So you have to engage not just the senior leadership but also these influencers who are not necessarily at the top levels of the organization. That particular business-unit president would oversee that across the organization. Once we got to the point where the leaders were the ones accountable for help in overseeing, by cost category, it was much more impactful. Plus, they knew they had the resources under them to support that from a visibility and a governance standpoint. And then, finally, you need to have a serious and visible commitment from top management, especially during the activation phase as you’re embedding the new ways of working. In other words, it can underpin a more dynamic approach to reallocating resources across the company.
Aligning ZBB with Sustainability
- This article explores what is zero-based budgeting, how it works, and the pros and cons of a based budgeting strategy.
- One of many examples is an experiment conducted by psychologist Melissa Bateson, who placed an “honesty box” along with a price list for tea and coffee in a university commissary.
- This reinforcement of resource optimization plays into sustainable practices, a key aspect of many successful CSR strategies.
- Someone must decide which projects to fund and which projects to delay or re-scope.
Limelight helps maintain accurate cost tracking by centralizing planning data and ensuring that budgeting aligns with business goals. The platform’s flexibility allows users to create various budgeting models, including zero-based approaches tailored to specific organizational needs. Implementing ZBB without FP&A software is time-consuming and prone to errors. Manual data collection, analysis, and justification of each expense can delay the budgeting cycle and increase the risk of misallocations. Companies may struggle with inefficient processes and inaccurate financial oversight without automation and real-time tracking.
- Effective cloud-based digital-budgeting products, while no less intuitive than offline spreadsheets, are programmed to compel disciplined data entry.
- Federal mandates require that state Medicaid funding meet a specific minimum level if Medicaid is to exist at all in a state.
- This level of involvement often empowers employees, as they hold an essential role in shaping the budget that, in turn, shapes the company’s future strategies.
- This approach challenged the assumption that previous spending levels were automatically justified, requiring individuals and departments to provide a detailed rationale for each expenditure.
- Pyhrr recognized the limitations of traditional methods of budgeting that relied on incremental adjustments to previous budgets.
Fostering Accountability and Engagement
Zero-based budgeting (ZBB) is a budgeting method that requires all expenses to be justified and approved in each new budget period, typically each year. This budgeting method analyzes an organization’s needs and costs by starting from a “zero base” (meaning no funding allocation) at the beginning of every period. The intended outcome is to assess the efficient use of resources by determining if services can be provided at a lower cost. However, the saving comes at the expense of a complete restructuring every budget cycle. Although used at least partially in both government and the private sector, there is some doubt whether ZBB has ever been utilized to its fullest extent in any organization. With ZBB, every department or division of a business begins their budget at zero.
For example, losing one’s daily food ration could lead to illness or death, but gaining one additional ration will have only limited benefits. Our default psychological setting thus is to guard what we need, rather than to gamble on acquiring something we may not. The practice favors areas that achieve direct revenues or production because their contributions are more easily justifiable than in departments such as client service and research and development.
It is also important to provide ongoing support and refresher training as necessary to ensure the continued success of the program. Clear and frequent communication within the organization can minimize misunderstanding and confusion during the implementation process of a zero-based budget. All employees should have an understanding of why the company is transitioning to this system and how it will impact their specific department or role.
Impact on Business Processes
Eventually, all leaders will realize some Seats no longer zero based budgeting forces managers to make sense. Some incredible, loyal, hard-working people may no longer be the right fit. Many companies have adopted this approach to improve their financial performance. The team also ensures that systems and processes are in place for the detailed reporting, governance, and performance management needed for world-class ZBB.
© 2025 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. In this paper, explore four key elements for successful ZBB implementation. Helping clients meet their business challenges begins with an in-depth understanding of the industries in which they work. That’s why KPMG LLP established its industry-driven structure.
Key Takeaways
Involving key personnel from various departments in budgeting helps ensure that the final budget reflects top-level goals and on-the-ground realities. Stakeholder engagement fosters collaboration, providing valuable insights into each department’s needs and constraints. This ensures alignment between financial goals and operational requirements, which is critical for maintaining a realistic, well-supported budget that can be effectively implemented across the organization.
Also, taking into consideration the company’s culture and what is it that’s going to help make this successful? And how you can get them to that point of being fact based and addressing some of the emotional reactions are really key. In the last five years, it has experienced a bit of a renaissance because it’s become much more than that. It’s really a new way of working that allows companies to put their money where it matters most, align resources with their business priorities, and do that on a repeatable basis. It is the combination of a predominant mindset, actions (both big and small) that we all commit to every day, and the underlying processes, programs and systems supporting how work gets done. Add your monthly expenses to the amount of money you’d like to save each month.
Team members should be encouraged to ask questions and voice any concerns, ensuring all team members feel included and invested in the change. In order to design a zero-based budget, the process begins from scratch, treating each financial period as a blank slate. This is often quite different from the traditional budgeting approach where last year’s budget is taken as a base and then adjusted according to the upcoming year’s needs.
Zero-based budgeting—The dos and don’ts of lasting change
Hence, it is essential that those making decisions have a comprehensive understanding of all business functions. Therefore, ZBB’s focus is not only on financial rationale but it also intertwines with and supports the wider values of sustainability and corporate responsibility. It ensures that every dollar spent aligns with the firm’s strategic goals, which can and should include CSR programs for a forward-thinking, socially responsible business. In this way, ZBB can serve as a conduit for a company’s commitment to sustainable practices and broader societal good.
Implications of Zero Based Budgeting for Business Operations
The fundamental difference lies in the starting point and the concepts driving each method. ZBB requires every budget item to be justified from scratch, whereas traditional budgeting generally adjusts the previous year’s budget to account for inflation or other incremental changes. Implementing zero-based budgeting can be time-consuming and resource-intensive. This is especially true during the initial stages where every item of expenditure needs to be justified and approved.
The practice shot back into favour a few years ago when Brazilian private-equity firm 3G Capital used ZBB to squeeze billion-dollar savings from food processor Kraft Heinz. A third demonstrable trait is that people behave more accountably when they perceive—consciously or subconsciously—that someone else is watching. One of many examples is an experiment conducted by psychologist Melissa Bateson, who placed an “honesty box” along with a price list for tea and coffee in a university commissary.
