Zero Based Budgeting

Kim Buus Overbye

Kim Buus Overbye
Senior Hospitality | Real Estate | Operational Excellence Leader

What is Zero Based Budgeting (ZBB)?

Zero Based Budgeting or ZBB is a reverse approach of traditional planning and decision making with respect to budgeting and in my humble opinion the best and most effective method of budgeting in any organization. In traditional budgeting, managers would begin by reviewing the budget of the previous year and make corrections (in revenue and expenditures) based on performance expectations. The budget of the previous year is consequently considered to be the baseline (starting point). In Zero Based Budgeting all managers are required to justify all budgeted expenses, not just the changes in the budget of the previous year. The baseline in Zero Based Budgeting is not last year’s budget but “zero”.

Zero Based Budgeting requirements

This financial management and decision-making approach requires much documentation and justification. In addition to the total budget, the manager responsible must identify all expected expenditures and rank all of the activities according to their relevant importance and costs. The persons ultimately responsible (high-level managers) can make decisions about investments and budget cuts that can be justified at all times based on their supporting information and no immediate pre-financing as is the case in the traditional manner of budgeting.

Zero Based Budgeting advantages

Zero Based Budgeting has the following advantages:

1. Efficient allocation of resources, as it is based on needs and benefits.
2. This approach drives managers to find cost-effective ways to improve activities.
3. This approach detects inflated budgets.
4. It is useful for service departments because criteria are not always easy to identify.
5. It increases staff motivation because it gives them more initiative and responsibility in the decision-making process.
6. This approach increases the communication and coordination within the organization about certain decisions.
7. This approach identifies and eliminates wastage and out-of-date operations.
8. This approach identifies opportunities for outsourcing.
9. This approach forces cost centers to link their mission to the related organizational objectives.

It would be my pleasure to further discuss the advantages of Zero-Based Budgeting with anyone interested. Please feel free to message me here on LinkedIn or email me

It’s Your Turn

What do you think? Is the Zero-Based Budgeting method applicable in your organization? Do you recognize the practical explanation or do you have more suggestions?

Share your experience and knowledge in the comments.