Zero-Based Budgeting

Zero-based budgeting, or ZBB, is a method where every cost starts at zero and must be justified for each new period.

While traditional budgeting begins with last year’s numbers and makes adjustments, zero-based budgeting wipes the slate clean and evaluates costs one by one.

For example, at Horizon Foods, a frozen food manufacturer, Nancy, the production manager, rebuilds the department’s budget from scratch.

First, she begins by reviewing all expenses, like materials, labor, and equipment maintenance, to see what the team actually needs for the upcoming year.

Next, she creates decision packages, which are formal proposals for specific activities.

Each decision package summarizes the activities, purpose, associated costs, expected benefits, and the consequences of not receiving funding.

The senior management then compares and ranks packages across departments to decide which activities align with the company’s goals.

Overall, ZBB gives companies tighter control over spending and better alignment with their goals. But it takes a lot of time and effort in large organizations.