZBB, and how to effectively implement this approach across your organization.

What is zero-based budgeting?

Zero-based budgeting (ZBB) is when you start each fiscal year with a zero-base. When you create a zero-based budget, each department accounts for its needs down to the line item, regardless of whether the amount is higher or lower than the previous budget.

Why zero-based budgeting (ZBB) works:

• Superior accuracy, as budgets are more likely to be within +/- 5% of target.
• Prevents small shifts in expenses that can impact business performance.

If you’re struggling with your budget, there could be lots of reasons why your budgeting isn’t working. It could be in the way that you are budgeting—for example, if you continue to use static processes and manual tools, like Excel. However, you may also uncover opportunities with a different budgeting method that allows for more effective budgeting.

Zero-based budgeting is often compared to more traditional methods, where company’s take an incremental approach to budgeting (i.e., businesses take their current budget and flex it a few percent for the coming year against high-level business forecasts and plans). The danger with this approach, when compared to zero-based budgeting, is that the historic cost base becomes fixed, regardless of whether the costs are necessary to meet an organization’s presumed level of activity. It also assumes that the market will change and evolve in a controlled and predictable manner, which doesn’t reflect the current reality of business.

But for those looking for a more agile approach to planning, zero-based budgeting has several advantages.

What are the pros of zero-based budgeting?

ZBB promotes agility

The primary advantage of zero-based budgeting is its ability to improve the agility of your finance team. ZBB requires budget holders to ‘start from zero’ and justify their resource requirements at each budget setting, which is particularly valuable during times of economic instability.

ZBB positions data as an asset

When you compare businesses that use ZBB versus those that take an incremental approach to budgeting, the difference is clear. Agile businesses can manage data as a corporate asset rather than being overwhelmed by disconnected spreadsheets with poor data governance.

ZBB supports re-forecasting

To do zero-based budgeting effectively, you need validated, well-organized data. And this data can also be used to improve the speed of your forecasting process, halving the time it takes to reforecast earnings and revenue.

What are the cons of zero-based budgeting?

ZBB is not forward-looking

The only area ZBB fails to improve, when compared to more traditional methods, is its ability to forecast further into the future, because ZBB is primarily concerned with recalibrating the budget rather than forecasting further into the distance.

ZBB is labour intensive

For organizations who are used to an incremental approach to budgeting, ZBB can seem labour intensive. Each department must justify their expenses and plans, without relying on assumptions from past years. While this is an ideal way to reduce overspending, ZBB does require collaboration with departments from across the organization.

ZBB prioritizes tangible outputs

When a department's output isn't clear-cut, determining where to allocate funds, and justifying these expenses to upper management can be difficult.

How to implement zero-based budgeting

There are a few key considerations when it comes to implementing zero-based budgeting: getting the right people involved, ensuring effective processes & training are available, and boosting your efforts with technology.

Key considerations to implement zero-based budgeting in your organization:

• Get the right people involved
• Ensure effective processes and training are available
• Boost efforts with the right technology

People

Before undertaking ZBB, you need to get support from all levels of the organization. As we discussed above, a successful ZBB process requires input and involvement from everyone – especially senior leaders.

If your business pursues ZBB, consider rolling it out as a top-down corporate initiative — and make sure to clearly outline what’s in it for the organization and everyone involved.

Processes and training

To successfully implement ZBB, you may need to upskill your finance team and other budget contributors. Offer training for other departments so they can learn how to use the tools, and make sure your finance team has a high-level vision of how things roll up from a company-wide perspective.

Technology

While it’s possible to implement ZBB with spreadsheets, it’s a time-consuming and complex process that diminishes your returns. With Financial Performance Management (FPM) software (also referred to Corporate Performance Management (CPM), Enterprise Performance Management (EPM), FP&A software, or budgeting software), you can automate your budgeting, planning, and reporting processes, which can drastically reduce the time and effort required to perform ZBB.

How to choose zero-based budgeting software

There are a variety of budgeting software options on the market. To support zero-based budgeting, forecasting, and planning, it’s best to choose Financial Performance Management (FPM) software, which is equipped to handle the full breadth of finance processes. 

Capabilities to look for in a zero-based budgeting solution:

• Data integration
• Workflows
• Artificial intelligence
• Intuitive design

When evaluating software solutions to support zero-based budgeting, you should look for the following capabilities:

Data integration – Instead of time-consuming and error-prone manual data entry, Financial Performance Management (FPM) software can do the work for you by seamlessly integrating with your other business systems to pull in actual, plan, and forecast data.

Workflows – FPM software can improve accountability and streamline budgeting by tracking inputs, changes, and approvals with workflow capabilities.

Artificial intelligence – FPM software empowers you to quickly adapt to rapidly changing variables like interest rates, currency rates, production levels, and payment terms with artificial intelligence.

Intuitive design - Contribute to budgets, approve templates, and manipulate data in a user-friendly interface with FPM software.

Choosing the best budgeting method for your business

If you’re looking to control costs, improve agility, and boost collaboration, you should consider implementing zero-based budgeting. Not only does this reduce overspending, but the data you use to budget can also be used to reforecast, giving you the ability to anticipate change and position your business for success.

To implement ZBB effectively, you should consider adopting FPM software, which can automate your core processes, so you can spend more time driving business performance.

Want to learn more about different budgeting methods and software? Check out our blog on 21 Best Business Budgeting Software for CFOs (in 2024).