Zero-Based Budgeting: Benefits and Drawbacks

As we’ve said, a successful ZBB program depends on there being a clear view of how much the company is spending on every given item, and by whom. As a result, financial tracking must reflect a cost-category perspective across organizational units, as well. And this, in turn, means that the organization must embed cost transparency in its systems and technology tools. It gives management a basis for making objective, better-informed decisions, rather than relying on gut instinct, politics, or sheer habit. It enables them to more accurately balance tradeoffs and determine whether the return is worth the money. Companies will find it easier to track and trace the impact of their budget decisions—and ensure rigorous implementation.

1. So helping them relate to that, why would this initiative be different?
2. When properly implemented, ZBB can reduce SG&A costs by 10 to 25 percent, often within as little as six months.
3. You can set aside a sum of money each month for unexpected expenses or emergencies, but these can still be hard to predict.

In our experience, this setup period could take anywhere from four to ten months and is primarily led by full-time support from finance and IT, with part-time involvement from profit-and-loss owners and cost-category owners across the company. Zero-based budgeting can drive significant and sustainable savings, but it is much more than simply building a budget from zero. World-class ZBB programs build a culture of cost management through unprecedented cost visibility, a unique governance model, accountability at all levels of the organization, aligned incentives, and a rigorous and routine process. ZBB frees up unproductive costs and allows those savings to be taken to the bottom line or redirected to more productive areas that will drive future growth. The fundamental elements of a ZBB program—governance, accountability, visibility, aligned incentives, and a rigorous process—form a comprehensive cost-management tool kit. However, certain adjustments need to be made when using this tool kit in particular areas.

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For example, to signal their commitment, executives might suspend travel privileges for senior managers or cancel an expensive company offsite. Suppose a construction equipment company implements a zero-based budgeting process calling for closer scrutiny of manufacturing department expenses. The company notices that the cost of certain parts used in its final products and outsourced to another manufacturer increases by 5% every year.

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Zero-based budgeting (ZBB) is a budgeting technique that allocates funding based on efficiency and necessity rather than budget history. Management starts from scratch and develops a budget that only includes operations and expenses essential to running the business; there are no expenses that are automatically added to the budget. Legacy costs may not be examined for years in traditional budgeting until there’s some sort of economic shock that forces the company to take extreme actions. Expenses tend to grow over time with each department protecting its budget from cuts. Zero-based budgeting is an accounting practice that forces managers to think about how every dollar is spent in every budgeting period. Instead of manually tracking your expenses, you can always use a budgeting app.

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Second, it may reward short-term perspectives in the company by allocating more resources to operations with the highest revenues. In turn, areas such as research and development, or those that have a long-term horizon, may get overlooked. And sometimes just giving the managers the words, or even the sales reps. “How do I talk to my clients and my customers now when I have this new meal allowance I have to adhere to?

One way of addressing these frequent drawbacks is to spread the time factor and responsibility evenly by seconding a small number of executives from their line and staff duties to look afresh at the company’s key operations. Training existing senior staff on ZBB methodology within each department will generate further costs. This helps to allocate resources based on the priorities of various programs, given that only the best program is considered. This might mean funding for some new high-priority programs at the cost of other ongoing low-priority ones. The approach involves evaluating and reviewing all activities and programs based on a cost-benefit analysis.

Perspective on considering a Zero Based Budgeting (ZBB) planning approach, Deloitte Analysis. Take self-paced courses to master the fundamentals of finance and connect with like-minded individuals. A financial professional will offer guidance based on the zero based budgeting forces managers to information provided and offer a no-obligation call to better understand your situation. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs.