Zero-Based Budgeting Pros & Cons

Zero-Based vs. Traditional Budgeting

Zero-based budgeting is one example of a bottom-up budgeting process.

As a way of ensuring your budget remains aligned with current financial performance and priorities, zero-based budgeting (ZBB) makes “zero” its starting line. While traditional budgets rely on your current year’s budget as a jumping-off point for the new year’s budgeting cycle, ZBB takes a different approach, wiping the slate clean every time.

With traditional (or incremental) budgeting, certain expenses are fixed, while deeper analysis is reserved for new expenses. This can help to quickly seed your plan, but also means you potentially miss out on changes to your business operations, as well as possible cost savings and investments that might help your organization evolve.

“SaaS companies must achieve annual growth rates greater than 20% if they want to survive.”

ZBB, on the other hand, can promote transparency and a holistic, organization-wide view, while giving departments an incentive to look for potential cuts. Every expense is connected to ongoing financial performance and company goals, and new and ongoing expenses are examined with the same level of scrutiny to see where funding should go.

By starting at nothing every time, ZBB makes sure every expense is connected to ongoing financial performance and aligned with company goals–an approach that can have both advantages and drawbacks.

Pros of Zero-Based Budgeting

• It can lead to significant cost savings, living you new dollars to invest in other places while improving operational efficiency as a whole.
• It gives your team true visibility into your organization–allowing you to establish stronger leadership and insights.
• It can make for better collaboration organization wide, as you determine the programs that should be prioritized and how they’ll work together to contribute to company goals.
• It can make your company more agile, keeping teams on top of every expenditure and goal–and giving them the insight to pivot quickly when needed.

Cons of Zero-Based Budgeting

• It can be more complex and costly–requiring more time from your team to complete.
• It can take specialized training or operational acumen to do it right.
• It requires complete organizational buy-in–otherwise it may put other departments on the defensive as they try to justify their programs and initiatives.
• Without the right metrics to analyze, it can potentially impact departments that offer less tangible results.

With the right organizational culture in place, zero-based budgeting can help you move your planning process and decision making forward. But of course, zero-based budgeting isn’t the only option–there are several ways to approach your budgeting, depending on your goals.