AT A GLANCE

The origins of zero-based budgeting.

Zero-based budgeting was first developed in the 1970s by Peter Pyhrr, an accounting manager at Texas Instruments. Dissatisfied with its existing budgeting methods, Pyhrr introduced ZBB as a way to better align spending with the company’s goals. Decades later, Pyhrr emphasized its timeless value in a Wall Street Journal interview:

“Zero-based budgeting is a ‘tremendous’ tool,” Pyhrr told WSJ “especially in times of economic problems when you need to make reductions or when you have significant and rapid technological change.”

ZBB gained national attention when then-president Jimmy Carter, impressed with ZBB’s potential for reducing government waste, implemented it in parts of the U.S. federal budget. While it saw mixed success in public sectors, ZBB continued to grow in popularity in private businesses, particularly in industries where cost control and efficiency are critical.

Today, zero-based budgeting has experienced a resurgence, fueled by advancements in technology that make data collection and analysis easier. FP&A software tools allow companies to implement ZBB more effectively, turning a once labor-intensive process into a more streamlined, impactful financial strategy.

Drawbacks and challenges of zero-based budgeting.

While the benefits of zero-based budgeting are clear, ZBB also comes with its own set of challenges. The level of detail and scrutiny involved in ZBB requires time, effort, and access to reliable data. Without proper planning and resources, the process can be overwhelming or even counterproductive. Here are three potential disadvantages to zero-based budgeting that an organization should consider before implementation.

Time-consuming process.

Zero-based budgeting is far more time-intensive than traditional budgeting. Starting from zero and performing individual expense justifications demands detailed analysis, planning, and cross-departmental collaboration. For large organizations or companies with complex operations, the process can become especially burdensome.

Data dependency.

Zero-based budgeting relies heavily on accurate, detailed, up-to-date data. To justify expenses, decision-makers need a clear understanding of historical spending, operational metrics, and the value delivered by each cost. Incomplete or inaccurate data can undermine the process, leading to uninformed decisions and misaligned budgets.

Organizations without robust data management systems may struggle to implement ZBB successfully. In these cases, the process can become overly subjective, with justifications based on assumptions rather than evidence.

Potential for short-term thinking.

The focus on justifying costs period by period can sometimes encourage short-term decision-making at the expense of long-term growth. Departments under pressure to prove the immediate value of their expenses may deprioritize investments that take longer to generate returns, such as employee training programs, research and development, or brand-building initiatives.

Over time, this short-term mindset can hinder innovation, reduce employee development, and impact the company’s ability to remain competitive. To mitigate this risk, organizations implementing ZBB must strike a balance, ensuring that cost discipline doesn’t come at the expense of long-term strategic planning.

Decide if zero-based budgeting is right for your business.

Zero-based budgeting isn’t a one-size-fits-all solution. Its success depends on each organization’s priorities, resources, and culture. Before committing to ZBB, business leaders must assess whether the benefits outweigh the challenges and align with their specific needs. Here are five important considerations to help you decide.

Is cost discipline a top priority?

ZBB is ideal for organizations under pressure to control costs or improve efficiency. If expenses are growing without clear value or outdated spending patterns are draining resources, zero-based budgeting can provide a systematic way to cut waste and redirect funds to higher-impact activities.

Key questions to ask:

• Are rising costs impacting profitability?
• Are we carrying expenses that no longer add value?
• Do we need a framework to eliminate unnecessary spending?

Can your organization handle the time commitment?

Reviewing every individual expense can be time-consuming, especially for larger organizations. Success with zero-based budgeting depends on whether teams can dedicate the effort necessary to analyze and justify costs. Businesses without the bandwidth for this level of scrutiny may find ZBB overwhelming.

Key questions to ask:

• Do we have the resources and time to conduct detailed budget reviews?
• Will our teams view ZBB as productive or overly burdensome?
• Are we prepared to invest in tools that streamline the process?

Do you have access to reliable data?

Zero-based budgeting depends on accurate, detailed data to justify spending and measure outcomes. Companies without strong financial systems or clear reporting structures risk making decisions based on incomplete information, which undermines the entire process.

Key questions to ask:

• Can we track and analyze expenses at a granular level?
• Is our financial data current, accurate, and accessible?
• Are we equipped with tools to measure ROI and outcomes effectively?

Does your culture support accountability?

Implementing ZBB requires buy-in across the organization. Department leaders must be willing to challenge existing budgets, defend expenses, align spending with company priorities, and compromise when needed. Without this cultural commitment, zero-based budgeting can face resistance and stall progress.

Key questions to ask:

• Are leaders and teams open to reevaluating their budgets?
• Can we foster a culture that prioritizes accountability and transparency?
• Will ZBB’s process encourage collaboration or create friction?

Is flexibility a business imperative?

For companies operating in especially competitive or uncertain markets, ZBB provides the flexibility to adapt quickly. By resetting the budget each cycle, resources more easily be reallocated to new priorities or challenges as they arise. If agility is critical to your strategy, ZBB offers a structured way to support it.

Key questions to ask:

• Do we need a budgeting process that allows us to pivot quickly?
• Are we prioritizing innovation, restructuring, or growth?
• Could a fresh budgeting approach better reflect our strategic goals?

Making the decision.

Zero-based budgeting works best for organizations that need cost discipline, have strong data practices in place, and are prepared to invest the time and effort it requires. If your business operates in a stable environment with minimal change, traditional budgeting may be sufficient. However, if inefficiencies are holding you back, ZBB can provide the transparency, accountability, and flexibility that drives change.

To test the waters, consider implementing ZBB on a smaller scale—such as in a single department or project—before rolling it out across the entire organization. This can allow you to gauge its effectiveness and fine-tune the process while minimizing disruption.

By carefully evaluating the above priorities and your own organization’s capacity, you can determine whether zero-based budgeting is the right fit for your business goals.

How to implement zero-based budgeting.

Implementing zero-based budgeting requires careful planning, collaboration, and a disciplined approach. By breaking it into the following clear and actionable steps, you can smoothly transition your organization to the ZBB method.

1.  Identify your goals.

Start by defining what you want to achieve and your reason for choosing zero-based budgeting. Your goals might include reducing costs, making room in the budget for a new project, or increasing financial literacy and accountability among your leadership team. Identify your priorities and establish measurable targets that give you a benchmark for success as you implement ZBB.

2.  Assemble a cross-functional budget team.

A cross-functional budget team is essential to drive ZBB forward. Build a team with representation from finance, operations, marketing, HR, and other key departments to support a comprehensive approach to cost evaluation. Each budget team member will bring a unique perspective on spending priorities and organizational requirements.

3.  Engage stakeholders

Successful zero-based budgeting requires buy-in across your organization. Leaders and department managers must understand why the switch to ZBB is happening, what the process entails, and how it will impact their operations.

Be transparent about why you’re adopting ZBB and its timeline for implementation. Clear communication about expectations and timelines will help to build trust and reduce resistance. Provide support through personalized guidance, tools, and training so that stakeholders feel equipped to contribute meaningfully to the process.

4.  Break activities down into units

Before evaluating costs, break the organization’s operations into clearly defined activities. This step provides visibility into where resources are being spent and sets the foundation for justifying expenses. Activities can include tasks, projects, departments, or cost centers, depending on your organizational structure.

Treat each activity as a distinct unit of cost. Instead of reviewing a department’s budget as a whole, identify each individual expense—for example, software subscriptions, equipment maintenance, office supplies, travel, vendor contracts, or staffing.

By breaking expenses into measurable activities, you’ll avoid generalized assumptions and make more informed decisions about what to keep, adjust, or eliminate.

5.  Justify every cost from zero.

This step is the core of zero-based budgeting: justifying every expense as if it were being requested for the first time. No cost is approved automatically—even if it existed in prior budgets. Teams must provide a clear explanation for why each expense is necessary going forward, line item by line item.

Analyze the value of each activity—weighing its costs against its outcomes—and look for opportunities to eliminate unnecessary spending wherever possible. The justification process will encourage your teams to think critically about their operations and challenge assumptions about what is truly essential.

6.  Prioritize budget allocations.

Once all expenses have been justified, prioritize budget allocations based on their importance to your organization’s goals. Activities that deliver the highest immediate ROI or directly support strategic priorities should be funded first. Lower-value or redundant activities can be scaled back or eliminated to free up resources.

Prioritizing expenses requires a data-driven approach. Leverage data insights to assess the costs that are most critical, can be optimized, and no longer align with current objectives.

7.  Develop and approve the budget.

After prioritizing expenses, consolidate approved costs into a final budget proposal built by your budget team. Senior leadership should then review the proposed budget to ensure it reflects the desired balance of cost-efficiency and strategic investment. The review process may involve further refinements to address any gaps, inconsistencies, or new priorities before final budget approval.

8.  Implement and monitor.

Once approved, move into budget execution. Be sure department leaders monitor their progress and that expenses remain aligned with expectations over time. Ongoing monitoring can help catch deviations early and address issues quickly as they arise. Department leaders should also track whether approved expenses deliver their expected value and make adjustments in realtime when necessary.

9.  Refine and repeat.

Zero-based budgeting is not a one-time exercise. While it often doesn’t have to be performed every year or cycle, it works best when adopted as a recurring process. This way, your organization can refine its budget approaches over time and continuously improve outcomes. At the end of each zero-based budgeting cycle, review the results to identify what worked well and address any challenges encountered. Then apply those findings to each future iteration.

Putting zero-based budgeting into action.

Zero-based budgeting is a powerful way to align your organization’s spending with its priorities, but it’s not just about cutting costs—it’s about making every dollar work harder. The key to successful cost management lies in making ZBB a repeatable process your leaders understand, value, and actively support.

To put ZBB into action, start with clear goals, structured implementation, and the right tools. When done right, zero-based budgeting directs budgets to what matters most—helping your organization adapt, innovate, and grow.