Zero-Based Budgeting (ZBB): what it is and how to implement it step-by-step

Zero-based budgeting (ZBB) is a method where you plan each budget item from scratch and re-justify it in each cycle, instead of adjusting last year's figures up or down. Our budget doesn't balance. And do we even have a budget for this? Once again, finance didn't foresee something in the budget. How true this is. Every year it's the same, the budget is always too small, and all the blame for the lack of money falls on the CFO? Why does this happen, and how should budgeting be done to minimize situations where "there's not enough money"? I am a proponent of zero-based budgeting, which means an annual analysis of what funds we need. The method works for everyone: in a large corporation, a small company, or an NGO.

Table of Contents

• What is Zero-Based Budgeting (ZBB)?
• How does ZBB differ from incremental budgeting?
• How does zero-based budgeting work step by step?
• What are the advantages and disadvantages of ZBB?
• For which companies does ZBB make sense, and for which does it not?
• Common mistakes when implementing ZBB
• How to implement ZBB in a company: where to start
• Summary

What is Zero-Based Budgeting (ZBB)?

Zero-based budgeting involves determining what the company plans to earn in the coming year and how much, as well as what costs it must incur to achieve the projected revenue. We start, as the name suggests, from zero, from a blank slate. It's a bit like building a company from scratch every year. It involves analyzing the products we sell or services we provide, assessing sales potential; analyzing sales markets, customer profiles, changes in trends, technology, and climate. Everything that affects our revenue. On the other hand, we compare the figures with costs. That is, how much we need to spend to achieve the projected revenue. And, most importantly, on what. Depreciation, energy, employees, advertising. Zero-based budgeting is not about "cutting" costs, or removing items from the budget that were there the previous year, but about asking ourselves "what will I achieve by spending on advertising, training, or another SaaS."

I can't count how many budgets I've prepared over the last 20+ years. Budgets for large corporations, for small companies, for organizations. And only creating a budget using this method led to reflection and asking the question - what added value will this cost bring.

How does Zero-Based Budgeting differ from incremental budgeting?

In short: an incremental budget takes last year's figures and adjusts them by some percentage, while ZBB requires every item to be justified from scratch. The standard budgeting process usually starts with a "wish list," meaning we want revenues to grow by X% and ideally, costs to decrease by Y% simultaneously, where X is, of course, greater than Y. The sales department says it's impossible, the purchasing department says the same, HR demands raises for employees, and finance has to somehow put it all together and calculate. An annual game. This is precisely incremental budgeting.

Let's take this year's budget, add or subtract a certain percentage, sometimes based on ill-defined analyses. And voilà, the budget is ready - a day of fiddling in Excel. But such a budget won't answer the question: why. Why do we spend so much on office supplies, why do we need 15 people for cleaning, is a doorman necessary, is every SaaS being used? Incremental budgeting assumes that every expense from the current year is justified and that the company will be able to replicate every revenue in the next year. In my opinion, this is a very optimistic approach and rarely works out. Only when the company is in a revenue growth phase without additional costs. Or when both the business and the market are very stable. Which is rare.

Zero-based budgeting is a method that makes us ask questions. When I was preparing the annual budget while working at UBS (using the ZBB method), we looked at expenses for coffee, additional services, training, etc. It turned out that we were consuming over a ton of coffee per year in the company. Quite a lot. What's the conclusion? Stop buying coffee? No, that's not the goal. With this information, you can check whether the unit purchase price is appropriately discounted.

How does zero-based budgeting work step by step?

You start zero-based budgeting by assuming that expenses are zero, and then, based on experience and knowledge of the company, you add only those items that are necessary to achieve revenue. There are many variations of budgeting. Budgeting based on expenses, budgeting based on income, on an annual basis, or budgeting for each month separately. The logic of these ways of creating a financial scenario is quite obvious and their names speak for themselves. How does zero-based budgeting work? We start the process by assuming that expenses are zero. Of course, based on experience and knowledge of the company's specifics, we create a list of expenses that must be incurred to achieve revenue. The difference between zero-based and incremental budgeting is that we do not rely on previous cost values, assuming inflation or a "margin for emergencies." Instead, we look for justification for each expense and its value for revenue.

Let's take IT costs, for example, related to software fees or infrastructure. Classic. I described this problem in more detail here (link). A company buys a license. One department buys one, another buys a second, then they decide that another program is also fine. The license renews, and no one controls it. Well, maybe except the CFO, who once a quarter has to explain rising costs. I know a company that bought 100 Chat GPT licenses. They paid. Usage - zero. Why? Because employees didn't know who could use the license and under what terms. Grant Thornton's 2025 investment survey shows that 1/3 of entrepreneurs increased IT spending (licenses, hardware), with a distinctly lower inclination to raise investment budgets. A well-thought-out strategy, hype, or perhaps a lack of review of where the money is actually going.

Returning to the zero-based budgeting process, cost categories usually do not differ significantly from the typical categories that a company or organization regularly uses in its reports. What is diametrically different compared to traditional financial planning methods is the verification of whether an expenditure is truly justified and whether, frankly speaking, it will pay off. We analyze whether all positions in the company are necessary, whether purchases essential for production are justified and optimal, whether administrative costs are proportionate, and whether training expenses will yield a return. When the question "why" is asked, it usually creates space for discussion and seeking alternative solutions.

What are the advantages and disadvantages of ZBB?

ZBB, as a budgeting system, has both its supporters and opponents. The former include management boards. It is usually from them that the initiative for the zero-based budgeting method comes. Opponents include those who must justify every expense and demonstrate its value for revenue. Finance usually remains neutral. A budget is a budget. It must be prepared.

For which companies does Zero-Based Budgeting make sense, and for which does it not?

In my opinion, zero-based budgeting works in every company. If it were your budget, your money, your income, and your expenses, you would probably be able to quite precisely assess what value they bring you and which ones address your needs, and which are unnecessary. This is how controlling (which includes the budgeting process) should work in every company. I am not suggesting that we should "reinvent the wheel" every year, but rather that we should know the answer to the question: why, what for, what benefit does it bring to the company.

I have prepared ZBB many times, both when I worked in corporations like UBS and now, advising small, medium, and large Polish companies. The greatest value from budgeting with the initial assumption of "expenses equal zero" is when companies:

• do not have a well-functioning budgeting, planning, and reporting system

• for many years, companies prepared budgets based on historical data

• are in a phase of transformation, growth, succession

• are in a difficult financial situation and require restructuring

• are being prepared for sale and transparency is necessary

• have been acquired by a Private Equity fund and standardization and financial discipline are necessary

Common mistakes when implementing zero-based budgeting

Linking zero-based budgeting with cost cutting

ZBB should be an integral part of the organizational culture, encompassing knowledge of costs, the ability to rationalize them, and broadly defined financial efficiency. If the term ZBB only appears in the context of cuts rather than rationalization, it will not be positively received by employees.

Applying the ZBB method uniformly to all cost categories

Zero-based budgeting requires precise justification for expenditures. However, if the CFO and management expect the same justification for IT costs, travel, or marketing, as well as for costs related to regulatory requirements, it may turn out that we "threw the baby out with the bathwater." The management is primarily responsible for meeting regulatory requirements. "Zero-budget" in this area seemingly appears obvious, because what added value for revenue does meeting regulatory requirements bring? Well, seemingly small. Seemingly. Because ultimately, if the regulator has the power to shut down our business, the approach described above can have fatal consequences.

Lack of cost category owners and governance

In a classical budget, responsibility for costs is usually established vertically, according to the organizational structure. ZBB operates according to cost categories that cut across many departments (travel, telephony, printing, licenses, training). If no one owns a category across the entire company, decisions become diffused among units and no one is accountable for maintaining cost levels. The solution is a matrix division of the budget or the designation of owners for individual categories.

How to implement ZBB in a company: where to start

Since zero-based budgeting is a costly process – time is money – it's worth considering whether cost control and efficiency are a problem in our organization. Do we know what we spend money on and why? If so, I would suggest redirecting that energy to other areas.

If we decide on ZBB, we start by identifying all cost categories. We create a budget per cost type, not per department. This means costs for training, travel, salaries, energy, depreciation, etc., across the entire company. We don't invent these categories from scratch, of course. We look at costs incurred over the last few months and identify the categories.

Stage 2 is the division of costs into mandatory (regulatory, taxes, duties, insurance, etc.), costs directly related to the volume of production (or services provided), and other costs. It is usually in this last category that most "legacy issues" reside.

Overlay all of this with a project plan, specifying who is responsible for what and the timeframes. Planning in a medium-sized company typically takes 1-3 months, depending on data availability and complexity. There are usually several budgeting rounds. This must be kept in mind when planning the entire process.

Summary

Zero-based budgeting is not a one-time cost cut, but a way of thinking about the budget: each item must justify its value for revenue every year. It works wherever the budget has been created "by inertia" for years, and no one asks "why." It starts with cost categories, their division, and the designation of owners — not from last year's spreadsheet.

Do you need support with implementing zero-based budgeting or streamlining your controlling? See how I help companies in the finance area, or develop your team's competencies in the Controlling 360 training.