What Is Zero Base Budgeting

So, you want to know how to do Zero Base Budgeting? Then you’ve come to the right place! This budgeting strategy is becoming more common as organizations focus on cost management. Let’s discuss what this type of budgeting is, how it is different from traditional budgeting, and how to execute it.

What is Zero Base Budgeting

It is a method in which all expenses, both recurring and new, must be justified. An organization starts with a blank slate (zero-base) and then analyzes its needs and costs to deliver products and services.

For example, your organization has historically hired an outside firm to prepare Tax filings. Using traditional budgeting, you would take the prior year cost, add 3% for inflation, and set the new budget. However, using Zero Base Budgeting, you would identify the task (filing taxes) and the minimum expense to achieve the task. This blank slate approach could lead to reduced expenses via insourcing the work or shopping for less expensive vendors.

Differences from Traditional Budgeting

Historical Data: In traditional budgeting, spend from prior periods is evaluated. It is adjusted for inflation as well as business drivers and then rolled forward. This is in contrast to the blank slate approach.

Time Commitment: Unlike traditional budgeting, you can’t model off of historicals. This means that the time commitment is significantly higher as each department documents their needs by line item and presents it for review.

Perspective: Traditional budgeting provides momentum to existing spend levels. By starting with a blank slate, zero-base budgeting favors operations and short-term goals that can be easily documented. On the other hand, it can defer critical research & development (R&D) and long-term goals.

Steps in the Budgeting Process

1. Determine Strategy/Goals – First, the company needs to determine its strategy and goals before budgeting. This step will determine what needs to be funded in the first place.
2. Compile Expenses – Next, each department must compile their expenses to support ongoing operations. In addition, each department should add expenses to support the new strategies and goals of the company. This step should be at a very detailed level.
3. Executive Reviews – Each organization will present its completed budget to senior operations and finance leadership for review. Finance will review all submitted budgets and compare to the expectations for the year.
4. Revise and Resubmit – Typically, senior leadership will provide feedback. You will need to revise the budget based on feedback and resubmit. In many cases, there will be more than one round of feedback.
5. Approve and Execute – Finally, leadership will approve the budgets. Then it is time to execute on the budget. Typically, a company will use the detailed build to manage and approve expenses as they come up. To stay on budget, they will only spend approved items, or swap out an approved expense one-for-one with another.

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