Definition of Zero-Based Budgeting ZBB Gartner Finance Glossary

This budgeting method is ideal for companies in mature industries where growth has stagnated and it’s necessary to pursue cost efficiencies, such as the healthcare industry. On the other end of the spectrum, zero-based budgeting can be useful at a startup. Many earlier stage companies are in constant testing and validation mode, so their expenses, revenues and short-term goals are more flexible and fluid.

Also, do this before the month begins so you’re ready, ahead of time, for what’s coming your way. When you make $100 from your side hustle, add that to the side hustle income. When you pay the rent, subtract that expense from Housing. When you fill up the gas tank, subtract that from the gas budget line under Transportation.

What is a zero-based budget?

Similarly, traditional personal budgeting looks at past spending to determine future expenditures. With a traditional budget, a person might say, “I always spend $500 on food, that is how much I will spend this month.” By following these zero-based budgeting steps, you will determine what expenses go toward achieving business goals that directly benefit your company. If you come up with a negative number, you’re planning to spend more than your means. This is when you’ll want to review those nonessential costs you identified earlier and see what can go.

They come in handy when you’re wondering how much you normally make or spend on stuff. You can also check out these budget percentages and averages. So, if you make $3,000 a month, everything you give, save or spend should add up to $3,000. Every dollar that comes in has a purpose, a job, a goal. Nothing is left hiding or getting mindlessly spent on fancy coffees or $1 bin deals.

What Are the Common Uses for Zero-Based Budgeting?

The targets can be financial and operationally aligned. Some examples of this are revenue and expense budgets, R&D costs, marketing expenses, project costs and revenues, and capital expenditures. Zero-based budgeting (ZBB) is a method of budgeting in which all expenses must be justified for each new period. The process of zero-based budgeting starts from a “zero base,” and every function within an organization is analyzed for its needs and costs.

Does your business need flexible talent to ease your transition into a new budgeting method? Paro’s elite community of remote finance experts can help you build a more accurate and forward-facing budget. Get the expertise and guided insights you need to achieve your plan. As with any other significant change, contribution margin income statement management incentives should be reviewed to ensure they support completing the budget process. Accountability for meeting the budget goals should be compensated in an appropriate manner. Should your business use zero-based budget templates, macro-laden spreadsheets or specialized budgeting software?

Zero-Based Budgeting (ZBB)

Remember those month-specific expenses we mentioned in the second step? Now, let’s talk about what to do if you subtract your planned expenses and end up with a negative number. This means you’re spending more than you make, and that just won’t work. The ranking also helps the top management to determine the benefits of each decision package to the organization which will be evaluated by systematic analysis and ranked in order of importance. For each decision package, managers evaluate the incremental benefits that they get from the incremental cost.

Ideally, your zero-based budget assigns part of your monthly income to savings goals, like building up your emergency fund and saving for retirement. What’s important is that nothing just happens to your money by chance. “A zero-based budget is very intentional. There is no unplanned free cash or spending,” says Beau Zhao, director of Financial Solutions at Fidelity. As an accounting practice, zero-based budgeting offers a number of advantages including focused operations, lower costs, budget flexibility, and strategic execution. When managers think about how each dollar is spent, the highest revenue-generating operations come into greater focus. Meanwhile, lowered costs may result as zero-based budgeting may prevent the misallocation of resources that may happen over time when a budget grows incrementally.

The pros and cons of zero-based budgeting

To create a zero based budget, start by evaluating your income and expenses from the previous month. Determine how much money you have coming in, and what your regular expenses are. Then, calculate how much money you have left over after covering your necessary expenses. This is your starting point for creating a zero based budget. No item is automatically carried over from the previous period, regardless of whether it was spent or not. This type of budgeting can be tedious, but it forces managers to think critically about each expense and justify why it is necessary.

• In the traditional approach, it is assumed that all previous activities are essential for achieving the ongoing objectives.
• The 7 Baby Steps are the proven, guided path to save money, pay off debt, and build wealth.
• TBB, as a modified form of ZBB, has worked out moderately well for the Chinese government in Hubei over the years, but many problems still face the budgeting system.

In such circumstances, it is difficult to ask unit heads to contemplate an in-depth analysis of those other functions that impact their activities and ultimately their costs. Consideration should be given to scheduling the ZBB review process not annually but periodically, ensuring all responsibility centers are covered at least once every four to five years. This might mean funding for some new high-priority programs at the cost of other ongoing low-priority ones.