Traditional budgeting often carries over last year's numbers with a few tweaks, leaving plenty of room for hidden inefficiencies. Over time, these small "carryovers" turn into bloated expenses that no one really questions.
Now that's where zero based budgeting comes in. Instead of assuming that every dollar spent in the past deserves a place in the future, this method forces every cost to justify its existence from scratch. The result? Leaner budgets, smarter resource allocation, and fewer surprises in the financial statements.
But zero based budgeting isn't without its critics. It can be time-consuming, demanding, and sometimes impractical for certain organizations.
Still, its growing popularity in corporate finance, procurement, and even personal money management raises an important question: Is it worth the effort?
In this guide, we'll break down what zero-based budgeting is, examine its benefits and drawbacks, and share real-world examples of its application.
Zero based budgeting (ZBB) is a method of financial planning where every expense must be justified from the ground up, for every new period.
Instead of automatically rolling over last year's numbers, managers or individuals start at "zero" and build a budget by proving the value of each cost before it earns a place. This approach ensures that money is directed only toward activities, projects, or purchases that align with current priorities.
Traditional budgeting assumes that past spending provides a reasonable baseline. If last year's department spent $100,000, the new budget often starts there, maybe with an added percentage for inflation or growth.
However, zero based budgeting rejects this logic. It asks, "Does this expense still make sense today?" If the answer is no, it doesn't get funded. That means:
Zero-based budgeting first showed up in the early 1970s, thanks to Peter Pyhrr, an accounting manager at Texas Instruments. He designed it as a way for companies to cut waste and focus resources where they mattered most.
The idea caught on quickly, so much so that President Jimmy Carter tried rolling it out across federal agencies. While it proved too complex to manage at a government-wide scale, businesses didn't let it die out.
Many corporations, especially those in procurement and cost-heavy industries, kept using it to drive efficiency. Fast forward to today, and the method is making a comeback as organizations look for smarter ways to stretch every dollar.
Zero-based budgeting may sound like a radical reset, but the process is straightforward once you break it down. At its core, ZBB forces managers to rebuild their budgets from scratch by weighing the value of each activity against the organization's goals. Let's unpack how it actually works.
Every budget cycle begins with a blank slate. Unlike traditional methods that assume last year's expenses will continue, zero based budgeting wipes the board clean. Each cost must earn its place, whether it's office supplies, software licenses, or travel budgets.
Instead of lumping all expenses together, managers group spending into what's called decision packages. Each package details the purpose of the expense, its cost, and the benefit it delivers. Think of it as a mini-business case for every activity, clear, specific, and measurable.
For example, the marketing department might create separate packages for digital ads, trade shows, and content production.
Once the decision packages are created, they don't automatically get approved. Managers rank them based on strategic importance and return on investment. The top-priority packages get funded first, while lower-priority ones may be scaled back or cut entirely. This ranking system is what makes zero based budgeting so effective at eliminating unnecessary spending.
The final stage is the justification cycle. Each department presents its decision packages and makes the case for why it deserves funding. Senior leaders or finance teams then approve, reject, or request changes.
The process repeats with every new budget cycle, keeping everyone accountable and ensuring funds are always aligned with current goals.
Take the inside sales department as an example. Instead of automatically receiving the same $1 million budget it had last year, it must justify every expense:
By forcing each line item through this scrutiny, the department ends up with a budget that reflects today's priorities, not yesterday's habits.
Zero-based budgeting has earned a reputation for being tough but effective. By starting from scratch each cycle, organizations gain sharper visibility into where their money is going and why.
When applied well, ZBB can transform the way a company spends and plans in the following ways.
One of the strongest benefits of zero based budgeting is how it forces organizations to confront costs directly. Nothing hides under the excuse of "that's how we've always done it." Every dollar is reviewed, justified, and tied back to current business objectives. This not only keeps costs under control but also ensures budgets align with company strategy.
The transparency that comes with this process makes it easier for leadership to spot inefficiencies and for teams to understand how their spending decisions fit into the bigger picture.
Zero-based budgeting also acts as a filter for waste. Legacy expenses, like outdated subscriptions, redundant processes, or low-value projects, get exposed quickly when every line item must prove its worth.
Resources can then be redirected toward areas with measurable impact, whether that's scaling up a profitable business unit or funding an emerging initiative.
A study by McKinsey found that companies using zero based budgeting reported savings of 10–25% in certain cost categories, simply by reallocating funds more efficiently.
For all its strengths, zero-based budgeting is not a one-size-fits-all solution. Its rigor can also create hurdles that make it challenging to adopt, especially in large or fast-moving organizations.
Here's how:
Building a budget from zero takes time. Departments must prepare detailed decision packages, justify each line item, and run through lengthy approval cycles. For large organizations, this process can consume significant administrative resources. While the payoff may be worth it, the up-front time cost is often the biggest reason companies hesitate to fully commit.
Because zero based budgeting emphasizes short-term justification, there's a risk that long-term projects, like research and development, get overlooked. R&D often requires sustained investment without immediate returns, making it harder to "justify" year after year. If leadership isn't careful, this short-term bias could stifle innovation and strategic growth.
Finally, ZBB can face pushback from employees and managers who view it as overly complex or even threatening. Having to defend every cost may feel like micromanagement, especially in departments that already run lean. Without clear communication and strong leadership support, resistance can undermine the process before it delivers real results.
Seeing zero-based budgeting in action helps you understand both the power and the pitfalls. Here are some recent cases, corporate and public sector, that illustrate how ZBB works (and what sometimes goes wrong when it doesn't).
Starbucks has recently leaned into zero based budgeting as part of its "Back to Starbucks" turnaround plan. According to Business Insider, the company asked managers to justify every expense annually instead of simply inheriting last year's budget. The aim is to identify what they call "stranded costs" expenses that no longer serve their strategy.
They're doing this while also investing in key priorities like paying baristas more hours. So ZBB isn't just about cuts because Starbucks is trying to offset some investments by eliminating waste.
Lessons from Starbucks:
Kraft Heinz is almost a poster child (or warning) for zero-based budgeting. After the 2015 merger under 3G Capital, they used ZBB aggressively to reshape cost structures. They achieved massive savings, including a significant drop in overhead costs, and many departments saw steep cuts.
But it wasn't all smooth sailing. The downsides popped up:
Other Examples:
While most high-profile ZBB stories come from corporations, local governments also apply the zero-based budgeting idea to reallocate funds more effectively.
One example comes from a government finance study by the Government Finance Officers Association, which found that many local governments use variants of zero based budgeting to require each department to justify line items (rather than simply rolling over past budgets), identify overlapping or redundant costs, and reallocate funds within departments toward higher-priority services.
This kind of public sector implementation typically has extra constraints (legal, regulatory, political), but it shows that zero-based budgeting can also bring transparency and reallocation benefits in civic budgeting.
Zero-based budgeting becomes far easier to manage when you have a structured template. Instead of wrestling with scattered spreadsheets, a clean table helps you map out income, essential needs, and justifications for every cost. The goal is simple: make each line item prove its place in the budget before it's approved.
Here's a starter template you can adapt to your needs:
|
Category |
Description |
Requested Amount |
Justification |
Adjustment / Final Approval |
|
Income |
Revenue, grants, salary |
$___ |
Source of funds |
Confirmed / Adjusted |
|
Baseline Needs |
Rent, utilities, payroll |
$___ |
Essential to operations / survival |
Approved / Adjusted |
|
Strategic Initiatives |
Marketing, R&D, growth |
$___ |
Supports strategic goals, ROI explained |
Approved / Deferred |
|
Discretionary Costs |
Travel, perks, extras |
$___ |
Optional—must prove measurable benefit |
Approved / Cut |
|
Total |
$___ |
$___ |
Here's how to make use of this zero based budgeting template:
Zero based budgeting works best when you need to reset spending decisions and force a fresh look at every cost. It's not a daily tool, but a strategic mechanism you bring in when the status quo no longer serves your goals.
Just as sales leaders compare sales quotas and forecasts to see which method better predicts outcomes, finance teams weigh these two budgeting styles to decide which cadence works best for their goals.
Here's how to do it effectively.
|
Aspect |
Zero-Based Budgeting (ZBB) |
Traditional Budgeting |
|
Pros |
Forces cost discipline, aligns spending with current strategy, and has high transparency |
Faster to prepare, simple to understand, familiar to teams |
|
Cons |
Time-intensive, risks cutting long-term investments, and can trigger resistance |
Tends to carry waste forward, weaker alignment with strategy, and limited transparency |
|
Resource Requirements |
Requires detailed justifications, decision packages, and leadership oversight |
Requires incremental adjustments, minimal documentation |
|
Business Fit |
Best for turnaround, cost-control drives, strategic resets, or discretionary-heavy areas |
Best for stable, low-change environments with predictable expenses |
|
Planning Agility |
Budgets can flex to current needs and priorities |
Budgets follow historical patterns and assumptions |
When viewed side by side, the trade-off is clear. ZBB offers sharper precision and adaptability, but at a heavier lift. Traditional budgeting keeps the process light and predictable, but risks stale spending patterns.
Rolling out zero-based budgeting can feel daunting, but the right approach makes it far more manageable. Like introducing a new sales incentive plan, success hinges on communication, structure, and the right approach. Here are three proven ways to make ZBB stick.
Zero based budgeting thrives when everyone understands the "why" behind it. Without context, employees may see it as a cost-cutting scheme rather than a smarter way to align resources with strategy.
Leaders should communicate how ZBB works, why it's being introduced, and what role each team plays. Training is key as managers need to know how to build and defend decision packages, and finance teams should be equipped to guide them through the process. This clarity reduces resistance and builds buy-in across departments.
Implementing ZBB company-wide in one swoop can overwhelm teams. A phased rollout works better. Start with departments that have large discretionary budgets, such as marketing or procurement, where inefficiencies are easier to spot.
Once the process proves its value, expand to other areas. This gradual cadence ensures lessons are learned along the way and that leaders have time to fine-tune the process before scaling it.
ZBB involves a lot of detail, and spreadsheets can quickly become unmanageable. Digital budgeting software or apps streamline the process by tracking expenses, storing justifications, and generating reports for leadership reviews. These tools also make it easier to compare decision packages and prioritize spending objectively.
For example, platforms that integrate budgeting with performance dashboards allow finance teams to link budget decisions directly to outcomes, ensuring ZBB becomes a driver of efficiency rather than just an exercise in documentation.
As you've already seen, zero-based budgeting can be a powerful tool for sales strategy. By forcing every expense to be justified, ZBB ensures that sales initiatives, from quota-setting to pipeline forecasting, are funded based on impact rather than tradition.
This approach helps sales leaders avoid "autopilot budgets" where old spending habits eat into resources that could be redirected toward higher-return activities.
In practice, zero based budgeting strengthens sales planning in several ways:
By tying sales budgets directly to measurable outcomes, zero-based budgeting keeps sales teams agile. Every initiative, from incentive plans to account-based marketing campaigns, gets scrutinized through the same lens: does this investment directly support revenue goals? If not, the budget gets reallocated to where it will make the biggest difference.
Zero based budgeting may feel like a heavy lift at first, but it forces businesses to rethink spending with intention. Instead of coasting on last year's numbers, every budget line must justify its place. The result is sharper financial discipline, stronger alignment between costs and strategy, and greater agility in adapting to shifting markets.
For sales teams, that means quotas backed by data, forecasts built on efficient tools, and cadence planning that ties directly to performance, instead of assumptions.
If you're ready to connect the dots between smarter budgeting and stronger sales execution, Ringy CRM can help. With tools for sales forecasting, performance tracking, and cadence management, Ringy gives your team the visibility it needs to turn a leaner, zero-based budget into sustainable growth.
Start aligning your sales process with your budget strategy today. See how Ringy CRM can keep your sales and spending working toward the same goals.