Zero-based budgeting (ZBB) is a budgeting methodology where every expense must be justified from scratch for each new period. Unlike traditional budgeting that starts with last year's numbers and adjusts incrementally, ZBB starts from a base of zero — forcing teams to evaluate whether each activity still delivers value.
This guide covers what ZBB is, how it differs from traditional budgeting, the step-by-step process, when it makes sense, common challenges and how it fits alongside other planning approaches.
What Is Zero-Based Budgeting?
Traditional budgeting is inherently backward-looking. It takes last year's spending as a given and asks "how much more or less do we need?" This approach embeds historical inefficiencies into every future budget. A department that overspent last year simply becomes a department that spends more this year.
Zero-based budgeting breaks this pattern. Every dollar must be justified based on current needs, strategic priorities and expected return. No line item gets a free pass because it existed last year.
How ZBB Works in Practice
Define decision units
Break the organization into units that can be evaluated independently — departments, programs, cost centers or activities. Each unit builds its budget from zero.
Identify activities and costs
For each decision unit, catalog every activity and its associated cost. What does the team do? What does each activity cost? What value does it create?
Build decision packages
For each activity, create packages at different funding levels — minimum viable, current level and enhanced. Each package describes the output, cost and tradeoffs.
Rank and prioritize
Leadership ranks decision packages across the organization based on strategic alignment, ROI and necessity. This forces explicit tradeoffs rather than implicit ones.
Allocate resources
Fund packages from the top of the ranked list until the budget is exhausted. Activities that fall below the line are eliminated or deferred.
ZBB vs Traditional Budgeting
When ZBB Makes Sense
•Margin pressure requiring cost discipline
•Post-acquisition integration and rationalization
•Organizational transformation or restructuring
•Significant discretionary spending with unclear ROI
•Board or investor mandate for cost transparency
•Historical budgets that no longer reflect strategic priorities
Common Challenges
• Time and effort — ZBB requires 3-5x more work than incremental budgeting. Scope it carefully.
• Organizational fatigue — asking every department to justify its existence annually creates resistance.
• Missing the forest for the trees — ZBB can devolve into micro-managing line items rather than strategic reallocation.
• Lack of executive sponsorship — without top-down commitment, ZBB becomes a finance exercise that operational leaders resist.
• One-and-done thinking — ZBB is most effective as an ongoing discipline, not a one-time cost cut.