What is zero-based budgeting?
In traditional incremental budgeting, last year's [budget](/glossary/budget) is the starting point, adjusted up or down. ZBB assumes nothing: each department builds its budget from zero and must explain why every cost is needed.
How it works
- Identify activities and the goals they support.
- Break activities into "decision packages", each with costs and benefits.
- Rank packages by priority.
- Fund packages in order until the budget is used.
- Monitor spending against the approved plan.
Benefits
- Removes outdated or unnecessary spending
- Links spending directly to strategy
- Encourages cost awareness across teams
- Helps uncover [X-inefficiency](/glossary/x-inefficiency)
Drawbacks
- Time-consuming and resource-heavy
- Can encourage short-term cuts that harm long-term investment
- Needs good data and management support
Practical approach for small businesses
Many companies apply ZBB selectively: for example, to [overhead](/glossary/overhead) and discretionary costs such as software, travel and marketing, or every two to three years rather than annually.
Example
Instead of renewing all software subscriptions automatically, a business lists every tool, its users and its value. It cancels four unused subscriptions and merges two overlapping ones, saving 25% of its software budget.