If you’re looking for a way to take control of your finances and optimize your spending, you might want to consider zero-based budgeting. Zero-based budgeting, or ZBB for short, is a method of budgeting that requires you to justify every expense for each new period, starting from a zero base. This means that you don’t rely on previous budgets or assumptions, but rather plan your budget from scratch every time.
ZBB can help you achieve various benefits, such as reducing waste, increasing efficiency, aligning your spending with your goals, and fostering a culture of accountability. However, ZBB also comes with some challenges, such as requiring more time, effort, and resources, facing resistance from stakeholders, and potentially compromising quality or innovation.
In this blog post, we’ll explain everything you need to know about ZBB, including its definition, history, features, principles, steps, tools, templates, examples, best practices, tips, advantages, disadvantages, and alternatives. Whether you’re a business owner or an individual looking to improve your financial situation, this guide will help you understand how ZBB works and how you can use it effectively.
So let’s get started with the definition of zero-based budgeting.
In this Article:
What Is Zero-Based Budgeting?
Zero-based budgeting (ZBB) is a method of budgeting that requires all expenses to be justified for each new period, starting from a zero base. This means that every expense must be approved and supported by evidence of its necessity and value, rather than being based on historical data or assumptions.
ZBB was first developed in the 1970s by Peter Pyhrr, an accountant at Texas Instruments. He proposed ZBB as a way to overcome the limitations and inefficiencies of traditional budgeting methods, such as incremental budgeting. Incremental budgeting is a method of budgeting that uses the previous period’s budget as a base and then adjusts it for inflation, growth, or other factors. Incremental budgeting is often criticized for being too rigid, conservative, and prone to errors.
ZBB, on the other hand, aims to be more flexible, realistic, and accurate. It challenges the status quo and encourages managers to evaluate every expense based on its current relevance and impact, rather than its past performance or expectation. ZBB also promotes a culture of accountability and transparency, as every expense must be clearly documented and linked to the strategic goals and objectives of the organization.
ZBB can be applied to various types of expenses, such as operating expenses, capital expenditures, marketing expenses, or project expenses. ZBB can also be used at different levels of the organization, such as departments, divisions, or units. However, ZBB is not suitable for all types of expenses or organizations. For example, ZBB may not work well for fixed costs that are legally or contractually obligated, such as rent or salaries. ZBB may also be difficult to implement for large or complex organizations that have multiple layers of management and decision-making.
To understand how ZBB works in practice, it is helpful to know some of the key features and principles of ZBB. These include:
Cost drivers
Cost drivers are the factors that cause an expense to occur or vary. For example, the number of employees, customers, products, or services can be cost drivers for different types of expenses. Cost drivers help managers identify and measure the sources and drivers of their expenses and allocate resources accordingly.
Decision units
Decision units are the smallest segments of the organization that can be separately planned and budgeted for. For example, a decision unit can be a department, a project, a product line, or a service. Decision units help managers break down their expenses into manageable and comparable units that can be prioritized and ranked.
Cost-benefit analysis
Cost-benefit analysis is a technique that compares the costs and benefits of different alternatives or options. For example, a cost-benefit analysis can help managers decide whether to invest in a new equipment, outsource a service, or launch a campaign. Cost-benefit analysis helps managers evaluate the trade-offs and impacts of their decisions and choose the most optimal option.
Continuous improvement
Continuous improvement is a process that involves regularly monitoring, reviewing, and updating the budget and performance of the organization. For example, a continuous improvement process can involve collecting feedback, analyzing data, identifying gaps, implementing changes, and measuring results. Continuous improvement helps managers ensure that their budgets are aligned with their goals and objectives and that they are achieving the desired outcomes.
How to Use Zero-Based Budgeting for Your Business
If you’re interested in using ZBB for your business, you might be wondering how to get started and what steps to follow. ZBB can be a complex and time-consuming process, but it can also be rewarding and beneficial if done correctly. Here are some of the steps involved in implementing ZBB for your business:
Create transparency
The first step of ZBB is to create transparency and visibility into your current expenses and performance. This means that you need to collect and analyze data from various sources, such as accounting records, financial statements, reports, invoices, contracts, etc. You also need to identify and categorize your expenses into different types, such as fixed, variable, discretionary, or mandatory. You also need to define and communicate your strategic goals and objectives to your stakeholders and align them with your budgeting process.
Identify opportunities
The next step of ZBB is to identify opportunities and areas for improvement or optimization. This means that you need to evaluate and justify every expense based on its cost drivers, decision units, and cost-benefit analysis. You also need to compare and benchmark your expenses and performance against your competitors, industry standards, or best practices. You also need to identify and eliminate any waste, inefficiency, duplication, or redundancy in your expenses or processes.
Set targets
The third step of ZBB is to set targets and expectations for your expenses and performance. This means that you need to establish and prioritize your budget requests based on their value creation and alignment with your strategic goals and objectives. You also need to set realistic and achievable targets for your expenses and performance that reflect your current situation and future aspirations. You also need to allocate and distribute your resources according to your priorities and needs.
Monitor outcomes
The final step of ZBB is to monitor outcomes and results of your budgeting process. This means that you need to track and measure your expenses and performance against your targets and expectations. You also need to collect and analyze feedback from your stakeholders, customers, employees, etc. You also need to review and update your budget regularly and make adjustments as needed. You also need to celebrate your achievements and recognize your successes.
To help you with ZBB, you might want to use some tools and templates that can simplify and streamline your budgeting process. For example, you can use a zero-based budgeting app that can automate some of the tasks involved in ZBB, such as data collection, analysis, reporting, etc. You can also use a zero-based budgeting template that can provide you with a framework and structure for creating your budget requests and reports. You can also use a dashboard or a software that can help you visualize and monitor your expenses and performance.
Some of the best practices and tips for using ZBB effectively include:
Involve stakeholders
One of the key factors for the success of ZBB is the involvement and engagement of your stakeholders, such as managers, employees, customers, suppliers, etc. You need to communicate clearly and frequently with them about the purpose, process, benefits, challenges, expectations, roles, responsibilities, etc. of ZBB. You also need to solicit their input, feedback, suggestions, ideas, etc. throughout the budgeting process. You also need to address any concerns or resistance they might have about ZBB.
Align with strategic goals
Another key factor for the success of ZBB is the alignment of your budgeting process with your strategic goals and objectives. You need to ensure that your budget requests and decisions are consistent with your vision, mission, values, etc. of your organization. You also need to ensure that your budget supports and enables your growth, innovation, differentiation, etc. strategies. You also need to ensure that your budget reflects the needs and preferences of your customers and markets.
Prioritize value creation
A third key factor for the success of ZBB is the prioritization of value creation over cost reduction. You need to focus on how you can create more value for your customers, stakeholders, shareholders, etc. rather than how you can cut costs or save money. You also need to focus on how you can improve the quality or efficiency of your products or services rather than how you can reduce the quantity or scope of them. You also need to focus on how you can invest in opportunities or initiatives that can generate more revenue or profit rather than how you can avoid risks or uncertainties.
Avoid common pitfalls
A fourth key factor for the success of ZBB is the avoidance of common pitfalls or mistakes that can undermine or jeopardize your budgeting process. Some of these pitfalls include:
- Being too rigid or inflexible: While ZBB requires discipline and rigor in justifying every expense, it also requires flexibility and adaptability in responding to changing circumstances or needs. You need to be able to adjust your budget as needed and not stick to it blindly or dogmatically. You also need to be able to balance your short-term and long-term goals and not sacrifice one for the other.
- Being too complex or time-consuming: While ZBB requires detail and accuracy in analyzing and documenting every expense, it also requires simplicity and efficiency in presenting and communicating your budget requests and decisions. You need to be able to summarize and highlight the key points and takeaways of your budget and not overwhelm or confuse your stakeholders with too much information or jargon. You also need to be able to manage your time and resources effectively and not spend too much time or effort on your budgeting process.
- Being too isolated or siloed: While ZBB requires individual accountability and responsibility for every expense, it also requires collaboration and coordination across different departments, divisions, or units. You need to be able to work with others and share information, insights, best practices, etc. with them. You also need to be able to align your budget with the overall budget of the organization and not create conflicts or discrepancies with other budgets.
- Being too conservative or risk-averse: While ZBB requires evidence and justification for every expense, it also requires creativity and innovation in finding new ways to create value or reduce costs. You need to be able to challenge the status quo and explore new possibilities or opportunities. You also need to be able to take calculated risks and experiment with new ideas or initiatives that can potentially generate more revenue or profit.
ZBB can be a powerful and effective method of budgeting for your business if you follow these steps, use these tools, apply these best practices, and avoid these pitfalls. ZBB can help you optimize your spending, improve your performance, and achieve your strategic goals.
However, ZBB is not the only method of budgeting that you can use for your business. There are other methods that you can consider, such as activity-based budgeting, rolling budgeting, or scenario budgeting. Each method has its own advantages and disadvantages, depending on your situation and needs.
But what if you want to use ZBB for your personal finances? Can you apply the same principles and steps as you would for your business? The answer is yes. ZBB can also help you manage your personal finances better by reducing unnecessary spending, increasing savings, and achieving your financial goals.
How to Use Zero-Based Budgeting for Your Personal Finances
If you’re interested in using ZBB for your personal finances, you might be wondering how to get started and what steps to follow. ZBB can be a simple and effective way to manage your money and plan your budget, especially if you have a variable or irregular income. Here are some of the steps involved in using ZBB for your personal finances:
Calculate your income
The first step of ZBB is to calculate your income for each month or period. This means that you need to add up all the sources of income that you expect to receive, such as salary, wages, tips, bonuses, commissions, interest, dividends, etc. You also need to account for any taxes or deductions that might affect your income, such as income tax, social security, health insurance, etc. You also need to estimate your income as accurately as possible and not overestimate or underestimate it.
List your expenses
The next step of ZBB is to list your expenses for each month or period. This means that you need to identify and categorize all the expenses that you expect to incur, such as rent, mortgage, utilities, groceries, transportation, entertainment, etc. You also need to differentiate between your fixed and variable expenses. Fixed expenses are those that are the same or similar every month or period, such as rent or mortgage. Variable expenses are those that can change or vary every month or period, such as groceries or entertainment. You also need to estimate your expenses as accurately as possible and not overestimate or underestimate them.
Subtract your expenses from your income
The third step of ZBB is to subtract your expenses from your income for each month or period. This means that you need to calculate the difference between your income and expenses and see if you have a surplus or a deficit. A surplus means that you have more income than expenses and a deficit means that you have more expenses than income. Ideally, you want to have a surplus or at least break even every month or period. If you have a deficit, you need to find ways to reduce your expenses or increase your income.
Allocate your surplus or cover your deficit
The final step of ZBB is to allocate your surplus or cover your deficit for each month or period. This means that you need to decide what to do with the money that you have left over after paying all your expenses or how to cover the money that you are short of after paying all your expenses. For example, if you have a surplus, you can use it to save for your goals, invest for your future, pay off your debt, donate to charity, etc. If you have a deficit, you can use it to borrow from your savings, sell some of your assets, take on a side hustle, etc.
To help you with ZBB, you might want to use some apps and worksheets that can simplify and streamline your budgeting process. For example, you can use a zero-dollar budget app that can help you track your income and expenses and automatically calculate your surplus or deficit. You can also use a zero-based budget printable that can help you list and categorize your income and expenses and manually calculate your surplus or deficit. You can also use a zero-based budget sheet or excel that can help you create and customize your budget according to your preferences and needs.
Some of the best practices and tips for using ZBB effectively include:
- Set realistic budgets: One of the key factors for the success of ZBB is setting realistic and achievable budgets for yourself. You need to be honest and realistic about how much money you make and how much money you spend every month or period. You also need to be flexible and adaptable in adjusting your budget as needed according to changes in your income or expenses.
- Track your expenses: Another key factor for the success of ZBB is tracking your expenses regularly and accurately. You need to keep track of every expense that you incur every month or period and record it in your budget app or worksheet. You also need to review and analyze your spending habits and patterns and see where you can save money or cut costs.
- Adjust your budgets regularly: A third key factor for the success of ZBB is adjusting your budgets regularly and accordingly. You need to update your budget every month or period and make changes as needed according to your income or expenses. You also need to evaluate your progress and results and see if you are meeting your goals and objectives. You also need to make revisions or corrections if you find any errors or discrepancies in your budget.
- Celebrate your progress: A fourth key factor for the success of ZBB is celebrating your progress and achievements. You need to acknowledge and appreciate your efforts and hard work in managing your money and planning your budget. You also need to reward yourself and enjoy the benefits of your savings, investments, debt reduction, etc. You also need to share your success stories and tips with others who might benefit from ZBB.
ZBB can be a simple and effective way to manage your personal finances and achieve your financial goals. ZBB can help you reduce unnecessary spending, increase savings, and optimize your money.
However, ZBB is not the only way to manage your personal finances. There are other ways that you can consider, such as envelope budgeting, 50/30/20 budgeting, or pay yourself first budgeting. Each way has its own advantages and disadvantages, depending on your situation and needs.
But what are the advantages and disadvantages of ZBB in general? How does ZBB compare with other budgeting methods? What are some of the pros and cons of using ZBB for your business or personal finances?
Advantages and Disadvantages of Zero-Based Budgeting
ZBB is a budgeting method that has many advantages and disadvantages for both businesses and individuals. ZBB can help you optimize your spending, improve your performance, and achieve your goals. However, ZBB can also be complex, time-consuming, challenging, and risky.
Advantages of Zero-Based Budgeting
Some of the main advantages of ZBB are:
- Improved efficiency: ZBB can help you improve your efficiency by eliminating waste, redundancy, or duplication in your expenses or processes. ZBB can help you identify and focus on the activities or expenses that add value or contribute to your goals and objectives. ZBB can also help you allocate your resources more effectively and efficiently according to your priorities and needs.
- Increased accountability: ZBB can help you increase your accountability by requiring you to justify and document every expense for each new period. ZBB can help you create a culture of transparency and responsibility in your organization or personal finances. ZBB can also help you monitor and measure your expenses and performance against your targets and expectations.
- Enhanced flexibility: ZBB can help you enhance your flexibility by allowing you to adjust your budget as needed according to changes in your income or expenses. ZBB can help you adapt to changing circumstances or needs in your business or personal finances. ZBB can also help you balance your short-term and long-term goals and not sacrifice one for the other.
- Fostered innovation: ZBB can help you foster innovation by encouraging you to challenge the status quo and explore new possibilities or opportunities. ZBB can help you find new ways to create value or reduce costs in your business or personal finances. ZBB can also help you invest in opportunities or initiatives that can generate more revenue or profit.
Some examples of companies that have used ZBB successfully and achieved positive results are:
- Kraft Heinz: Kraft Heinz is a food and beverage company that adopted ZBB in 2015 after its merger with Heinz. Kraft Heinz used ZBB to cut costs, improve efficiency, and increase profitability. Kraft Heinz reported that it saved $1.7 billion in operating expenses in 2017 thanks to ZBB.
- Unilever: Unilever is a consumer goods company that adopted ZBB in 2016 as part of its strategy to boost growth, margins, and shareholder returns. Unilever used ZBB to reduce overheads, streamline processes, and optimize marketing spending. Unilever reported that it achieved €2 billion in savings in 2018 thanks to ZBB.
- Coca-Cola: Coca-Cola is a beverage company that adopted ZBB in 2014 as part of its plan to restructure its operations, reduce costs, and increase productivity. Coca-Cola used ZBB to identify and eliminate non-value-added activities or expenses, such as travel, entertainment, consulting fees, etc. Coca-Cola reported that it saved $3 billion in annualized savings by 2019 thanks to ZBB.
- Kellogg’s: Kellogg’s is a food company that adopted ZBB in 2016 as part of its initiative to improve its profitability, competitiveness, and growth. Kellogg’s used ZBB to rationalize its product portfolio, optimize its supply chain, and enhance its marketing effectiveness. Kellogg’s reported that it delivered $450 million in savings in 2018 thanks to ZBB.
Disadvantages of Zero-Based Budgeting
Some of the main disadvantages of ZBB are:
- Increased complexity: ZBB can increase your complexity by requiring you to collect and analyze a large amount of data from various sources for every expense for each new period. ZBB can also require you to use sophisticated tools or templates to create and present your budget requests and reports. ZBB can also require you to deal with multiple stakeholders and decision-makers who might have different opinions or interests.
- Time consumption: ZBB can consume a lot of your time and resources by requiring you to spend more time and effort on your budgeting process than other methods. ZBB can also require you to review and update your budget more frequently and regularly than other methods. ZBB can also require you to monitor and measure your expenses and performance more closely and accurately than other methods.
- Resistance: ZBB can cause resistance or backlash from your stakeholders, such as managers, employees, customers, suppliers, etc. who might not understand or agree with your budgeting process or decisions. ZBB can also cause dissatisfaction or demotivation among your stakeholders who might feel that their input or feedback is not valued or considered. ZBB can also cause conflict or tension among your stakeholders who might have competing or conflicting priorities or needs.
- Risk: ZBB can increase your risk by requiring you to make assumptions or estimations about your income or expenses that might not be accurate or realistic. ZBB can also require you to make trade-offs or compromises that might affect the quality or innovation of your products or services. ZBB can also require you to take calculated risks or experiment with new ideas or initiatives that might not work out or generate the expected results.
Some examples of companies that have faced challenges or drawbacks from using ZBB are:
General Motors: General Motors is an automotive company that adopted ZBB in the 1980s as part of its effort to reduce costs and improve profitability. However, General Motors faced criticism and backlash from its employees, unions, customers, and dealers who felt that ZBB was too rigid, bureaucratic, and short-sighted. General Motors also faced difficulties in implementing ZBB across its diverse and complex operations and divisions. General Motors eventually abandoned ZBB in the 1990s.
Campbell Soup Company: Campbell Soup Company is a food company that adopted ZBB in 2015 as part of its strategy to revitalize its growth, margins, and innovation. However, Campbell Soup Company faced challenges and setbacks from using ZBB, such as losing market share, customer loyalty, and brand equity. Campbell Soup Company also faced issues with employee morale, retention, and engagement. Campbell Soup Company eventually modified its approach to ZBB in 2018.
Anheuser-Busch InBev (ABI): ABI is a beverage company that adopted ZBB in 2008 as part of its culture of cost discipline and efficiency. However, ABI faced problems and risks from using ZBB, such as losing sales volume, market share, and customer satisfaction. ABI also faced pressure and scrutiny from regulators, investors, and activists who questioned its social and environmental impact. ABI also faced challenges in integrating its acquisitions and diversifying its portfolio.
Diageo: Diageo is a beverage company that adopted ZBB in 2016 as part of its plan to improve its organic growth, operating margin, and cash flow. However, Diageo faced difficulties and delays in implementing ZBB across its global and regional operations and functions. Diageo also faced resistance and skepticism from its employees and managers who felt that ZBB was too complicated, time-consuming, and restrictive. Diageo also faced uncertainty and volatility in its markets and currencies.
As you can see, ZBB has both advantages and disadvantages for businesses and individuals. ZBB can help you optimize your spending, improve your performance, and achieve your goals. However, ZBB can also be complex, time-consuming, challenging, and risky. Therefore, you need to weigh the pros and cons of ZBB and decide whether it is suitable and feasible for your situation and needs.
Conclusion
That’s it! You’ve just learned everything you need to know about zero-based budgeting (ZBB). You’ve learned what ZBB is, how it works, and how you can use it for your business or personal finances. You’ve also learned some of the pros and cons of ZBB and some of the success and failure stories of ZBB.
If you’re ready to give ZBB a try, just follow these simple steps:
– Calculate your income
– List your expenses
– Subtract your expenses from your income
– Allocate your surplus or cover your deficit
You can also use some of the apps and worksheets we’ve mentioned in this blog post to make ZBB easier and faster. Or you can get some professional help or advice from a financial planner or consultant if you need more support.
We hope you enjoyed this blog post and learned something new and useful. We hope you’ll try ZBB and see how it can help you with your money matters. And we hope you’ll share this blog post with your friends and family who might benefit from it.
Thank you for reading this blog post. We’d love to hear from you. Please leave a comment below and tell us what you think about ZBB and other budgeting methods. And don’t forget to subscribe to our newsletter and follow us on social media for more tips and tricks on managing your money and planning your budget.
Useful books
If you want to learn more about ZBB or other budgeting methods, you might find these books helpful:
Zero-Based Budgeting (ZBB) To Zero-Based Everything by Sam Schreim and Business Model Hackers
This book explains how ZBB can be augmented with other management tools and techniques to achieve a step-change in performance for your business.
Zero-Base Budgeting: A Practical Management Tool for Evaluating Expenses by Peter A. Pyhrr
This book is one of the original and classic books on ZBB that explains the concept, history, features, principles, steps, tools, templates, examples, best practices, tips, advantages, disadvantages, and alternatives of ZBB.
The 3G Way
An introduction to the management style of the trio who’s taken over some of the most important icons of American capitalism by Francisco Souza Homem de Mello. This book describes the management style and culture of 3G Capital, a private equity firm that is known for using ZBB and other methods to transform some of the most important icons of American capitalism, such as Kraft Heinz, Burger King, Anheuser-Busch InBev, etc.